Day Trading - How Risky is it Really?

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This is a question most new traders will ask, and with good reason, after all your family, your co workers and your neighbour will tell you it's risky, and they should know, because they heard it from someone else who never traded!

The bottom line is trading like any form of high performing investment has a higher risk factor which matches its higher returns. If you want safety buy bonds or deposit your savings in a bank for next to no interest. Although the recent history of banking might call that strategy into question!

Your biggest risk lies in not having sufficient knowledge about your chosen investment field. It might be OK to buy a blue chip stock and then forget about it, but day trading is a hands on, in the moment activity which takes your entire attention for short periods of time.

One difference with day trading is that you control the level of risk. You decide how much you wish to invest, and how much you are prepared to lose should the trade go against you.

Most people who invest in stocks in a traditional way would not consider day trading because its too risky, but they are prepared to hold stocks even when the market falls. They just fool themselves that they have not taken a loss. The only difference is that they have not realised that loss yet. They hope that the market will come back.

But history has shown some so called very sound stocks can go all the way out the back door.

If you are prepared to study the field of day trading, when the time comes to actually take a trade you can do so from a position of being able to analyse, access and calculate the probabilities.

In trading the term mark to market means that your account shows in real time exactly how much you are winning or losing. So there is no excuse for a day trading to let a position become a big loser.

Unless, the other big risk we have not mentioned yet comes into play. That is you, your emotions, your beliefs, your personality and your ability to cope under pressure.

One of the riskiest things you can ever do is not know your risk. If you take a trade, your risk is the difference between where you entered the market and where your stop loss is placed plus any brokerage and tax.

This means you need to know the exact point value of any commodity or currency you are trading, if you do not then you can not calculate your risk. If you can not make this calculation then you certainly should not be trading.

PS If you do not know what a stop loss is, then do not trade until you not only clearly know what it is, but you will always use them.

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Source by Ian Newton