Money is a huge source of stress for many people, with studies showing that over 70% of Americans class their financial situation as their number one source of day-to-day worry and anxiety.
This stress can occur in people of all ages but is especially affecting those of younger generations who are struggling to cope in a world of high house prices, huge amounts of student debt, and relatively low entry-level incomes.
The costs of medicine, food, and general living are rising, and in response, people are looking for more ways to make their money work for them, searching for side hustles or options to make their existing accounts grow through investment and trading.
Day trading can be a really appealing option for people looking to push their money further and achieve more financial independence, and it was a hugely popular side hustle back in the 1990s, before waning in popularity.
Now, day trading is starting to make a comeback in a big way and can be a fantastic method for generating extra cash or even making yourself a millionaire if you're able to fully commit to it. But what is day trading? And how does it work? Read on for a brief primer.
What Is Day Trading?
Day trading is a trading style that involves opening and closing positions on the same day. As the name implies, it's all about doing your trades during the day, and a single-day trade can be opened up at 11 am and closed just a few hours later.
This is a stark contrast to usual trading and investment, which generally follows more of a long-term format, with investors opening positions one day and not closing them until several days, weeks, months, or even years later.
What's the Purpose of Day Trading?
Day trading's primary purpose is to make small amounts of profit in short amounts of time. Successful day traders work hard throughout any given day to monitor markets and carry out technical analysis in order to buy and sell securities and stocks very quickly.
With this method, by the end of each day, you'll have a clear picture of your profits or losses. Rather than a long-term investment plan which may take many months to bear fruit, day trading can provide real-world gains right away, but it does have risks.
Is Day Trading Risky?
Absolutely. Any kind of trading has at least some level of risk associated with it, and day trading is no different. Whenever you're buying and selling stocks that can have changing prices from one hour to the next, there's always a risk that you'll lose more money than you make. This is why day traders need to have a sound strategy.
What Are Some Day Trading Strategies?
The main aim of a day trader is to find volatility in the market. Volatility is basically the term used to describe the overall risk of a stock or security and the likelihood of it rapidly changing price.
This short-term price movement is what day traders need in order to make money, so they have to find stocks and securities with high levels of volatility that can move around a lot. The higher the volatility, the more money the trader can gain (and also lose).
Some common strategies can therefore include:
Momentum - Momentum trading is all about picking trades based on the latest news and information about certain businesses. For example, when an earnings report is released, a company's stock may fluctuate quite a lot.
Scalping - Scalping is a day trading strategy in which traders sell the stock as soon as it enters profit. This is an easy, beginner-friendly method for getting into day trading.
Breakout - The breakout strategy of day trading is when traders try to identify a "breakout" or large fluctuation in a stock's price. Perhaps a stock has been hovering around $24 or $25 for a while, for example, but suddenly dips to $20 or rises to $30. This might represent a good time for a day trader to get involved.
Fade - Fade day trading is all about going against market trends. Perhaps a lot of people are investing in a stock that seems safe and reliable, for example, but you feel that it might be due for a dip. You can short the stock and take advantage of a surprise for the rest of the market. This strategy requires careful analysis and involves a lot of risks.
Day trading can be a great way to dive into the stock market and potentially make some extra money or even become a professional trader, but it's important to prepare properly, carry out research, and never invest more than you're willing to lose.