Although an enticing endeavor, it is important to weigh the pros and cons of day trading before taking a risk. Learn more about the risks and benefits of being a day trader.
Many individuals are intrigued by the idea of day trading. Particularly enticing is the idea of making truck loads of cash from the comfort of your home office, coffee in hand and slippers on your feet. The potential is certainly there to make a substantial income, raising the quality of your family's lifestyle.
However, there is a significant amount of hard work, preparation, and risk involved. In this article we'll briefly discuss the pros and cons of day trading, as well as how you can actually reduce the risk of losing your shirt (and slippers).
First of all, what qualifies as day trading? A day trader is a person who buys and sells the same stocks, options, and/or currencies within the same trading day. A same-day buy and sell, or a same-day sell short and buy to cover, is considered a day trade. A pattern day trader as defined in NYSE Rule 431, is someone who executes four or more day trades within a period of five business days. The goal is to take advantage of small price movements and fluctuations during a relatively short period of time in order to make a profit.
The pros of day trading are the opportunities to make a great deal of money by buying, and subsequently selling, a financial instrument at the right time. It can be an extremely exciting experience. In addition, it is possible to execute these trades online from your home computer.
When it comes to the cons, there are many that need to be considered. It can be very risky, due to sudden fluctuations and market volatility. Keep in mind, volatility is often considered a beneficial quality, since it can cause a financial instrument to rapidly rise in value after being acquired by the day trader. Obviously, though, the opposite can possibly occur. Success greatly depends on knowledge and efficient analysis tools. The competition is extraordinarily fierce, especially from traders who work for large financial institutions and therefore enjoy access to superior tools and resources.
Another factor to keep in mind that may affect your choice of market is day trading margin. Day trading margin is the minimum amount of equity that needs to be held in order to be involved in a particular market. Also, many argue that a successful day trader needs to have an aggressive personality, and should not be fearful or have an aversion to risk.
So how can this inherent risk be reduced? A trader can utilize the services of a financial services software company. These can be found online and can provide analysis and consultation regarding which markets may be appropriate for you. A financial services software company can provide the proper products and services to help you compete with larger institutions.
Closely related to a financial services software company that a trader would also want to enlist the aid of is collateral management software. Proper, creditable collateral management software can reduce the credit risk in any unsecured financial transaction. It will provide necessary insights and strategies so you can make informed decisions.
In addition, traders need to be made aware of the latest changes in day trading policy. An example of a changing policy is the Option Symbology Initiative. This initiative entirely overhauled the way options processing applications functioned. It now requires them to support a 21 digit "operations symbol identifier" within any existing records and books automated environment. While this would ordinarily be a stressful procedure, new financial services software can help make the adjustments and transition as smooth as possible.
Another perfect example of a changing policy to be aware of are changes to global regulatory compliance. As these regulations are changed, it is mandatory to keep up to date with the latest policies to avoid being in violation, and risking your position as a day trader.
Of course, this is barely the tip (of the tip, of the tip) of the iceberg regarding the competitive, lucrative.
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