Why is day trading considered so risky

Does day trading offer more opportunities or more risk?

Numerous legends and myths have grown up around day trading.

Quite a few traders have now specialized in day trading, while other market participants advise against day trading.

In day trading, the focus is always on the comparatively small time window that is available for setting positions.

In addition, it is above all about absolutely disciplined trading.

The following article will tell you everything you need to know about the Day trading.

What exactly is day trading

Day trading is a trading strategy in which you as a trader open a position in the course of a day and then close it again within the same trading day.

While other strategies are primarily about holding a certain position over a longer period of time and allowing it to run in a desired direction, day trading explicitly takes advantage of short-term fluctuations on the stock exchanges.

The traders prefer to trade with securities that are considered in-play stocks. These are mostly securities that have generated a lot of momentum within the last few days of trading.

A strong momentum always goes hand in hand with large movements within a trading day. This is why this form of securities trading is also called intraday trading.

In this context, you should always concentrate on so-called gap candidates when day trading. Because securities of this type always have large price gaps before the start of the stock market.

These usually result from events or news that are relevant to the stock market and the economy.

As a trader, you should look specifically for comparatively liquid stocks that have the highest possible volatility. In practice, day traders also like to rely on Forex.

Or don't you want to trade physical stocks? Then CFDs (Contracts for Difference; in German: Contracts for Difference) are a good solution.

In addition to reverse convertibles, futures, warrants, swaps and certificates, these are among the most important types of derivatives.

What news and events do you have to watch out for as a day trader?

In order to be successful in day trading, you must always be informed about the latest developments, circumstances and occurrences.

  • Which company has presented a promising product?
  • Who could close a favorable deal?

Or in the opposite case:

  • Which company has problems with a defective product?
  • Has a contract with an important business partner or customer been canceled?

Events of this kind generally lead to violent price reactions either upwards or downwards.

A prime example of the effects of certain events is Apple, which brings a new iPhone onto the market every year. The introduction of a new model is seen worldwide as a real event with an extremely high attention factor, which has a significant impact on the share price.

For example, with the introduction of the first iPhone model in early January 2007, the price of Apple shares rose from $ 12.17 to almost $ 14 in just two days. A total of around 270,000 devices were sold on the first day of sale alone.

Such events or events are predestined for day trading.

On the one hand, Apple is an extremely liquid asset and, on the other hand, events of this type are among the absolute major events that immediately affect the share price and sometimes drive it to very large leaps.

In this regard, there is also the option of buying securities from large companies such as Apple as CFDs from your trusted broker and leveraging them if necessary.

These industries are particularly attractive for day trading

Companies from the electronics industry and biotechnology companies as well as the pharmaceutical industry are particularly suitable for day trading.

Companies from these sectors tend to have large price gaps due to news about product launches and technical or technological innovations or, for example, about the development of promising drugs (here: gaps).

Negative news can also be used sustainably by day traders. For example, do you remember the glyphosate scandal at Bayer? The revelations and developments provoked an extremely strong price reaction, which could be optimally implemented in day trading.

In contrast, biotechnology companies and the pharmaceutical industry represent sectors that are difficult to trade for medium and long-term trading strategies. This is due to the fact that it is extremely difficult to correctly assess active ingredients and drugs over a longer period of time.

As a day trader, you don't have to worry about making a corresponding assessment. What counts here is the news that promising work is being carried out on an active ingredient, for example against breast cancer. Such news alone can cause violent reactions on the stock market.

For example, the company Morphosys announced at the beginning of November 2018 that the interim results of a study with over 80 blood cancer patients were far better than generally expected. There was a strong reaction from market participants to this news, which led to significant price jumps.

But the announcement of quarterly results is also interesting for day traders - regardless of the respective industry - as this is usually always accompanied by strong price reactions.

In the event of large price gaps, the imbalance of many shareholders is almost guaranteed, which leads to strong momentum. The direction depends on how good or how bad the quarterly results were.

If you use so-called gap trading strategies, profits of ten percent or even more are possible within a few minutes.

How much start-up capital is required for day trading?

Day trading is often mistakenly associated with large amounts. Because this statement is not true: You can do day trading with almost any start-up capital.

With most brokers, the minimum deposit is around 100 euros. You can already take action with this sum. Of course, any profits are correspondingly low. In addition, you have to cut back on the selection of financial products to be traded for small amounts.

Futures contracts in particular are rather unsuitable for smaller amounts, because the position sizes in this area are automatically very large.

As a day trader, you benefit from these advantages

Day trading offers you numerous advantages. We have listed the most important advantages for you below.

  • There is no gap risk in day trading

Traders around the world know the problem. While they are slumbering peacefully at night, gaps suddenly appear from one day to the next. This kind of nasty surprise overnight is ruled out from the outset in day trading. The positions are usually not held overnight.

As a day trader, you are completely independent of the general development of the market at all times. Even bearish market phases, during which the markets are volatile and nervous, do not pose any risk to day trading.

Instead, day traders tend to benefit from such phases. Because a nervous market always ensures correspondingly strong price movements. A position or swing trader cannot use this for his portfolio.

As a day trader, on the other hand, you can react extremely flexibly and benefit from the respective changes. Sector rotations and particularly short-term trends can also be used to great effect.

  • Act on different time levels

In principle, you can trade all available formations intraday. Position and swing traders look for their formations around triangles, flags, pennants or, for example, reverse functions in the weekly and daily charts.

The respective technical aspects of day trading, on the other hand, have no direct effects. Only the time levels change, so you are looking for your trading setups in lower time levels.

A clearly structured time management has proven to be a good solution in the past. At the start of the stock exchange, trading takes place within a time frame of two minutes.

The first tradable formations quickly form here. Later you can switch to a time frame of five minutes before - if the trading day is already advanced - you can then concentrate on charts in the 15 minute sector.

  • Focus on chart technique and analysis

As a day trader, you do not have to deal with comprehensive data and figures as well as balance sheets or fundamental aspects when analyzing securities.

Instead, the focus here is mainly on the respective chart. The aim is to identify strong sectors and weak sectors and to benefit from the respective price movements during a trading day.

  • Comparatively very small risks compared to other types of trading

Experienced day traders often do not put profit at the top of the priority list, but primarily protect themselves against the risk of loss. This includes permanently disciplined work with stops. Those who do not do this have very little chance of success in day trading in the long term.

With good trading setups that form in the charts, you can usually generate a very good risk-reward ratio (CRV for short).

Good day traders can get CRVs of up to 10: 1 in a ratio. In this case, the chance of winning is ten times higher than the risk of loss. However, this is by no means a guarantee that your trading setup will actually work.

In practice, the hit rate of successful day traders is usually not more than 50 percent. However, this does not mean a high loss. Rather, it is because day traders immediately leave a position if a trade does not go in the desired direction.

This means that you only have to cope with a small discount. You can quickly catch up with another trade. Therefore, day trading is always about discipline and continuous trading. Sitting out positions accompanied by hopes and fears does not exist in day trading.

  • You only have to invest a little time

Time and again, traders criticize that day trading demands an enormous amount of time from the respective day trader. This may be the case with professional day traders, but if you don't sit in front of your computer all the time, you can organize your time freely.

Pick the days of the week you want to trade. You can achieve positive results with just two or three hours of concentrated day trading a week.

You have to be aware of these disadvantages of day trading

Where there is a lot of light, you will always find shade. This also applies to day trading. You should therefore always keep an eye on the following list of (possible) disadvantages.

  • In some cases, high fees are charged.
  • Promising trends of a medium and long-term nature are ignored.
  • Due to the given trading times, trading is often difficult to implement in terms of time.
  • If you do not master the chart technique, you can run into losses quickly. A forgotten stop is enough to go into the red.