If you’ve been looking at a way to escape the rat race then you may have been casting around looking for different options.
One area that many people see as a possibility is day trading and it certainly has its positives but just how useful is this method of developing a full-time income?
In this post, we’re going to take a quick look at the viability of day trading as an income form – both the good and the bad.
What is day trading?
Let’s start with the basics. What actually is day trading?
Well in the strictest sense day trading describes the practice of buying and selling shares or other financial instruments and holding them for an ultra-short period of time, often buying and selling on the same day – hence ‘day trading’.
The term has morphed over recent years and in more common parlance relates to people who are active short term investors looking for quick profits.
Anyone can be a day trader, all you need to start is a bank account and a share dealing account and you are away.
For the purposes of this article, we’re looking at stocks and shares trading but the term day trader can also relate to all sorts of different things from bonds to currency (forex) to spread betting.
Day trading – the upside
Everyone has heard tales of the city trader who made a million through a smart purchase and whilst they are exciting, these stories are usually untrue or at the very least wildly exaggerated.
In fact, the essence of day trading is often SPQR – Small Profit Quick Return.
Professional city traders carry out thousands of deals a day, most only making a few pounds, but the volume more than makes up for the small return.For the rest of us, an active strategy is likely to result in only a few trades a day where we search for value in underrated stocks.
This is naturally the main thing that brings people to day trading – the money.
You can make money and the best day traders do very well but see the downside section for further analysis of this.
The simplicity of getting into day trading is one of its key attractions. In theory, all you need is a laptop and an account and you are away although we wouldn’t by any means suggest that this is a winning strategy.
There’s no doubt that day trading is exciting as you watch your shares go up and down in value and take decisions that can make you money in a split second. In this respect, it can be very like gambling with all of the enjoyment, excitement and risk that this entails.
If you want to take this route to develop full or part-time income then the good news is that you can do it anywhere with an internet connection, be it your home, an office or a beachfront bar.
To a large extent you are developing a lifestyle career however many successful day traders would say that their lives are dictated by the hours that the London Stock Exchange (LSE) or NASDAQ keep.
So if you listen to the advocates, day trading will make you a lot of money and can prove to be an exciting and rewarding occupation.
Day trading – is it really that easy?
A quick search online will turn up any number of advocates of day trading but don’t be fooled by the gloss, only a very few day traders actually make money.
Think of it like any profession, it takes training, experience and hard work to do well and if you aren’t prepared to commit then you are likely to fail.
Most successful day traders have a large amount of capital to invest in their strategy and it is capital that they are prepared to lose if need be.
Called ‘risk capital’ because it is constantly at risk, it works on the theory that if you can afford to lose it, then you won’t be emotionally tied to your trades.
And that points the way to probably the biggest downside of day trading – the risk.
Even the very best traders can have their off days or be the victim of bad luck and when this happens, it will cost you money.
Professional day traders working for city firms will have access to huge amounts of resources, a trading desk with little in the way of fees and research and information that a single trader couldn’t hope to emulate.
Remember that the market will always have winners and losers and for the professional trader to make money, someone somewhere has to lose it.
So it is important to remember that in your new career you could be competing with some very big fish indeed.
Day trading – some tips
If you are committed to getting involved then there are some ways that you can make your chances of success that much greater.
Firstly educate yourself. Read up as much as you can about trading strategies, how the market works and how successful traders make money.
Your next step needs to be building up your own resources and sources of information.
Subscribe to news services like the FT and look for a good source of information as to the best stocks to look for.
You’ll need to build up some healthy capital because trading small amounts tends to reduce your profit due to the fees involved and while you are doing this choose a broker service and set up a dummy account.
Your dummy account allows you to trade in stocks using pretend money. It’s a great way to test your strategies without risking your capital and to make sure that you are really cut out for the life of a day trader.
Look also for good quality information about becoming a day trader from people who have been there and done it. There’s plenty out there for free but don’t take people’s word for things even if they sound absolutely certain. Take their tips and run them through your dummy account to test if they really work.
You can even find mentoring services that will assign you a successful trader who will guide you through the early days of your new career.
And finally, don’t ever risk capital that you wouldn’t be happy to lose. Good day traders can make great returns but they can also lose their shirt.
