Day trading: Is suitable for beginners?

Day trading gets a lot of attention as stories of traders who made it big in social platforms proliferate. Everyone has come at least once across a story about a day trader who made quick profits and managed to replace their day job with the exciting world of online trading.  This was very much the story of forex and CFD trading during the Covid-19 pandemic, as more and more people took to online trying their luck and finding something new during the lockdowns.

Are these success stories the norm?

It cannot be denied that success stories are real, but these are rarely the standard. IT takes years of experience and knowledge to develop one’s skills to such a degree so they can confidently say they are good at.  Stories may be good PR, but the reality is different. Getting your hopes up, only to get disappointed or risk your funds is not an option.

When you actually do the research, you will find that the big majority of day traders make mistakes and experience losses. Others start trading and incur losses, only to quit soon after, and others continue to lose, unable to stop. Only a small percentage of traders make profit, and an even smaller number is successful in the long term, making consistent profits in a predictable manner.

In this article, we’ll look closely at the research and discuss some of the factors that make day trading a difficult job, but not without its rewards.

What is day trading?  

Day trading involves buying and selling a instrument and can be done by both “institutional” investors —professionals at investment funds and banks—and “retail” traders who are not professional traders. The majority of retail is conducted through brokers using online platforms such as the well-known 交易平台.

When it comes to 外匯 and online trading, the dynamic nature of the market and the easiness with which traders can buy and sell any trading instrument at any time, creates a fairer market environment, but not without risks. Beginner traders can start day trading in just minutes, but that flexibility doesn’t mean that they have mastered it. On the contrary, this can be misleading, as they my jump right into it without the necessary practice, knowledge or skill. There is a number of traders who do well though, as they understand the risks involved and do their research, prepared to incur the unavoidable losses, but learning from their mistakes and improving day by day.  

Can you make money day trading?

Many people start day trading as their occupation and create long-term success from it. But the vast majority don’t. Most day traders experience losing daily.

How many day traders create wealth from their trading activities?

Every big news headline hides many retail traders who spend their money unsuccessfully. According to studies,

A big percentage of day traders end up losing money. Research indicates that many day traders exit the market within 50 days because just a 7% remains active throughout the entire time period.

Why do some day traders fail?

Why do some day traders lose? Here are some of the key reasons:

• Due to the low percentage of making it big as a beginner, most day traders quit early, with only a small percentage of traders staying active after three years.

• You need extreme determination to succeed and only those with the right mindset pursue it either full-time or part-time.

• To succeed at day trading you need both smart decisions plus proven past profits. Only those with experience, tend to trade effectively, as trading experience brings valuable benefits. To predict future profits, you need both trade experience and proven past earning results.

• Research shows that day traders have a strong chance of experiencing financial losses. When you want to profit from day trading you need to prepare yourself to experience losses throughout your journey.

• Prejudices and emotional reactions lead day traders to make the wrong decisions as the majority of people starting day trading think they will match or beat normal results. Their built-in mental ability or basic grasp of money management may help them at first, but if they lack determination and knowledge, success may be short-lived.

Why do successful traders stand out?

Successful traders stand out because they test and use strategies based on data and market sentiment. Most traders, however, continue to trade despite suffering losses due to overconfidence and emotion.

How emotions affect trading

Many traders, even after experiencing continued losses, remain focused on trading and don’t give up. Whether you are making profits or losing, being attached to the market, despite negative feedback will only result in losses. 

Being emotionally attached means that you through logic out of the window. A rational one would possibly stop after 50 days of unsuccessful trading. But most traders are incapable of making rational decisions.

• FOMO is risky

“Fear of missing out” (FOMO) can lead traders to make rash decisions as they don’t want to lose on what looks like a great opportunity. But if everyone has already jumped on the train, maybe the hype is old news, and you will only trade ineffectively. It is based on emotion and lack of knowledge is dangerous.

• Emotional discipline in trading

Controlling your emotions is closely linked to good performance. Research has shown that those who experience strong emotion tend to exhibit weaker trading performance, than those who can control their emotional reactions. Profitable traders successfully manage their emotions and avoid being too confident or greedy.

Understand why you’re trading

• Set rules then follow them as planned. Set your trading plan to limit individual risks at 1% of your investment funds. Through stop-loss orders you choose to sell your positions once they hit a predefined price to avoid further losses.
• Stop trading when you start to lose money. You should evaluate your approach as potential mistakes may reveal weaknesses you can improve.
• Day trading can result in excitement and can make you feel intense pleasure. Your greatest risk occurs when you follow your impulse instead of sticking to your trading plan.

Studies have consistently shown that a small percentage of retail day traders generate steady profits with predictable results. Developing a proven strategy along with strong discipline, emotional control, and smart risk management will allow you to become a successful day trader.

Choosing the right broker

Trading CFDs requires you to work with a broker but you need someone that has the experience and is trusted. If you are looking to make money through day trading, then you will need your CFD broker to provide you with special personalised services as you will need to trade different products and make numerous transactions per day.

When choosing your broker ensure that they provide a wide range of resources and tools.

• Ensure they provide a substantial range of available traded products with a strong focus on the exchange-traded items you prefer to day trade such as shares or forex.
• When you trade often the costs pile up fast so you need preferential rates. Your ability to generate income through day trading depends on the funds left over from your wins.
• They should be able to handle many trading transactions.
• In-house education and independent research are great resources for day traders.

To succeed as a day trader, you will need the right broker on your side. IronFX provides the tools, educational resources and friendly customer support to help you succeed in the markets. Register today and explore all they have to offer.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.