Day trading: 5 things you need to know

Sure, some people make money day trading -- but could you be one of them? Here are some things to consider before you get in the game.

By Bryan Borzykowski

Everyone’s got one friend, or maybe an arrogant uncle, who claims to have made big bucks by day-trading stocks. After listening to your buddy for a while, you might start to wonder how you too can make money sitting in front of a computer playing the stock market.

Well, we’re here to say that your friend may be fibbing. Day trading is when people buy a security in the morning and then sell it a few hours, if not minutes, later. It’s difficult to make a living at it and often a big win is followed by a big loss. Before you get lured into day trading, here are five things to know.

Trading vs. investing

Day trading and investing are not the same thing. Sure, both involve buying and selling stocks (or other securities, such as options or futures), but investing is when you hold something for the long term. Investors put stocks in their RRSPs or buy companies that will generate positive returns over years. Day traders quickly dump stocks as soon as they buy so they won't lose money.

Some think it’s gambling

Many experts think day trading is gambling and if you talk to a trader it’s easy to see how they can come to that conclusion. It’s fast paced and, just like a game of blackjack, at one moment you’re up, and the next you’re down. Traders often feel bursts of adrenaline and some play markets -- such as the foreign exchange market -- that are open 24/7.

Day trading can be dangerous

There are numerous stories of people going bankrupt, getting divorced and even committing suicide. One of the most famous day trading horror stories is about Mark Barton, an Atlanta-based trader who lost $105,000 in one day. After his big loss he killed his wife and kids, drove to a day-trading brokerage firm and opened fire, murdering four people. He then went to another firm and killed five more people. He eventually shot himself. While it’s unlikely you’ll snap like Barton did, this is just one example of how a bad day of trading can ruin lives.

Discipline is the key to making money

Yes, people can make money day trading. However, you need to be extremely disciplined. The best traders have spent years honing their craft and they know to do their research so they don't lose money. The key to becoming a successful trader is to not let emotions get in the way. Create a business plan, just like you would if you started a company, and stick to it. Write down how much you want to make in a year and how much you’re willing to lose money. When you do lose money, don’t worry -- tomorrow’s another day.

The secret to day-trading success

Besides being disciplined, you also have to know how to read charts. There are all sorts of detailed diagrams that try to predict which way a stock is moving. Each trader has his or her own technique, so before you get into this, learn as much as you can about charting and then figure out which method you like best.

Clearly, day trading isn’t for the average investor. It’s for the person who likes the rush, can afford to lose money and doesn’t mind a lot of hard work. Even then, there is no guarantee of riches. It may be best to just leave the trading up to your uncle.

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