Why Trade?

Reasons why day trading is right - or wrong - for you.

 

Looking at it from the outside-in, day trading can seem intimidating. Day trading has paved the road to riches for many but you wouldn't know where to start. Even if you did, day trading is for someone else - not for you. Day trading is intimidating, and rightly so, but you probably have many of the misconceptions that those new to trading typically have. In fact, many of these misconceptions might be keeping you from day trading for the wrong reasons. In any case, those who decide to day trade or swing trade and those who decide not to inevitably asked themselves the same question: "Why Trade?"

Day trading is a unique undertaking that challenges even the smartest of people. The risk is very high, but the rewards are great, and the rush from a successful trade is even greater. The risk, however, can sometimes seem too high, uncontrollable, and not worth the effort for many day traders. Day trading and swing trading aren't for everyone - it's up to each individual day-trader-to-be to decide whether or not he or she has what it takes to be a successful day trader or swing trader.

When considering entering into day trading as a hobby or as a full time occupation, there are many considerations to take into account. By weighing these considerations before entering the market, you can determine whether or not day trading will be your road to riches - or to ruin.

Financial Rewards

Imagine a business that has almost no overhead, you set your own hours, all your assets are liquid at all times, you are not tied to one location, you can never be fired or laid off, you can take a vacation when ever you want, you can work out of your home and if you do it well, you can also make as much money as you want.

Done imagining? Day trading can be this perfect business. The amount of capital that you start with grows with you as you grow. As your capital grows, so do your earnings and so on. It is quite possible for a day trader to, on a daily basis, make profits equaling 5% or higher.

This means, if you start day trading with $25,000, then that day you'll earn 5% of that in profit, or $1250. The next day, you will have $26,250. Earning 5% on this equals $1312 profit for the second day. Formulaicly, this would suggest that you would earn at the end of "d" days $25000(1.05)^d-1. Theoretically, if you were to earn an average of 5% profit a day, you can turn $25000 into $108,000 in only 31 days.

To earn rewards like that in day trading or swing trading, however, requires a great commitment and stamina, a great mind for how the market works, or at least access to a great wealth of knowledge.

Trading is a Business

Would-be-traders see day trading as a source of income much like gambling. You chance your money on a venture that might or might not be, and if you gambled correctly you reap the rewards. What day trading actually is - and what most new investors fail to understand - is that day trading is actually a business that requires a great deal of research, time, and ethic to execute successfully.

Your trading business has employees (i.e., yourself), out-sources services (e.g., a broker), and competitors (e.g. other traders, the market itself). Every business, like yours, exists in a market, and trading is no different. Day trading however, is a much faster-paced business than any other in that market fluctuations occur at every instant and each flux instantly affects your earnings.

Just like any other business the purpose of trading is to make money, and like any other business trading aims to not just make money, but also make it on a consistent basis. Longevity in any business such as trading requires hard work, stamina, growth, consistency, bookkeeping skills and the willingness to risk a lot for much larger returns. The rewards wouldn't be so great if the risk weren't likewise.

Working capital, the amount of money available for use, is a business's livelihood. Your capital is what you depend on for the sustenance and growth of your trading business. Capital preservation is always more important to growth than capital appreciation, and that is why, as a potential businessman, you must be prepared to inject your profits back into your business. There's a chance that you'll lose the money you just earned, but your business as a trader stands to give you so much more if you risk it wisely.

Not Everyone Can be a Trader

Traders are analytical, problem solvers, entrepreneurial people who are not afraid to take a risk. Traders have to be well capitalized with the patience and dedication it takes to learn how to trade. Beyond all things, a trader must have the stamina to recover from losses, and to wisely use profits to achieve greater day trading rewards.

Being a successful trader requires traits that most do not. If you do not have these traits, perhaps day trading is not right for you. Traders have to be able to think outside conventional frameworks, think quickly and wisely, without involving emotions or prejudice and act immediately. While this may not sound like something difficult to do, when you consider that waiting a minute too long, making a wrong decision, or ignoring a trade for any reason can result in a loss of hundreds to thousands of dollars you realize that anything less than perfect judgement can be disastrous.

Day trading can be a difficult field to enter, but it's just as difficult once you've penetrated to continue trading successfully. In fact, many existing traders find themselves overwhelmed by the inability to conduct their trades as successfully as their potential permits. A survey of 300 investors conducted in July of 2002 by InsightExpress shows that 33% of investors lack time to properly research all their trades and 28% admitted that analyzing the markets was too complex for them.

In spite of the over whelming barriers and demands to becoming a successful trader, I would like to encourage you to find out more about trading. Trading can be one of the most exciting and rewarding endeavors that you ever undertake. Even if you're not making thousands a day, trading with even moderate success will invigorate you as well as teach you the important concepts of money management and thinking on your feet. There are many resources that can help you get started, and if you're not convinced that you can be a day trader, I suggest researching the subject some more. All you need to get started is knowledge and capital. Whether you are successful and continue to trade is up to you.