Risks of day trading
Live by the sword, die by the sword
Daytrading is exciting and potentially highly rewarding, because we can quickly make big money from rapid changes in the market. This is however also a downside with daytrading. We risk getting caught up in the action and lose a lot of money from sudden changes that, by the end of the day, will have corrected themselves and doesn´t really impact the more long-term investors.
Running ouf of bankroll during the learning-process
No one is born a successful daytrader and learning the ropes takes time. A lot of people grind to a halt early on in this process, because they make too large trades in relation to the size of their total bankroll.
A few tips!
- Save up a sizeable bankroll first. It doesn´t have to be huge, but it should be large enough to make it possible for you to spread risk at your trading level.
- Start out small. Daytrading $50 stocks on a $500 bankroll is not recommended.
- Never risk money you can´t afford to lose. Not only is it dangerous, but it is also likely to make you a worser trader since you wont be able to act cold and detached when making decisions.
Losing the rest of your life
Day trading require us to be present and active. Today, when anyone can access a trading platform from the comfort of their own home, there is a risk of getting ”addicted” to the rush of trading and spend more and more of life in front of the screen, constantly fearing that a break might cause one to miss a good opportunity to profit. This lifestyle is not healthy in the long run; neither physically nor mentally. It can be fund to go all-in one in a while and focus on day trading only, but in the long most of us need a more well-balanced and well-rounded life to be and feel great.
Getting into debt
Many daytraders rely heavily on the practise of ”leverage” which means that they are risking borrowed money. Many brokers and trading platform, including retail trading platforms, will happily offer you leaverage since it increases their profits. Using leverage, or any other type of credit, means that you can end up losing more money than you had in your account. This is of course very risky, since you can end up having to sell your possessions, e.g. your home, to pay for losses incurred from daytrading. Daytrading is highly unpredictable and borrowing money to carry out daytrading has a very different risk profil compared to borrowing money to purchase real estate.
Scams and similar
Anyone interested in daytrading should read up on common (and preferably also not so common) scams, frauds and similar fishy practises that can hurt your bottom line. No one is immune, and thinking that you are way to smart to fall for a scam will actually put you at increased risk.
Also be aware that many actors on this scene work their schemes in the gray area, where they are technically not breaking the law.