Investing in the stock market is the most effective way to build wealth. A simple slow-growth strategy is perfect for those of us with steady outside incomes and lots of patience, but it’s not your only option. You could decide to become a day trader.
Day traders actively manage their investments and turn their investments into their main source of income. It’s not for everyone, but this high-risk, high-reward lifestyle can be immensely rewarding for some. Here’s what you need to know if you’re considering or just embarking on a career in day trading.
Define your philosophy and strategies
You can view the stock market in a lot of ways, and you can use a lot of strategies when trading stocks. And they can get very complicated! Take ichimoku cloud strategies, for instance. These strategies use a complex indicator called the Ichimoku cloud, which is an equilibrium chart that helps those who understand it spot trends and momentum that can help them make decisions about when to buy or sell.
Using the Ichimoku cloud can help you make money, but an incomplete understanding of the strategy can lead to mistakes. So can a scattershot philosophy. If you’re using five different strategies, you can often find reasons to do just about anything — which means that you’re relying on your gut again, and not on your strategies.
You should consider defining your investing philosophy and focusing intently on certain types of strategies. This doesn’t mean that you shouldn’t hedge your bets, but it does mean that you should commit to fully understanding the strategies that you’re using and to being consistent in your application of those strategies.
Prepare to lose money
It’s a harsh truth that most investors don’t beat the market. It’s very hard to do. Furthermore, the results of committed day traders aren’t always pretty. To be sure, amateur day traders bring down averages and make the long-tenured and talented ones look bad, but you should be conservative in your dreams for your own day-trading career, and you should prepare to lose money.
You should prepare to lose money not because you definitely will, but because you might. Being a responsible day trader means maintaining a proper emergency fund and being ready to weather bad days on the market. It means maintaining a nest egg in a stable and diverse portfolio — you’re day trading for income, not to grow your retirement fund directly! Putting your nest egg in risky active investment strategies is a very bad idea.
Be very careful when trading on margin
Trading on margin means that you’re borrowing money to purchase stock. This is not in and of itself a bad idea. It takes a bit of time to process new deposits into an account, and sometimes you need to act fast. Other times, you may spot a way to make big bucks with a little borrowing, and are ready to accept the risk that you make the wrong bet and have to pay back the loan out of your own pocket.
Your brokerage will regulate your ability to trade on margin, but you need to be very careful with it on your end, too. Your brokerage is not your friend, and it is your responsibility — not theirs — to recognize when you’re borrowing too much.
Remember that it’s not just about how much you borrow, but about how volatile your holdings are. How much slack your brokerage is willing to give you will depend on the value of your assets, which means that a sudden plunge in the value of your assets could result in a brokerage suddenly demanding that you pay your debts. Your brokerage is almost certainly even allowed to sell you out in certain situations to stop the losses — and then they’ll bill you for whatever is left.
Trading on margin is an important part of your toolkit as a day trader, but remember to look at risk as a big picture. If you’re trading on margin based on the value of an account full of volatile penny stocks, you’re playing with fire!