By Ian Comandao – Apr 20, 2022
As a first time investor, you may be tempted to try your hand at day trading. After all, it seems like an interesting and exciting way to make a lot of money in a short amount of time. Plus, that’s the closest you’ll get to feel like you’re Leonardo DiCaprio! But before you jump in, you should know that day trading is not for the faint of heart – it’s a high-risk, high-reward investment strategy that can result in big profits…or big losses. If you’re not comfortable with taking risks, then day trading is probably not right for you. More importantly, if you’re a first time investor then it’s DEFINITELY not right for you.
Before we begin, what is day trading anyway?
Day trading is the process of buying and selling shares of stocks within a very short period of time, usually the same day. Sometimes a buy and sell process can be just seconds apart. Day traders aim to capitalize on short-term market fluctuations, rather than holding stocks for long-term investment goals. It requires a high degree of discipline and focus, as well as a strong understanding of the market. Do the words “head and shoulders” even mean anything to you? What about “wedge”? Day trading can be a great way to make money, but if you’ve never done it before, please do yourself a favour and read through this first.
1. Day trading requires the right tools
Day trading is generally only done by people who are already very familiar with the stock market and have a lot of experience with investing. Most day traders will have access to (or pay for) a whole suite of professional tools and resources to help them make informed decisions. They will also have an understanding of the various market conditions and how these can impact stock prices. Some might even have insider information. As a first time investor, you likely don’t have any of these things. If you do, please let me know now. I’d love to talk with you.
2. You need to have a high level of risk tolerance
If you’re the kind of person who gets queasy at the thought of taking risks, day trading probably isn’t for you. Successful day traders need to be comfortable with uncertainty and willing to take on a fair amount of risk. After all, there’s no guarantee that any given trade will be profitable, no matter how well-researched it may be. That’s why day traders need to have a high level of risk tolerance. They need to be able to stomach occasional losses and accept that not every trade will be a winner. How much is in your bank account? Ok, pretend you lost half of that in the span of an hour. That’s the potential risk we’re talking about. So if you’re not comfortable with taking risks, you might want to give day trading a pass.
3. It’s important to have a solid understanding of the stock market
While it may seem like an easy way to make a quick buck, the reality is that day trading is a complex and risky endeavor. Before jumping into the world of day trading, it’s important to have a solid understanding of the stock market:
These are just some of the questions that need to be answered before starting day trading. Without a firm grasp of the basics, it’s incredibly easy to get in over your head – and that can lead to some big losses.
4. You need a lot of time to devote to monitoring your trades
It’s a full-time job. You need to be glued to your computer monitor, watching the markets tick up and down in real-time. And it’s not just the U.S. markets you need to worry about – with the advent of online trading (not to mention Cryptos), the whole world is your oyster. Do you want to trade stocks from back home? Go for it! But be prepared to do so in the middle of the night, as that’s when the Stock Exchange is open. You want to trade in the same time zone? Well you can forget about having a social life, at least while the markets are open. So unless you’re prepared to devote every waking hour to monitoring your trades, you might want to reconsider your decision to day trade.
5. There are other, less risky ways to invest your money that will give you better results in the long run
Many people believe that the only way to make a good return on their investment is to take risks. However, history has shown time and time again that the best way to grow your wealth is to invest in an index fund. While it may be more exciting to invest in the latest start-up or some up and coming technology, these are often more volatile and less likely to succeed in the long run. If you’re looking to grow your money, it’s better to stick with established companies that have a proven track record of success.
See Ian’s blog: Small and Easy Investments for Expats in Vietnam
So, is day trading for you? The answer to that question depends on a lot of factors, including your risk tolerance, how much time you want to spend learning about the stock market and technical analysis (or finding someone who can do it for you), and whether you’re comfortable with the idea of making your fortune – or losing it all – in a single day.
For most people, the risks associated with day trading are simply too high. If you’re a first time investor, this is not a risk you want to take. Trust me. I know. I’ve been there. I studied finance, so luckily I didn’t lose anything other than… but all I can show for it now are wrinkles on my forehead, and a stock portfolio that I’ve basically just decided not to touch. I don’t have the time. And I don’t need the stress. Might just stick that “capital” into real estate or agriculture.
Point of the matter is, there are other, less risky ways to invest your money that will give you better results in the long run. Consider starting a savings account – it only takes 250USD a month. If you can afford a few beers on the weekend, then you can afford to plan for your future.
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