What is day trading?
Day traders take advantage of daily market movements, and therefore execute trades multiple times a day. Often, day traders have to make quick decisions and study market movements closely. For some, day trading is a daily exercise and for others it is a full-time job. So, are you suited to day trading? Here are a few questions to ask yourself:
Are you good at maths?
Let’s get right to it. Day trading is more than eyeballing graphs and going with your gut, it’s a highly detailed and numbers heavy analysis of price movements, volume and the underlying companies. When talking about averages, most people struggle to define the difference between mean, median and mode. The standard day trader’s tool box includes exponential moving averages, Fibonacci sequence and Bollinger Bands. If these concepts put you in a spin and you have no desire to dust up on the details, then day trading might not be for you.
Do you have lots of time and can you be really flexible?
Once day traders have settled on a strategy, or more likely a select few strategies, they then typically wait for the right lead-ins to hit for them to enter a trade. There are three levels of automation when it comes to monitoring and executing your trades that all require lots of time.
Some traders are fully manual, meaning that they will have all the relevant information at hand and will manually monitor the relevant signals to identify when to set a trade up. These traders will need hours to sit at their computer.
Some traders will employ alerts and other monitoring programs to give them a heads up when a certain strategy is coming together and it may be time for a trade. These alerts can happen any time of the day or night. The trader will need the flexibility to drop what they’re doing and manually manage the execution.
Then there are those who employ computers to do the monitoring and execution of their trades. This requires a lot of time upfront to develop the algorithms and then ongoing time to continually monitor and adjust the algorithm. This aims to ensure that the algorithm is performing as expected, as any unexpected results could be very costly.
As the name suggests, day trading could literally become your day job. It will likely require a high level of commitment and time, any less is likely to result in losses.
Do you truly love following the market?
Day traders spend hours submerged in charts, numbers, economic data and whatever else they think will give them a trading edge. It can be absolutely thrilling when you’ve done all the hard work on developing a strategy and you’ve seen the set-up, executed the trade and exited with a profit. It can also be mind-numbingly boring, repetitive and lonely. If chasing fame and riches are your only motivating factors, then the days and weeks where nothing is happening in the market can be even more difficult.
Are you disciplined?
The day trading world is full of big talk and bravado, with stories of fortune and nerves of steel. The truth is that successful traders tend to be very disciplined about how they exit a position, that is, at what point they sell. Before entering a trade, they will have a clear idea of at what point they take the profits and where they stop the losses, and they will stick to that.
Successful traders also typically have the patience to wait for all their strategic signals to turn positive before entering the market. And they will stick to their strategy rather than try to create value on the fly. Especially when it’s your money on the line, being disciplined is hard but it’s perhaps the most important attribute of a day trader.
There is no denying that day trading is full-on and takes a great deal of dedication. Although, if you answered yes to all the above then day trading may be worth considering. If any of the above doesn’t sound like you, then the myriad of other investing options might be a better fit.
If you’re comparing online share trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to providers’ websites. The information displayed is based on an average of six trades per month. Please note the table is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of online share trading companies.