Mercedes Pantelis, Customer Support Manager, easyMarkets
If you want to trade on a full-time basis then you will likely be referred to as a day trader.
Day trading involves buying and selling highly liquid assets throughout the day in order to make small incremental profits from hour-by-hour or even minute-by-minute price fluctuations.
Though be a lot of money may be made in day trading, there are some disadvantages.
Today we are going to explore the pros and cons of day trading on a full-time basis.
The Pros of Full-Time Trading
- As mentioned above, day traders may make some serious profits, but you must be willing to develop a fine understanding of the markets and implement a solid strategy that you are willing to stick by.
- Leveraging enables you to significantly increase your profits by utilising borrowed funds.
- If you work as a day trader for a large financial institution then you will likely be granted access to software that would otherwise be unaffordable to the average person.
- Full-time daily traders are able to play a fairly significant role in the markets by taking advantage of market discrepancies, a phenomenon known as arbitrage. Simply put, if you see stocks listed with slightly different prices then you can exploit this by buying the under-priced stock and selling accordingly.
The Cons of Full-Time Trading
- The degree of risk associated with full-time trading definitely needs to be emphasised. The S. Securities and Exchange Commission, states that “day traders typically suffer severe financial losses in their first few months of trading.”
- Because of the high level of risk you need to have a certain amount of capital that you are willing to, or can “afford” to lose.
- Day traders are required by the SEC to have at least $25,000 in their accounts by the end of a trading day in order to make at least four round-trip day trades over a five-day period.
- And if you do not work for a large financial institution then you may well find yourself having to invest in very expensive software, not to mention a powerful computer and reliable high-speed Internet connection.
- Between broker commissions and short-term capital gains tax you can quickly find your gross profits being eaten into why costs that you might not have otherwise anticipated.
- Speaking of tax, taxation can quickly become complicated based on your short-term and long-term returns, so be sure to educate yourself thoroughly before beginning.
- According to Walt Woerheide, Dean and Professor of Investments at The American College in Bryn Mawr, Penn, “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.”
If you think that the risk and subsequent stresses of full-time day trading are worthwhile then you may well find life as a trader to be highly rewarding.