Why Day Traders Day Trade

Have you ever heard of day traders? At first glance the name might sound like some weird sci-fi name, like “night walkers”. But nope, there’s nothing super natural about day traders. Well, except for the fact that some of them make extraordinary returns. So what makes these traders different from other traders? Read on to find out!

Day traders look to make profits off of intra-day trading. They often trade fast and in high volumes. We won’t lie, day trading is a high-risk, high-reward sort of business. Such trading is often in high risk stocks, such as penny stocks, or trading in companies that are going through a lot of turmoil. These high risk activities could generate a lot of money. On the other hand, they could result in a lot of losses.

For example, as of the spring of 2014 General Motors has been going through some tough times due to government fines and safety violations. Stock prices have been moving up and down as some investors lose confidence, while others suddenly see a chance for a good bargain buy. As a result, prices could swing up and down and some day traders will almost certainly be in on the action, looking to profit off of quick drops and rises.

High Risks Mean High Rewards or Big Losses

Day traders like to live on the edge, few doubt that. The high risk nature of day trading means that the rewards can be substantial, but at the same time the risks can be substantial too. This is a “go big or go home” type of trading strategy, so keep that in mind.

If you are going to to engage in day trading, it’s a wise idea to set aside only part of your funds for such activities. In fact, no matter what you are trading in, it’s always a good idea to diversify. A good investment portfolio will consists of multiple stocks, and preferably multiple investment vehicles.

Consider parking at least some of your money in Forex, bonds, options, and other types of investments. A well-diversified portfolio will help protect you against losses in any one type of investment. If a stock crashes, or even the stock market itself, you will be better protected with a diversified portfolio. This is a very basic investing tip, but one that many people chose to ignore, and they do so at their own peril.

Of course, having some of your money in higher risk investments, such as options and yes day trading, is a good idea. By adding some higher risk investments to your portfolio, you’ll stand a better chance of making some serious profits, especially in the short term.

The special challenges of day trading

Besides the risks involved in trading in penny stocks or any other type of volatile stock, there are also major challenges that are specific to day trading. Every time you trade a stock, you have to use a broker to buy and/or sell your stocks. And each time you do so, that broker is going to charge you a fee.

See the problem here? People who engage in day trading have to pay for each trade they conduct. If you trade only a few times per month, the fees usually don’t amount to much. When you are trading numerous times per day, however, they can add up very quickly. And paying all of these fees can really eat into your profits.

Day traders thus end up paying a lot in fees and other trading costs, such as spreads, associated with investing. So while it might be a high reward, day trading can also cost a lot of money. Keep this in mind if you are considering this specific investment strategy.