subject: Day Trading. The Pros and Cons [print this page] Day TradingDay Trading. The Pros and Cons
Day trading is the practice of buying and selling a financial instrument within the same trading day, so that all positions are fully "flat" or zeroed before the markets close for the day. The one caveat about day trading is that there are some regulatory issues in certain countries when day trading stocks.
In the United States, the day trader must have an account balance of no less than $25,000 to actively day trade. If an account has less than the $25,000 required, they are "allowed" 3 day trades in a 5 day time period. What this means is that if you close out three separate trades within this time frame, you can be flagged as an active trader, and forced to either deposit enough money to bring the account up to the $25,000 minimum, or be forced to wait six months to trade again! There are similar rules in several countries around the world, so make sure to check with your local regulatory authority.
For those of you that have the account size, day trading can be very rewarding if done successfully. One of the advantages of day trading is that you close your positions at or before the end of the day. There is no possibility of having a market gap down or up against you at the open on the next day. Your funds are safe as you have no position.
Another reason that day trading can be so advantageous is that your stop losses typically are smaller, letting you leverage up your position to "supercharge" your gains by trading on margin. Of course, this can work against you just as easily. Trading on margin can work both ways so always be careful using it.
One of the most important aspects of a successful day trader is discipline. In order to take advantage of those small stops and high leverage, you must be very disciplined to follow your system to the letter. You cannot get emotional and flustered during the heat of the moment, as mistakes can be costly. If you are not disciplined, this is not a trading style for you.
Of course, one of the best things about day trading is that most trades are quick by their very nature, allowing a trader to go on about their day without using too much time. This is without a doubt the most appealing aspect of day trading. You can be done with your day in 30 minutes sometimes. This leaves all kinds of opportunities to spend extra time with your family and friends. Try doing that from an office!
Another advantage a day trader might have is volume discounts. Some brokers allow for commission discounts for high volume traders. This of course will vary from broker to broker, but some of the discounts are quite steep.
Day trading isn't for everyone. However, if you can follow a trading plan with the upmost discipline, have the account size, and can remain extremely focused, day trading might be for you. Knowing that the frequency of trades can work both for and against you, it is highly advisable to use a demo account to try day trading out for a trial period before committing any real capital to it.
It takes hard work, but your work days could be done before 10 a.m. every day!
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