The Benefits and Disadvantages of Day Trading

49north

Six Hidden Benefits of Day Trading
I started day trading several months ago after TraderMike’s careful switch from swing trading.  In fact, I sat with Mike one day when he was trading.  I’ve been day trading ever since.
Even when I had been day trading a few weeks and felt like I was in a nice routine, it still didn’t dawn on me until later just how many benefits there are to day trading (that is, being flat at the beginning and end of every trading day).  Like many people, I thought day trading was way too risky and there was no way to make money doing it.  (In fact, you’d be surprised just how many people continue to tell me that - I just have to laugh.)
Some of these benefits will be obvious to a lot of you, but some might not.

• You’re 100% Cash at the Beginning and End of Every Day!
  What a feeling!  It’s easy to sleep well at night when you’re in 100% cash.  Even though this is often touted as a good reason to day trade, you still won’t appreciate it until you experience it.  Imagine waking up in the morning and something comes up that will keep you away from the markets that day (sickness, errands, whatever).  If you’re swing trading, being away from the markets will take its toll - it will always be in the back of your mind.  If you’re day trading, you’re sitting in cash so just take a day off.
• You’ll Have Twice as Much Buying Power
  Once you refine your system, this is a big benefit.  You’ll be able to trade more opportunities because you’ll have 4 times your account equity in intraday buying power.  This startles a lot of newcomers, but if you have a handle on your risk this leverage is very valuable.
• You Actually Earn Interest on your Overnight Cash Balance
  This one was very surprising to me.  One of the reasons most non-day traders shy away from using margin is because you actually have to PAY interest when you use it.  Most brokers leave your cash account in an interest bearing account, so when you have cash in it you’ll actually be making money.  Here’s the important point: interest is paid on the overnight cash balance, so because you’re 100% cash you’ll be earning interest just as if you had your money in a savings account.  Last I checked my CyberTrader account earned 5% interest or so.  This is like earning the better part of 1R each month for doing nothing.
• You’ll Gather a Statistically Meaningful Sample Size Far More Quickly
  Because you’ll have more opportunities to trade, you’ll gather a much larger sample size much more quickly.  This is vitally important for good trading.  Let’s say you make 30 trades in a month.  That’s a decent sample size to begin delving into and to start learning from.  If you’re trading on a longer time frame, it could take you much longer to make 30 trades so it will take far longer to learn how your system really works.
• You Can Completely Ignore the News
  The vast majority of price affecting news like earnings reports is released after market hours.  You don’t have to worry about holding overnight when a company is releasing earnings or when, let’s say, the FBI raids a company’s headquarters (d’oh!).  You don’t need to worry about how you’re going to react to the news - you can just let other people worry about the news and trade their reactions.
• Day Trading Can Actually Be Less Risky
  Because you’ll be avoiding those overnight gaps, with proper money management you can really have better control of your risk.  Losses of greater than 2R are fairly common when holding overnight, but they are quite rare when day trading.

49north

The Disadvantages of Day TradingA while back I wrote about the hidden benefits of day trading.  In one of the responses, Trader Mike said:

You know I agree with this list but I’d also like to see what you think the disadvantages of day trading are as compared to swing trading. The biggest ones in my mind is missing out on gaps in your favor and periods when stocks just drift higher day after day.

It took me a while to think about some disadvantages, but here’s what I’ve come up with:

• Daytrading takes intense focus during market hours
  If you have trouble focusing for lengthy periods of time or have obligations that prevent you from doing so, you’ll likely be frustrated. It’s true that a lot of the day is spent twiddling your thumbs, but with many trading systems it’s hard to tell when good setups might come along so you have to be on your toes for a lot of the trading day.
• You’ll miss out on overnight gaps
  There’s a lot of money in those overnight gaps! Of course, this cuts both ways. As Mike had mentioned before, when you’re swing trading stocks seem to just drift day after day and you’ll miss out on these situations if you’re flat overnight.
• Sometimes the market will move alot, but your trades won’t
  I’m sure this happens with swing trading, too, but it seems to happen more frequently and more noticeably when you’re day trading. How many times has the market made a big move and you ended up breakeven or with a loss. When you run into friends later, it’s almost guaranteed that they’ll say something like: “Did you see the market today? You must have made a killing.” A lot of people just can’t understand that.
• Market hours aren’t convenient for everyone
  Us right coasters don’t think about this too much, but traders in other time zones might find it really inconvenient to trade the U.S. markets. Some really like the time difference, though. For example, pacific coasters seem to have a pretty sweet deal if you’re a morning person with the U.S. markets opening at 6:30AM PST and closing at 1:00PM PST.
• There are more opportunities to over trade
  Over trading (either trading too big or taking too many opportunities) seems to be much more prevalent for day traders. If you lack self discipline you can always find another trade to make. The extra buying power that comes with daytrading certainly gives you a pretty loose leash. If you have hidden psychological issues, the temptation to overtrade while daytrading could easily lead to your trading demise.
• You’ll spend a lot in commissions and trading costs
  This probably goes without saying, but when you move to a shorter timeframe your commissions will become more of an issue.
• You’ll need to have a plan for the “unexpected”
  Power outages, platform problems, general computer problems, network connectivity - all these problems are magnified when you trade on a shorter timeframe.  It’s critical that you have a plan because it’s not IF they happen, it’s WHEN.
• You’ll need more software
  A good day trading broker, a good scanner, charting software - you’ll spend a lot of time evaluating the variety of choices out there which takes time and money.

always

1# 49north


thanks for sharing!

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You’ll miss out on overnight gaps,    gap can be up and down, so sometimes it makes even?