January 29, 2014

So You Want to Live the Life of a Daytrader?

Day traders are a relatively new breed of investors. The popularity of daytrading has skyrocketed in recent years with the advent of internet brokerages, providing traders with easy access to the markets. Unlike traditional buy and hold investors who realize potential gains through riding a stock for days, months, and sometimes years, day traders make their profits by scalping the markets for gains in minutes and hours, ending each day with closed positions and thousands in potential profits.

Steeped in Controversy

Daytrading is an extreme version of trading the markets that completely goes against traditional investing practices. Utilizing perfect market timing, day traders profit from market momentum on a daily basis. Traditional investing logic suggests that investors gather as much information about a company as possible and invest in companies they think are underpriced, holding onto the stock until significant profits are realized through increased stock prices over time.

Day traders, however, couldn’t care less about whether a stock increases or decreases in value. In fact, day traders earn their profits from shorting stocks just as much as they do from going long on stocks they feel will increase in value over the course of a day. This gives day traders ultimate flexibility. While volatile markets play havoc on a traditional investor’s returns, it suits day traders perfectly as they ride the ups and downs of the market, profiting from every momentum shift.

Winning as a Day Trader

It may seem appealing to be able to profit from both bear and bull markets and realize profits at the end of each trading day, but daytrading is a skill that takes much time to learn. Successful day traders must have thorough knowledge of technical analysis tools to be able to buy and sell multiple stocks throughout the day on a moment’s notice. Most day traders have specialized alerts and technical indicators that let them know exactly when to enter and exit a trade. Doing this on a daily basis takes complete objectivity.

tradiing lifeComplete objectivity is the most difficult challenge faced by most traders. However, it is the driving force for successful ones. Traditional investors buy a stock and hold on to it in hopes that it will increase in value over time. Thus, these investors are inherently emotionally tied to their trades, resulting in an increased chance to hold onto a trade longer than they should. Day traders must be able to be emotionally unattached to all of their trades, buying and selling at precise moments when they can realize the most profits from their action. Being able to minimize their losses and maximize profits from perfect market timing requires that day traders have a machine-like daily routine, completely void of any emotion.

Life of a Day Trader

An obvious appeal of daytrading is the ability to work for no one but yourself and be in complete control of your own financial future. Though many day traders completely embrace the self-employed mantra and work from home, some choose to work in trading centers in an environment where they are surrounded by the buzz and competition of a workroom filled with other day traders. Either environment requires a daily routine and complete focus.

Day traders typically wake up between 5-6 am in order to digest the stock market news of the day. They then get their workstation set-up with all of their charts, indicators, and alerts. Some may choose to communicate with other traders, giving and receiving stock tips from one another. They then go through their day in a robot-like fashion, completing multiple trades throughout the day.

Most people become enamored with the idea of becoming a day trader, only to realize shortly after that daytrading is not what they had imagined it would be. Though day traders are never mentioned in a discussion of famous investors, successful day traders can earn a substantial living. It is not suited for everyone, but those that are driven, focused, and can objectively analyze data and take action on a daily basis, can live life on their own terms and control their destiny in the daytrading arena.

Max Hansson

Max Hansson is a guest author to the site. Writing about risk, chart strategies and money management. Max is an active day trader of forex, mainly EUR/USD and GBP/USD.