Only a few years ago the phrase "day trading" used to be looked down upon by Wall Street big shots, however now it is common practice among people of all ages and experience. Day trading is the practice of buying and selling financial instruments during the day with the hope that throughout the day the price will continue to climb or fall in value, allowing quick profits to be made. Some of the more commonly day traded financial instruments include stocks, options, futures contracts and currencies. The primary motivation for this strategy of trading is to reduce the risk of holding a position overnight, when the open price may have significantly changed from the previous day's closing price. Traders that practice this form of trading are called "day traders" and are becoming more and more prevalent in the industry.
Day trading may be extremely profitable; however it carries a significant risk. Most individual investors are not suited to be day traders as they lack the capital, time, and character to sustain devastating losses that can occur. The use of borrowing money (trading on margin) is common amongst day traders hoping that profits will be amplified through this leverage; however leveraging yourself also exposes you to a much higher risk of substantial losses. Day traders need to understand how margin works, how much time they'll have to meet a margin call and the potential for getting in over their heads. Unfortunately many do not fully understand these concepts or simply do not pay attention to them.
In addition to the high risk factor, day trading can be extremely expensive in comparison to the "buy and hold" strategy, with the trader incurring multiple commissions and paying the spread multiple times a day. It is commonly stated that 80-90% of day traders lose money. Therefore traders should never use money they will need for daily living expenses or retirement to fund their accounts. Like any other type of trading, regardless of your level of experience, trading is a gamble and a trader needs to know exactly what they are gambling. All traders should know up front how much they need to cover expenses and break even.
