pros and cons of day trading

pros and cons of day trading

Pros & Cons of Day Trading vs Swing Trading

Active traders often group themselves into two camps: the day traders and the swing traders. Both seek to profit from short-term stock movements (versus long-term investments), but which trading strategy is the better one? Below, we explore the pros and cons of day trading versus swing trading.

Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. The day trader's objective is to make a living from trading stocks, commodities or currencies, by making small profits on numerous trades and capping losses on unprofitable trades. Day traders typically do not keep any positions or own any securities overnight.

[Day trading involves a very unique skill set that can be difficult to master. Investopedia's Become a Day Trader Course provides an in-depth overview of day trading, complete with more than five hours of on-demand video. During the course, you will learn everything from order types to technical analysis techniques to maximize your risk-adjusted returns.]

Swing trading is based on identifying swings in stocks, commodities and currencies that take place over a period of days. A swing trade may take a few days to a few weeks to work out. Unlike a day trader, a swing trader is not likely to make trading a full-time career.

First, we'll look at the pros of day trading.

Potential to make substantial profits: The biggest lure of day trading is the potential for spectacular profits. But this may only be a possibility for the rare individual who possesses all the traits — such as decisiveness, discipline and diligence — required to become a successful day trader.

Being your own boss: The day trader works alone, independent from the whims of corporate bigwigs. He can have a flexible working schedule, take time off whenever needed, and work at his own pace, unlike someone on the corporate treadmill.

Never a dull moment: Long-time day traders love the thrill of pitting their wits against the market and other professionals day in and day out. The adrenaline rush from rapid-fire trading is something not many traders will admit to, but it is a big factor in their decision to make a living from trading. It's doubtful these kind of people would be content spending their days selling widgets or poring over numbers in an office cubicle.

Expensive education not required: For many jobs in finance, having the right degree from the right university is a prerequisite just for an interview. Day trading, in contrast, does not require an expensive education from an Ivy League school. While there are no formal educational requirements for becoming a day trader (see Best Undergraduate Degrees for Day Traders), courses in technical analysis and computerized trading may be very helpful.

Self-employment benefits: As a self-employed individual, a day trader can write off certain expenses for tax purposes, which cannot be claimed by an employed individual.

And now for the cons.

Risk of substantial losses: The U.S. Securities and Exchange Commission (SEC) points out that "days traders typically suffer financial losses in their first months of trading, and many never graduate to profit-making status." While the SEC cautions that day traders should only risk money they can afford to lose, the reality is that many day traders incur huge losses on borrowed monies, either through margined trades or capital borrowed from family or other sources. These losses may not only curtail their day trading career, but also put them in substantial debt.

Significant start-up and ongoing costs: Day traders have to compete with high-frequency traders, hedge funds and other market professionals who spend millions to gain trading advantages. In this environment, a day trader has little choice but to spend heavily on a trading platform, charting software, state-of-the-art computers, and the like. Ongoing expenses include costs for obtaining live price quotes and commission expenses that can add up because of the volume of trades.

No consistent pay: To really make a go at it, a trader must quit his day job and give up his steady monthly paycheck. From then on, the day trader must depend entirely on his own skill and efforts to generate enough profit to pay the bills and enjoy a decent lifestyle.

High stress and risk of burnout: Day trading is stressful because of the need to watch multiple screens to spot trading opportunities, and then act quickly to exploit them. This has to be done day after day, and the requirement for such a high degree of focus and concentration can often lead to burnout.

Next, we review the pros of swing trading.

Does not have to be a full-time job: Anyone with knowledge and investment capital can try swing trading. Because of the longer timeframe (from days to weeks as opposed to minutes to hours), a swing trader does not need to be glued to his computer screen all day. He can even maintain a separate full-time job (as long as he is not checking trading screens all the time at work).

Potential for significant profits: Trades generally need time to work out, and keeping a trade open for a few days or weeks may result in higher profits than trading in and out of the same security multiple times a day.

Constant monitoring not required: The swing trader can set stop losses. While there is a risk of a stop being executed at an unfavorable price, it beats the constant monitoring of all open positions that is a feature of day trading.

Less stress and risk of burnout: Since swing trading is seldom a full-time job, there is much less chance of burnout due to stress. Swing traders usually have a regular job or other source of income from which they can offset or mitigate trading losses.

Expensive investment not required: Swing trading can be done with just one computer and conventional trading tools. It does not require the state-of-the-art technology of day trading.

And now for the cons.

Higher margin requirements: Since swing trading usually involves positions held at least overnight, margin requirements are higher. Maximum leverage is usually two times one's capital. Compare this with day trading where margins are four times one's capital.

Risk of substantial losses: As with any style of trading, swing trading can also result in substantial losses. Because swing traders hold their positions for longer than day traders, they also run the risk of larger losses.

Day trading and swing trading each have advantages and drawbacks. Neither strategy is better than the other, and traders should choose the approach that works best for their skills, preferences and lifestyle. Day trading is better suited for individuals who are passionate about trading full time and possess the three Ds: decisiveness, discipline and diligence (prerequisites for successful day trading).

Day trading success also requires an advanced understanding of technical trading and charting. Since day trading is intense and stressful, traders should be able to stay calm and control their emotions under fire. Finally, day trading involves risk — traders should be prepared to sometimes walk away with 100% losses.

Swing trading, on the other hand, does not require such a formidable set of traits. Since swing trading can be undertaken by anyone with some investment capital and does not require full-time attention, it is a viable option for traders who want to keep their full-time jobs, but also dabble in the markets. Swing traders should also be able to apply a combination of fundamental and technical analysis, rather than technical analysis alone.

Day trading and swing trading should both be left to experienced traders who can accept the risks of trading. Day trading is a full-time job that requires complete concentration and intense focus. Swing trading is far less demanding. It’s the appropriate choice for those who want to try their hand at trading without becoming totally immersed in it.

What Are the Pros and Cons of Day Trading?

Published March 03, 2016 NewsCore

Day trading is a risky method that is sometimes sold as a get-rich-quick approach to the stock market. While educated traders may be able to turn day trading into a successful career, amateurs can lose money quickly.

What is day trading? Day traders buy and sell stocks throughout the day with the hopes of cashing in on small fluctuations in the price of highly liquid stocks or indexes. As with investing, the ideal situation involves buying low and selling high, but in this case the time frame is shortened from years to hours. Day traders want to make money by successfully completing numerous sales in the same day.

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So, if someone buys 1,000 shares and then sees a half-hour later that the price of that stock rose, he or she may decide to sell. From the sale, the trader makes the difference -- whatever that may be -- minus commission.

Pros The most touted pro of day trading is that it can earn you serious money, provided that you can afford to take the risk, understand the inner workings of the marketplace and have a well thought out strategy. You can increase your returns through leverage (money that you borrow to make more money). If you find work with a large institution, you may gain access to expensive software and a direct line to the dealing desk, along with other perks and resources.

Day traders play a role in the overall marketplace, thanks to arbitrage --  a common day trading strategy that involves identifying market discrepancies. An asset's price should be the same across the board, but if this is not the case and you see the difference fast enough, you can sell the higher-priced asset and buy the lower priced one. Cons The bottom line is that day trading carries a high risk. There is never a guarantee that you will make money. In fact, according to the U.S. Securities and Exchange Commission, "day traders typically suffer severe financial losses in their first few months of trading."

Day trading is expensive. You need software and the right computers to spot the price variations and access the necessary financial information. Because you may acquire capital losses and gains as a day trader, taxation can become a nightmare. Short-term capital gains, which are places on assets held for less than a year, are taxed at your income tax rate. Visit the IRS website for more information.

You need to have risk capital, or money you can "afford9quot; to lose, to protect yourself. The SEC also requires that day traders have a minimum of $25,000 in their account at the end of the trading day if they plan on making at least four round-trip day trades over a five-day period.

Another potentially negative aspect of day trading is that your success may be closely tied to the nature of the current market environment.

"When the market is in a churning period in which there is not significant upward or downward movement, then daily traders tend to lose money, especially after consideration of the commission costs and the bid-ask spread that they are frequently trading into," says Walt Woerheide, dean and professor of investments at The American College in Bryn Mawr, Penn.

Day trading also comes with a steep learning curve and the chance you can fail. It is a high-pressure, stressful job that takes discipline and strategy, and you can't let your emotions influence your trading decisions.

The Pros & Cons of Day Trading Vs Swing Trading

The Pros & Cons of Day Trading Vs Swing Trading

Active traders often group themselves into two camps: the day traders and the swing traders. Both seek to profit from short-term stock movements (versus long-term investments), but which trading strategy is the better one? Below, we explore the pros and cons of day trading versus swing trading.

Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. The day trader's objective is to make a living from trading stocks, commodities or currencies, by making small profits on numerous trades and capping losses on unprofitable trades. Day traders typically do not keep any positions or own any securities overnight.

Swing trading is based on identifying swings in stocks, commodities or currencies that take place over a period of days. A swing trade may take a few days to a few weeks to work out. Unlike a day trader, a swing trader is not likely to make such trading a full-time career.

Day Trading Pros and Cons

  • Potential to make substantial profits: The biggest lure of day trading is the potential for spectacular profits. But this is may only be a possibility for the rare individual who possesses all the traits - such as decisiveness, discipline and diligence - required to become a successful day trader.
  • Be your own boss: The day trader works alone, independent from the whims of corporate bigwigs. He can have a flexible working schedule, take time off whenever needed, and work at his own pace, unlike someone on the corporate treadmill.
  • Never a dull moment: Long-time day traders love the thrill of pitting their wits against the market and other professionals day in and day out. The adrenaline rush from rapid-fire trading is something that not many traders will admit to, but is a big factor in their decision to make a living from trading, compared with spending their days selling widgets or poring over numbers in an office cubicle.
  • Expensive education not required: For many jobs in finance, having the right degree from the right university is a prerequisite just for an interview. Day trading, in contrast, does not require an expensive education from an Ivy League school. While there are no formal educational requirements for becoming a day trader, courses in technical analysis and computerized trading may be very helpful.
  • Self-employment benefits: As a self-employed individual, a day trader can write off certain expenses for tax purposes, which cannot be claimed by an employed individual.
  • Risk of substantial losses: In an investor publication titled "Day Trading: Your Dollars at Risk," the U.S. Securities and Exchange Commission points out that "days traders typically suffer financial losses in their first months of trading, and many never graduate to profit-making status." While the SEC cautions that day traders should only risk money they can afford to lose, the reality is that many day traders incur huge losses on borrowed monies, either through margined trades or capital borrowed from family or other sources. These losses may not only curtail their day trading career, but also put them in substantial debt.
  • Significant start-up and ongoing costs: Day traders have to compete with high-frequency traders, hedge funds, and other market professionals who spend millions to gain trading advantages. In this environment, a day trader has little choice but to spend heavily on a trading platform, charting software, state-of-the-art computers, and the like. Ongoing expenses include costs for obtaining live price quotes and commission expenses that can add up because of the volume of trades.
  • Be your own boss: To really make a go at it, a trader must quit his day job and give up his steady monthly paycheck. From then on, the day trader must depend entirely on his own skill and efforts to generate enough profit to pay the bills and enjoy a decent lifestyle.
  • High stress and risk of burnout: Day trading is stressful because of the need to watch multiple screens to spot trading opportunities and then act quickly to exploit them. This has to be done day after day and the requirement for such a high degree of focus and concentration can often lead to burnout.

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12 Important Pros and Cons of Free Trade

A form of economic policy that allows imports and exports among member countries with lower or no tariffs imposed. With free access to the market and market information as well as elimination of trade barriers, supporters say that this is a win-win situation for both traders and consumers. However, not all agree, including some economists, say that free trade allows for foreign competition which can result to Americans losing their jobs, among other things.

In the United States, the country shares a free trade agreement between Canada and Mexico, a treaty known as North American Free Trade Agreement (NAFTA), with both benefits and setbacks divided groups argue about. To have a clearer picture about this contentious issue, here are some key points raised by two opposing groups.

1. Trading countries can benefit from competitive advantage.

Proponents of free trade claim that a country which has enough resources to produce a certain product has the competitive advantage to specialize in this product and be the one to supply to other countries at a lower cost. In return, the other country which can offer a product or service as specialization can also take advantage of the theory and trade with each other. This benefits two trading nations.

2. Consumers will have options and can benefit from lower prices.

Supporters also maintain that with imported products coming from exporting countries with lesser or reduced tariffs, consumers have to opportunity to choose from a myriad of products and services unlike if there is a monopoly in the market. Moreover, with no or limited barriers like high tariffs, products are offered at reduced prices which consumers can take advantage of.

3. It creates employment opportunities.

A clear advantage of free trade advocates point out is the need for more workers by the exporting country. With its market expanding globally, the demand for goods and services increase. Because of this, more labor force is necessary to ensure delivery and consequently, more jobs are available for the people.

4. It allows for foreign exchange gain.

When a country exports its products and services to another, the buyer pays with its own currency. The hard currencies paid by buying nations can then be used by the exporter to pay for products and services they will get from other countries at lower prices.

5. It results to lower oil prices.

As for the U.S., with NAFTA, oil can now be imported from Canada and Mexico at lower tariffs, which in turn, results to cheaper oil. Also, the United States does not have to rely to other countries like the Middle East for oil. This treaty with Mexico and Canada, along with the country’s own oil shale production, makes it beneficial to the U.S.

6. It is a key to economic growth.

Supporters say that the economies of trading countries will have a richer economy with the type of trade agreement they share. By being able to specialize in products they have plenty of materials of, they can increase productivity. There will be productive competition and they will be able to import products at lower prices. All these, according to proponents, are good for the economies of these countries.

1. Workers live in desolate places to work and paid low wages.

Opponents of free trade argue that free trade has led workers from poorer countries to work long hours and forced to live in shanties without electricity even, just so they can work and send money back to their families.

2. It directly affects local producers and small businesses.

Critics contend that free trade is not beneficial to local businesses when it comes to profits. With reduced tariffs imposed on imported goods, foreign suppliers can easily lower their costs. When this happens, local producers have to compete with the prices, which is often hard to do. In the end, consumers will prefer imported goods and products over locally produced commodities.

3. It takes away jobs from Americans.

Some groups against free trade say that it has robbed the average Americans of job opportunities because some manufacturers and employers are encouraged to employ foreign workers for cheaper labor and relocate their factories and plants in other countries. And with the threat of losing their jobs, some workers are forced not to join labor unions and to accept lower wages.

4. It has an impact on culture.

As for countries who buy imported goods, critics talk about the possibility of losing its culture or at least be colonized due to the influx goods from exporting countries. For them, this has an effect not only in the culture of the importing country but also in politics.

5. It can harm the environment and add to pollution.

Some environmentalists express their views on the adverse effects of globalization, including free trade. They emphasize that this will lead some countries to disregard the environment when it comes to producing products and getting rid of waste materials just so they can compete in the industry. With more competition, others might cut their costs like proper dumping of wastes and their process of manufacturing.

6. It has an impact on employees.

Opponents of free trade say that with the increasing competition this treaty offers, some businesses might close down or decide to do business elsewhere. When this happens, workers will be displaced. Regardless of the reduced prices, this will still have an effect on these workers because they will be unemployed or paid with lower wages.

The Pros and Cons of Scalping, Intraday, and Swing Trading

Learning to trade the Forex market can be an overwhelming venture. Just like any other career or trade a person needs to learn, it takes time.

There are many parts to trading including reading charts, candlesticks, and timing. Regardless of all of that, the first thing a new trader needs to decide is what type of trader they are.

There are three general types of active trading; scalping, intraday, and swing trading. Factors that help determine the trading style are: how much time an open trade position is maintained, trade size (or position size), and the type of money management strategy that is used.

Comparing the pros and cons of all three approaches may help you decide which trading style suits you best.

The Pros and Cons of Scalping, Intraday, and Swing Trading

Scalping is typically the shortest term style of trading in the markets, as scalpers seek to lower risk exposure by lowering their time in the market. Scalping usually yields the smallest gains per successful trade of the three styles that we will discuss.

  • Positions are typically only held for short periods of time, allowing less chance for reversals to knock out your trading position. This also means less need for patience and having to wait for a trade to close.
  • Scalpers typically take profits at 1:1 risk to reward or less, allowing their strategies to achieve a higher strike rate, rather than a high reward rate.
  • Because the position is typically held for a short period of time, there is also less knowledge of the Forex market, and trading strategies needed, as long-term analysis not as useful. Trends, pivot point, Fibonacci, and the like are fairly irrelevant.
  • Not all brokers allow for scalping on their platforms.
  • Since good trades typically yield only 1:1 risk to reward or less, one loss can deplete the gains of several successful trades.
  • Since the pip yields are often 5 pips or less, you may have to make many trades, even dozens in one day to accomplish your financial goals.
  • As I mentioned before, scalpers are in a world of their own. Long term analysis from your favorite fundamental resources or indicators is generally useless in scalping. This can be a blessing or a curse.

The next trading styles, intraday trading, is more common among Forex traders. Intraday trading is also simply known as day trading and refers to holding a position for a day or less. It’s common for a day trader to actually make more than one trade in a day, and have the positions only hold for an hour to a few hours.

  • The amount of pips per day trade can range from 15-45 easily. And with a couple of good day trades in a 24-hour market, it can be easy to walk away with 100 pips in a day.
  • With the time an intraday trade takes, an individual can choose from a number of strategies like price action, the Cornflower Blue, pivot points, or basic trend following to help them have consistency and intentionality when trading.
  • Intraday is also a fairly low-risk trading. To open a position of this size may only require a small amount of capital and a stop loss of less than 10 pips, even smaller depending on the strategy used within the trade.
  • An intraday trade will need more time to move than a scalp trade, and there is less margin for error than in swing trading. Even with a good trading strategy reversals and whipsaws can quickly take out a stop loss.
  • Intraday traders subject themselves to more market volatility than swing traders and stay exposed (with open positions) longer than scalpers.
  • Even though some days will contain multiple trades, some days won’t offer any. A person trading an intraday strategy follows a strict set of rules, and may not always have a set up in the market.

The last major form of active trading in the Forex market is swing trading. This is really a form of trading that really takes patience. Positions are held longer, but gains are massively larger.

  • The gains on a trade can be 100-250+ pips.
  • Signals on the daily charts are generally more meaningful.
  • Because trades are taken on daily charts, stop losses are bigger. This allows for more movement within the trade, and positions are less vulnerable to whipsaws.
  • Due to the trade being kept for a longer period of time, a trader doesn’t have to sit in front of a computer all the time or check it constantly throughout the day. Swing traders typically check the market once a day, as the new candle or bar begins, each day the market is open.
  • Although swing traders have the freedom to be away from their computers while their trades are in play, the market can be very unpredictable. One forgotten or unexpected news release, and the market can turn and take your money with it.
  • For swing traders, there is only one new candle or bar each day, meaning there will be fewer trades made over any given time, compared to the other two trading styles. This means you have to use a profitable trading strategy and follow your rules religiously. With as little as one trade a week or less, you cannot afford to be wrong very often.

Each style of active trading has its pros and cons. Each trading style lends itself to different levels of risk and potential reward. Choosing which style suits you best depends on a number of things, including your personal skill level, commitment, and attention span.

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