Risks in Day Trading


Day trading is the buying and selling of financial instruments in stock exchanges that begin and conclude in the trading session of a single day. The idea is to book quick profits leveraging the rise and fall in the prices of such instruments.

Another benefit that investors look for in day trading is that it is thought to reduce the risk of holding a position overnight as open price sometimes changes significantly from the previous day's closing price. Day has emerged from its erstwhile trading is gaining popularity among investors although there was a time when it was looked down upon.

Risks involved: Leaving aside its extremely profitable prospects, day trading is however, quite risky. This is because most small investors do not have the capital, time, and nerve to sustain the huge losses capable of occurring. Most day traders also indulge in trading on margin (by borrowing money) in the hope of increasing profits through such leverage, but by doing so they are also exposed to a much higher risk of incurring heavier losses.

One of the most important factors in day trading is about knowing how margin works, the amount of time they will likely have to meet a margin call and how they are going to proceed further.
Most trade this way without having fully understood these concepts or have not paid attention to them.

Besides the high risk factor and compared to the 'buy and hold strategy', day trading can be highly expensive as well because a trader will have to settle multiple commissions and pay for the spread numerous times in a day.
This way, almost 80-90% of day traders lose money. While engaging in day trading, they should always use their 'risk capital', or the money they can afford losing, and not the amounts they will need for meeting daily necessities or retirement. As all forms of trading require some amount of guesswork even if the trader is a veteran at the game, a day trader must know exactly where and why he is putting his money into. Emotions and market developments should not replace reason and all traders should be aware beforehand how much they need to cover expenses and break even.



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