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The opinions expressed by Entrepreneur contributors are their own.
Opinions about day trading vary depending on who you talk to. Some of the criticism you hear is valid, while others are simply based on emotion. Let’s distinguish between misconceptions and the actual facts surrounding this practice.
“Day trading is just gambling, nothing more, nothing less.”
error. It is certainly true that many gamblers try day trading, just as many gamblers make other types of investments based on “hot chips.” However, it would be a mistake to call all-day traders mere gamblers. That opinion usually comes from outsiders who form their opinions based on movies and social media.
Professional day trading is a highly disciplined process. It involves learning a lot about stock movements, assessing risk, and perhaps most importantly, human nature. It’s not just about how other traders react to market movements, it’s also about how you react when things are going well, and especially when things aren’t going well.
Day trading can be humiliating for those who work hard before seeing consistent profits, but the results are possible.
Related: How to find the best stocks for day trading
“Scientists talk about separating signals from noise. In long-term investing, it is possible to detect signals such as the fundamentals of a stock, where a position is held for hours, minutes, or even seconds. In day trading, everything is noise.
error. I can’t speak for high-frequency trading, where trades are sometimes measured in milliseconds, but it’s possible to detect signals among a lot of noise, no matter how long you hold a stock.
Day traders focus on repeating patterns. It reminds me of giant trees and fractal patterns that can be seen even under a microscope.
Indeed, you may notice a pattern forming in a stock’s last series of trades. You may also realize after taking a position that the expected pattern did not materialize. At that time, I will probably close out the position, cut my losses and turn it into a learning moment. I’m a big proponent of writing in a diary after a trading session. Write about what you thought would happen, what happened next, and what you can learn from the episode. Analyzing your trades rigorously is a shortcut to improving over time.
“Day trading is inherently riskier than any other form of investment except cryptocurrencies and futures.”
error. When I take a position in his $7 stock, I not only watch the market carefully, but even before I take the position, I calculate the points to bail out if the stock goes down. No need to wring your hands. Just execute the plan. Therefore, there is no risk of losing the entire value of the position. This is reflected in people who trade penny stocks that can quickly go to zero, or people who invest in options where the value of an option can be worth it one moment and then evaporate the next. Compare yourself with others. That kind of investment is too rich for my blood.
Related: How I turned $583 into $10 million by day trading
“Day traders who take positions to ‘stick with the guy’ are at best misguided and at worst foolish.”
truth. I’m all for investing in companies that provide useful services and are not involved in illegal or unethical activities. However, I don’t see investing as a way to get my point across. When I day trade, I’m looking for stocks that are making a specific move at this moment. The move is due to specific reasons, such as news of successful drug trials or new product announcements. And the stock is trading in my preferred $2 to $10 range, among other factors. My goal is to invest carefully and professionally. That way, any profits can be used to make a political statement.
“Gamers make the best day traders.”
error. It’s true that many great day traders are also veteran gamers. However, simply being fast at the keyboard does not make you a natural day trader.
Gamers bring benefits such as being proficient with commands and being able to make quick decisions. Both are useful for day trading, but they are not enough on their own. You must also have a great deal of self-awareness and self-control. Have you just seen some trader making a lot of money in a stock and your emotions are being hijacked by his FOMO at this very moment? Your pre-set threshold indicates you should sell. If so, would you want to ride the decline in stock prices “just a little bit more”?
Having fast fingers is a plus. Even more important is what’s happening between your ears.
Related: 10 important things to know before trying stock day trading
“Highly trained professional day traders can actually eliminate market risk.”
error. He has recorded over 20,000 transactions in his career so far. I am passionate about studying this specialty and have every tool at my disposal. However, it is not possible to eliminate all market risk. The most I can hope for is to learn from my mistakes and be strict and disciplined about when and how I trade. It helps a lot to reduce my risk. Even when I’m completely on my game, the market sometimes humbles me.
There may be some professions where extreme cockiness is rewarded, such as sports, art, or poker. Day trading is not included in this.
“Everyone, including day traders, can get lucky in the short term, but eventually that luck runs out. This is called ‘reversion to the mean.'”
error. I think there is such a thing as “beginner’s luck.” Some people get excited about day trading because they caught a hot chip, opened an account, and made thousands of dollars.
Let’s say it’s you. congratulations. What matters is what you do next. Just when you find another hot tip and think you can replicate its success, you’re in for a rude surprise.
Rather, it’s good if your first easy wins got you interested in day trading and you decided to get serious about how it actually works. You are on the first of many steps required to become a disciplined and competent trader.
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