Is Daytrading For You?

So you decide to learn about trading. Up to now, you probably have been investing (usually in stocks), but now you want to be much more active. You want to trade. Until a few years ago, indexes like Standard & Poor's (S&P 500) and the Dow Jones average futures were the main markets for daytrading, but the foreign exchange (forex) market has recently become fashionable too.

Suppose you decide to take it one step further and trade what you have learned. Let's look at the practicalities of daytrading (in any market) for the individual investor.

THE PERKS
Daytrading sounds like the perfect career, especially according to advertisers of daytrading products, who never hesitate to mention:

No boss: True, you have no bosses. In most cases, you will be based at home and trade the hours that suit you.

No employees: True, with daytrading, you are on your own. No need to have anyone there. In fact, having someone by your side (in my opinion) is not a good idea, as it could distract you from the precious focus that you need!

Little capital required: Although it is possible to trade with little capital, it is definitely against the odds to make a fortune with little capital. I will expound on this later.

Able to work from around the world: I agree with this, and it certainly was one of the reasons I started daytrading. The only limitation is that daytrading requires live data and quick action; you will need good Internet access at all times.

When I first started out, I did a few trades on the Dow Jones futures. The problem was that I had to phone my broker who, in turn, called his guy down in the pit! By the time he came back to me, five minutes would have lapsed. If you have ever daytraded, you will know a lot can happen during that time. Even though this is exactly how everyone daytraded before the Internet, I wouldn't recommend daytrading without excellent, fast communication.

Flexibility on trading hours: True to some extent. However, we are talking about daytrading, so you have to be in front of the computer at least some of the time during the trading session.

WHAT DO YOU TRADE?
Depending on what market you seek to daytrade in, you will need to know the active and inactive hours for the three main markets:

The indexes: The Dow Jones and S&P 500 are very popular with daytraders. Trading sessions run from 9:30 am (Eastern Time) to 4:15 pm (ET). Are you going to be in front of a computer during those times? If you are hoping to only trade the lunch hour, you will be seriously disadvantaged. Most of the activity occurs in the first two hours of the opening of these markets.

Stocks: Daytrading US stocks pretty much requires the same hours as the indexes. Again, how effective you want to be depends on following a market screen when the most activity occurs.

Forex: This market is very popular at the moment. Forex promoters like to boast about the 24-hour market. However, from my own experiences, the most active times are from about 2 am (ET) to about 12 noon (ET).

Can you get up at 2 am (if you live on the East Coast) every morning to sit in front of the computer and trade?

That's not for everyone! Even if you can be in front of a screen most times, there will be occasions when you will miss a trade and be gutted. The biggest problem in this scenario is what usually happens next: you may become frustrated and enter the market at the wrong time (trading emotionally). Inevitably, this will result in losses.

WHICH TIME FRAME?
I should also point out that there are different types of daytrading. Traditionally, daytrading involves entering and exiting a market around five to 10 times (or more) per day. However, there are daytraders who trade from longer time frames. For example, I know of traders who do their trading from a 30-minute chart.

Trading in this, longer-term, way may mean that you do not get a signal every day. So this is still called daytrading, even though the frequency of trades is much less.

A DAY IN THE LIFE
Let's assume we can sit in front of our computers when the market is most active. What's going to happen? Our scenario may go something like this:

You get up in the morning, maybe eat breakfast, and finally get to the screens. A glance tells you that about 20 minutes earlier there was a trade setup, according to your method/system. Just to annoy you further, it has been moving in your favor. You've missed out!

What should you do? You have to be patient and wait for the next signal. This is not easy, especially if this missed trade carries on in your favor. It's tempting to jump in and hope for the best, but guess what? Usually right after that, the market will turn or at least retrace enough to hit your stop (if you have one!).

Let's imagine you have the discipline to hold off trading until the conditions are just right. Some traders have devised alert systems so they can be elsewhere and not miss a trade. But is the wait going to get to you? It could be several hours before the next trade. Despite all the glamour of daytrading, lack of focus and frustration could lead to emotional trading and losses.

This may sound a bit negative and unfair to daytrading, but — having been there — I don't think it's that far off-track. In another article, I will talk about the positive points on daytrading and trading in general.

Alex Buzby is an experienced trader with a broad knowledge about the financial markets. He has a passion for trading and seeks to help other traders through the peaks and troughs of trading. For further information, visit www.MagicalTrading.com.

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