Day trading is a type of investing in which a trader will open and close their position within the space of a single trading day, often making multiple trades capitalizing on small fluctuations in a security’s price.
Investors will often take both long and short positions during the trading day, and will usually make leveraged calls in a bid to amplify their profits from a successful trade.
Is Day Trading Better Than Investing?
In truth, there is very little overlap between traditional investing and day trading, and the extent to which one is better than the other will depend on what the individual trader is looking to gain from their investments.
Day trading will typically involve the recognition of certain market conditions and, subsequently, the implementation of various trading techniques designed to exploit these conditions. Some of those include:
- Predicting break-outs
- Momentum and reversal trading
- High frequency trading
- Pivot points
In addition, day traders will have a high-level understanding and appreciation of the fundamentals and in-depth aspects of technical analysis, including the use of Fibonacci retracement levels and the interpretation of trading signals among others.
By contrast, traditional investing in more concerned with longer-term price appreciation in a given stock or commodity. Here, investors will employ a fundamental analysis of a potential investment to gauge its fair market price, identify any price inequalities or asymmetries, and appraise the current state of the relevant market to determine an entry price depending on whether they are taking a short or long position.
For example, when analyzing Apple (AAPL), an investor may perform a discounted cash flow analysis to assess its intrinsic value.
The kind of trading a stock market participant will choose, and the decision as to which is better, will very much come down to individual preference based on risk aversion, the amount of funds available for trading, and the general expectations in the rate of return that the investment will yield.
Is Trading More Profitable Than Investing?
As with any high-risk/high-reward kind of activity, day trading can be extremely lucrative for those who are successful, and, it has to be said, lucky.
The potential to make large amounts of profit in a short amount of time is attractive to those with the right personality traits. But day trading holds no guarantees, and the prosperous day trader will always need to know what they are doing.
Investing, on the other hand, also offers opportunities for profit, albeit with a more forgiving risk profile. Medium- to long-term investment returns can certainly approach those of any day trader and are not as affected by short-term market fluctuations as day trading positions are.
One benefit over day trading that traditional investing offers is the ability to compound your profits through dividend payouts.
By investing in stocks and shares that offer a handsome dividend bonus, the savvy investor can reinvest this money in the same or different stocks, and see their profits rise passively without even worrying about price movements.
The rate of return might seem modest compared to the day trader’s, but over the long-haul it can add up to significant profit with very little work from the investor.
Is Day Trading Really Worth It?
The appeal of day trading for most investors is the realization that large profits can be harvested in a very short span of time, in a number of different markets, and using a broad range of financial instruments.
Many day traders will have expert knowledge of a chosen market. A metals specialist might, for instance, focus all their attention on just a couple of rare or under-covered commodities, like platinum, and apply this particular knowledge to make calls on price movements few other investors would see coming.
The ability of a day trader to amplify these calls using leveraged positions means that a successful trade can yield a large profit margin in a short time bracket from what would be an otherwise small market movement.
Day trading also offers the possibility of making money without having to make the correct call on long-term market trends. Secular headwinds such as changing government regulations, Federal Reserve interventions, tax policy and the credit cycle can all conspire to derail even the best long-range investment decisions.
And even though day traders can still be affected by these changes, they are less susceptible to downside risk than the typical stock market investor, provided they use proper portfolio risk management.
But day trading is not a get-rich-quick-scheme that many looking in from the outside believe it to be.
A proficient day trader will have invested many hours into honing their practice, and is likely to have a credentialed educational background in finance and will continue their professional development for the rest of their career.
Far from being the amateur “bedroom” investor many perceive the day trader to be, the modern, successful trader is diligent, intelligent and highly qualified.
Why Day Trading Is A Bad Idea?
Statistics show that day trading is not a profitable form of investing for most people who employ it. It can be stressful, risky, and comes with the high likelihood that any gains made can wiped out with just one bad call.
Day trading is a complex process too. The sheer number of trading techniques and choices can faze both new and experienced investors.
And the lure of instant riches can make those who make a series of bad trades chase immediate returns by making increasingly riskier trades to cover their losses.
Furthermore, the personality traits required for successful day trading are not common. Good day traders are cool-headed, highly analytical, able to stick to a pre-conceived trading strategy and are not unduly moved when trades go wrong.
Because day trading is often conducted using leveraged trades, if a trader losses their composure on just one trade, the potential fallout can be devastating.
When Is Day Trading Worth It?
Entering the market as a day trader can be worthwhile if you understand the risks associated with it and the regulations applicable to those that are classed as “pattern day traders”. In addition, day trades are taxable events, so you’ll need to keep good records of your exploits for use when it comes to filing your tax return.
Even so, day trading can be both exciting and profitable for those who know what they’re doing. But don’t enter the water cold; educate yourself on every aspect of day trading, and never forget to implement risk management procedures such as stop-loss and stop-limit stock orders to protect yourself if the market moves against you.
Is day trading worth it? Yes – if you can weather the potential losses for the chance of a big return.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.