The majority of day traders experience a few major financial setbacks in their first year of trading, but most never reach profit-making level. Given these discouraging results, it is easy to understand why day traders must only expend as much money as they can safely afford to lose. They should never borrow money that they will have for living expenses, invest their retirement funds, borrow money for credit card bills, use their parent’s student loan cash for day trading, or even use their child’s student loan cash for day trading. Instead, traders should limit their risk by only risking money that they can afford.
In this article, I want to explain how the loss and profit of day trading differ from other forms of investing. Investing is the process of purchasing a security and expecting to earn a return on your investment within a set time frame. You pay the security’s purchase price for an asset that will appreciate in value over time. Your risk of loss increases each time that you make a purchase (for example, if the asset doesn’t appreciate as anticipated). If you were to sell that same asset for a profit, you lose your initial investment.
Day trading on the stock market is different. Instead of purchasing a security at a predetermined price and expecting to earn a profit when the security’s value appreciates, day traders place a trade at a predetermined price and expect to lose their initial investment when the value declines. The reason that traders to place trades is because they know that the market is dynamic and unpredictable. Day traders anticipate that the value of the underlying asset will decline (and they purchase the asset accordingly) because they have studied the behavior of the market and understand the likelihood that the asset will decline over time.
Although it is possible to make a profit from day trading the loss is also very high. Traders make profits when the price of the underlying asset increases, but they are often severely bruised by the loss of their initial investment.
Of course, not every trader makes a profit and lose every time. Many traders do well over time and have no losses over their entire life span. Even the best traders make some loses in a given year, so traders will still lose money during that year (the amount depends on the size of the trade).
If you are losing money, don’t be discouraged. It doesn’t mean that day trading is a bad investment; it simply means that you need to study the market and understand how to avoid losing money while making a profit.
Most traders have seen some losses. It is natural to experience losses along the way. You also will experience losses if you fail to study the market; for example, if you purchase a stock and lose your initial investment, you will experience a loss.
But, if you have been successful with day trading and your portfolio continues to grow over time, then you can continue to make profits even with some loses. There are some traders who have made multiple million dollars a year in one day trading without experiencing any losses. In the long run, success in the stock market requires consistent, continued success with small losses.
Successful traders realize that many of the greatest investments are made when the market is trending lower and are purchased at a reduced price. For instance, if you invest in a company whose stock is going down but has been steady for the past several months, you can make a profitable investment. This type of trade can work in the short-term as well, especially if the company is a growth story and has a solid future.
If the stock begins to trend downward, however, you should sell your shares before the trend turns upward again. This strategy will not only allow you to increase your profit over time, but you will also protect your investment.
Although you may lose money from time to time, the profits that you make will allow you to grow your capital and create wealth for your future. While this may take some time, you will eventually turn your initial investment into more wealth and financial freedom.