14.6 Risks in day trading
Day trading, as previously mentioned, can be very risky. The bottom line is that day traders should not risk the money that they cannot afford to lose.
Possibility Of Large Losses
Depending on the decisions made during the day you could lose thousands to lakhs of rupees in the course of a few hours. Many novice day traders suffer severe monetary losses in their first months of trading, and some don’t stay in the game long enough to see any profit. Most day traders abide by an important creed: only risk the money you can afford to lose.
Time And Knowledge
Day trading requires a lot of time and attention paid to the markets and their trends and daily activities. A lot of focus has to be put into the market hours, which requires plenty of time in front of the computer screen, ready to execute a trade at the drop of a hat. In addition to the time commitment, day trading requires a lot of study outside of your trading hours.
Stress is part of every day’s trading job. This isn’t only due to the possibilities of large losses, but also because of the idea that a lot of individuals in the investments’ field view it as gambling. Like watching a sports team you bet on, day trading can cause high levels of stress and anxiety waiting for a stock’s price.
Overtrading can be of two forms. One is taking too many risks/making too many risky trades and the other one is trading too large shares. Amateur day traders typically get overwhelmed with the fast pace of day trading and let their emotions, instead of their knowledge and analysis, make the decisions for them.
Stock Trade Commissions
Although many day traders deal with direct access brokers and many online day trading sites offer low commissions, it is possible that commissions will interfere with your ability to make a serious profit. Due to the rapid fashion of trading, and the large volume of trades (each trade carries with it a commission), a lot of money from your profits - or out of your pocket - will go toward commissions. For example, for commission of Rs 100 per trade,a quick buy and sell transaction would cost Rs 200. This would be 20 per cent of a profit of Rs 1,000 profit or 10 per cent of a profit of Rs 2,000.
Most of the day traders rely heavily on borrowed money or buying stocks on margin (collateral held to cover the risk of the trade). Borrowing money to trade stocks always holds some risks. Day traders utilize the leverage (borrowing money to supplement existing funds for a greater return) of borrowed money to increase returns. If not successful, this could lead to the trader losing large sums of money, and possibly an accruement of debt. So be very careful especially when you are using the margin for trading.
Understanding Market Trends
The focus of a day trader’s day is sitting in front of a computer screen and watching for stocks that have some movement. They tend to follow a stock’s momentum and make a quick transaction before it changes course. Since day traders do not know for sure how a stock will move, it is very important that they have knowledge of market trends and fi nancial and investment analysis.
Starting out as a day trader can cost a lot of money out of the pocket. In a sense, you can already begin your day trading career in the red. These expenses can include software (and hardware), commissions, manuals and other resources. It is very important to develop a budget for these out-of-pocket expenses before entering the arena of day trading.
Record Keeping and Taxes
As a day trader you are in business for yourself. So, in addition to being the boss, you are also the accountant and a full-time accountant at that. You will need to be aware of transactions made and money earned, and every April it will be your responsibility to check those records to properly give the government its share.
Technology can be your enemy too. Simply put, power outages, software/hardware issues, disrupted internet connections etc can cause major hurdles to your day trading strategies.