Both trading and investing involve seeking profit in the stock market but in different techniques. Investors have a long-term outlook to the market and take investment decisions mainly driven by fundamentals. On the other hand, trading involves short-term strategies to maximize returns daily, monthly, or quarterly.
When you start investing you must learn the rules of investing and risks associated with trading, some of which happen to revolve around day trading.
What is day trading?
Day trading is the act of opening and closing your position in a stock on the same day. This means you sell what you bought within the same trading session. Investors do transactions based on the price of the stock in a very short period of time.
Who is it for?
If you are new to investing, you may be playing with fire. Your odds of success are like those of any other high-stakes gambler. Expert day traders are usually traders in large financial institutions or individual experts that use advanced technical analysis and charting tools to understand chart patterns, trading volume and price movements. Those people usually invest large sums of money, which they can afford to lose. A small percentage of investors use day trading as their primary technique and do so on practically a full-time basis.
How do they do it ?
Most traders develop a very disciplined process and stick to it and know when to close out a position. You need to act fast and get out of your position but others do and the stock price starts to fall. Some of the tools used include:
- Real-time news services: Daily prices of stocks move heavily depending on the news sentiment of the stock.
- Level 2 market data: You need to know how much people are willing to buy or sell the stock for to be able to correctly price your stocks.
- Technical analysis: You need to run statistical trends on intraday charts using trendlines and candlestick patterns
- Stop-loss: To limit the loss of your position if the stocks price falls beyond a certain point.
In the days of pandemics and financial crisis, strong market fluctuations only compound the risks (Check our article on how to deal with market crashes). You need to understand the risk that could be caused by day trading and not just know how it works. Multiple studies have shown that day trading is extremely risky and associated with a high chance of losses. As a day trader, you need to stick to your plan and learn to keep yourself confident. Diversifying your portfolio in the long term has proven to be the most solid way of growing your wealth.
It is critical to note that speculative investing may significantly outperform fundamentally solid stocks in the short term despite the absence of any understandable catalysts, even a good product or service or at the very least expanding market share to start with.