Neophyte investors are, understandably, drawn in to day trading because of the potential rewards they could enjoy from it. This is also thanks to well-intentioned testimonials that they can find in the Internet from successful traders who just want to influence others to take a shot at earning big from trading stocks short-term.
However, most, if not all, are not aware of the risks that come with day trading. To recap, day trading is called as such because the trades (the buying and the selling) occur only in a single day. Day traders typically just take on stocks that they see are going on an uptrend in price, and they ride the momentum.
What are the risks that come with day trading? Here are some of those and how one can somehow dull the edges of these dangers.
One big risk in day trading is the limitation that are imposed on the broker. You see, brokers (whether a person or a middleman software) are the ones that receive your money and execute your order.
Now, there are many kinds of brokers, and they handle orders differently. To make the long story short, how they handle their orders will be instrumental to how fast they are able to execute your order. In day trading, timeliness is important as executing an order at the wrong time could materially affect your position and could make or break your trades.
It would help if you research first on the broker that you will tap as your “middleman” in day trading, so you understand exactly what the risks are and what strategy you can put in place to mitigate those dangers.
What technology do you use to connect to your broker? Typically, a day trader would say, “The Internet.” However, what happens when your Internet connection breaks down? Do you have a backup system in place to make sure you’re still connected and informed as to how your trade is doing?
The best way to get around this is to have a mobile data plan as a backup so you can keep watch on your trades on your mobile phone even without the Internet. Better yet, secure a landline connection so you can call your broker to update you when all else fails.
Your Risk Appetite
Are you the sort that panics at the sight of a little loss? Do you panic to a degree that you will want to drop or sell your position immediately? Well, such trigger happy attitudes have no place in day trading, because you’ll be dealing with short-term changes and lots of volatility.
If you cannot handle stress or the possibility of loss (after all, mistakes do happen), then you should avoid day trading totally. On the other hand, you could blunt these perils by getting appropriate education, setting up an effective strategy, and recognize your limits so you can set for yourself thresholds in losses and profits. This way, you don’t get trigger happy on your losses nor be greedy with your profits.