Investing in the stock market can be an amazing way to increase your net worth. In fact, approximately 50% of Americans own at least one stock.
A high-level moneymaking strategy on the stock market is known as day trading, which involves making multiple trades throughout a single stock market day. Some people have likened this process to gambling, but the answer isn’t quite as clear as most anticipate.
So, is day trading gambling? Let’s break down the key information you should know.
What Is Day Trading?
As previously mentioned, day trading involves buying and selling a group of securities within a single day. These transactions often occur within seconds.
Since day trading transactions occur so quickly, it differs greatly from conventional investing. In fact, it’s quite the opposite.
Your goal is to make as much money in the shortest amount of time as opposed to contributing money to a fund and letting it grow as the months and years pass. Day trading typically occurs on the stock market or foreign exchange (forex) market.
Day Trading Strategies
There are four primary strategies that people use while day trading stocks. These include high-frequency trading, news-based trading, scalping, and range trading. Let’s explore them in detail below.
High-Frequency Trading (HFT)
As the name implies, this focuses on making a large number of trades in a short period of time. However, these strategies use algorithms to take advantage of short-term market opportunities.
For instance, an algorithm could automatically buy or sell a security if its performance trend over the past few minutes meets certain criteria. HFT strategies need to be finely tuned to be profitable. Otherwise, you could fall well short of your performance goals.
News announcements often cause a large amount of market volatility. A publicly-traded tech company might announce a controversial new CEO that causes many people to dump their company shares.
Similarly, a business may announce a new technology that generates a large amount of interest in the brand. People who trade based on news stories must be highly attentive to a variety of news outlets. Reacting even a few seconds too late to an announcement could cause you to miss opportunities.
This is the strategy people often envision when they think of day trading. Scalping aims to make a large number of small profits by taking advantage of price changes throughout the day.
Put simply, day trading scalpers focus on buying low and selling high as many times as possible. Although this can be profitable over a long period of time, it’s highly stressful and requires careful attention to detail.
This method involves using support and resistance levels to make trades. These terms refer to instances when a price fluctuates up or down. To clarify, an area of support on a trendline is where prices stop falling and slowly begin to rise.
In contrast, an area of resistance is where prices stop rising and begin to fall. By pre-defining support and resistance levels, you can automatically buy and sell securities to maximize your profit.
This strategy is only as effective as the research behind it. If you don’t set the appropriate levels, you will likely lose money.
Why Is There Controversy?
If you’ve heard about day trading, you’ve likely heard about its controversy. The primary issue is that people get involved in day trading with no foundational knowledge. More often than not, they lose a substantial amount of money instead of striking it rich like Hollywood would have them believe.
Money managers and financial advisors tend to prefer long-term, stable investments. As a result, they criticize short-term, high-risk strategies like day trading. This further adds to the controversy.
With the right setup, though, day trading can be a lucrative pursuit that provides consistent returns. The problem is it takes a large amount of trial and error, research, and market analysis to come up with a winning strategy.
Methods that worked in the past are also liable to fluctuate in the future. Market conditions, news announcements, etc. could influence tactics that used to come out on top. A day trader must be highly adaptive.
There are few barriers to entry when it comes to day trading. However, one is fairly significant: required capital. You will need an account balance of at least $25,000 to trade more than three times per week.
If you fall below this amount, your account could get flagged if you trade more than three times in five business days. If you are flagged as a pattern trader without having a sufficient account balance, you could lose access to your account.
Assuming account balance isn’t an issue, you’ll still need to educate yourself on market trends. It’s required to have a deep, technical knowledge of how trendlines work, so you can appropriately assess market performance. Put simply, you can never learn too much about day trading.
There are many useful resources you can take advantage of, such as video tutorials and articles provided by My Investing Club. It’s recommended to spend weeks or months learning about the day trading process, so you can avoid mistakes you may have otherwise made.
Finally, you’ll need to remain emotionally stable regarding your performance. You might have days when you profit thousands of dollars. You may also have days when you lose twice as much.
If your overall mood is too closely linked to your day trading, you could adversely impact your mental health. This could lead to numerous complications, such as stress, insomnia, etc.
Is Day Trading Gambling?
Still wondering “Is day trading gambling?” In a literal sense, no. Day trading is not gambling since educated individuals have a large amount of control over their results.
However, any financial interaction you have with the stock market comes with a certain amount of risk. As long as you properly assess your situation, you can minimize the chance of things going awry.
Our blog has many financial articles like this one that you can use to make better decisions in the future. Check them out today to see what you can learn!