What does it take to be a day trader?

Since the 2008 US mortgage crisis, which resulted in a worldwide recession, markets have been extremely volatile and day traders have been making hay while the sun shines. We hear more and more about day traders and very often they are cast in very detrimental terms. Many people see them as opportunist, speculators and a pest for traditional long-term investors but they are a vital element of the market. Whether “traditional” investors like it or not it is very often the short term day traders who inject liquidity into the marketplace allowing others to trade more freely. So, what does it take to be a day trader?

Confidence in your decisions

If you ever come across a day trader they will seem very confident in their own decisions and often dismissive of other views. This is a vital component of the personality of the day trader, the ability to make snap decisions using limited information and have the nerve to act on them. Day trading by its very definition is often extremely quick with investors dealing on very small margins but regular traits.

Day Trader
What does it take to be a day trader?

While many traditional investors will buy and sell shares over a longer period of time, and often wish they had done this or done that, a day trader will buy and sell and then move on. They will never look back, they will have no regrets and they will be fully focused on the next trade.

Cut your losses

While the majority of day traders will tell you about their gains, and often keep losses to themselves, the fact is that all investors make losses at some point. The difference with a day trader and a traditional investor is their ability to cut losses and move on. The majority of investors will have encountered periods where an investment is going wrong but for whatever reason they refuse to sell. As the share price moves further and further down, creating more heavy losses, sometimes it gets to the point where is not worth selling.

A day trader, dealing on very thin margins, will have a stop loss limit on their trading for individual shares even if the fundamental reasons to invest remain intact. If this stop loss limit is hit they will simply dump their shares, move on to the next one and try to recoup their losses.

Quick decisions

Those who monitor stock markets closely will be well aware that share prices can be extremely volatile, prior to and after announcements. While many of us may take a breather when announcements are made and share prices are volatile, a day trader will make a snap decision based on their gut feeling. This gut feeling will take in their knowledge of a share, sector and simple valuation comparison with competitors. Human emotion dictates that very good or very bad news can result in oversold or overbought positions both of which are perfect for the day trader.

While you might automatically assume that day traders are “greedy” this is not necessarily the case because they have to take small profits on multiple daily trades. So, the “Gordon Gekko” image could not be further from the truth for your traditional day trader.

Conclusion

To be a day trader you need to have funds behind you, an ability to think on the move, the confidence to make snapshot decisions and also know when to bank a loss. All day traders have the upmost confidence in their decisions although they will listen to the market and react accordingly. Multiple trading on very small margins is dangerous because one bad trade could wipe out a series of small profits but that is the life of a day trader – and they love it!

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