Day Traders: Winners or Losers?

Day trading is a popular style of financial spread betting where traders look to find positions that can be profitable for them over the day. The logic runs that by trading across a greater number of smaller positions traders can keep the market risk (i.e. the risk of a market collapse while their capital is exposed) at a minimum and rack up smaller but more frequent profits from the many small opportunities available in the markets. As such, it appeals to new traders and those looking to trade their capital on a cautious basis, although many of its early proponents will switch to longer-term strategies as they develop their experience and trading expertise. So how does day trading stack up against longer-term strategies, and are day traders actually losing out as a result?

Why Day Trade

The advantages of day trading are in themselves quite appealing. Market risk is always a concern for traders, not to mention the opportunity cost of locking up their capital in a particular position or market. The ability to trade lightly across more multiple positions means that traders can use their capital more broadly in exploring positions, without the same level of risk or commitment attached to each position. This enables traders to be more free flowing in how they trade and to move their capital around markets at comparatively lower risk to find the most profitable, short term opportunities.

In the same breath, any day trading position that is profitable is a bonus, and because traders will enter multiple different positions, each individual trade needs to move less substantially to make it worthwhile. In other words, day traders can exploit 'easier' returns, through the low-hanging fruit of micro-opportunities that might not be as viable for traders with a longer-term outlook.

Dangers of Day Trading

While there are benefits to trading ultra short-term, it's important nevertheless for traders to realise that it's not a strategy without serious limitations. Firstly, from a purely practical point of view a greater number of trades to manage and execute can be a headache, particularly when factoring in research time. With day trading as a strategy, more frequent trading is guaranteed, yet still with the rewards from each transaction will be comparatively lower. This skews the effort to reward ratio in a less than favourable direction.

Furthermore, with less time for larger price swings to set in, the potential rewards are suppressed by day trading strategies. And when there are fewer points going round, the marginal cost of the spread (which accounts for the broker's commission) becomes a much more serious consideration. The more transactions with thinner returns you're trading, the more heavily felt the spread is going to seem as a trading cost, and in fact it is usually for this reason that traders ultimately switch away from day trading strategies.

To say day traders are either winners or losers would be too simplistic, but it's important to recognise that the strategy has both benefits and unique drawbacks. For this reason, it's up to the individual trader to make an informed decision about how best to manage his capital, in full recognition of the risks and opportunities posed.