Day Trading and Spread Betting
New traders taking to the spread betting markets for the first time are required to think about their spread betting strategy, and decide on how best to approach the markets with a view to maximising returns. One method that raises its head consistently in some trading circles is day trading, where traders take short term exposure to markets and trade positions over the course of no more than one trading day. This has a number of apparent advantages over trading over longer periods, and traders tend to favour it is a lower risk way of generating a yield. But is day trading in fact as low risk as it seems to be, and what factors should traders consider in weighing up whether to trade long or short term?
Why Day Trading Appeals
Day trading appeals because it sounds initially as if it solves a problem. The theory runs that by trading more frequent, smaller positions, traders can hit more numerate successes with smaller profits but also a much smaller risk profile, delivered mainly through the reduction in market risk as a direct result of capping the trading timeframe. Traders often feel as though day trading is less hard work because the opportunities they need to find to succeed aren't as intense - with many small positions easing the burden on 'home-run' trades.
For all these advantages, traders need to weigh up the corresponding negatives to decide whether day trading is truly for them. For the most part, traders tend to graduate away from shorter-term trades as they develop their expertise, but that's not to suggest that day trading strategies can't be made to work.
Advantages of Day Trading
Day trades do indeed incur a shallower market risk profile when compared to positions held for the longer period. This is because there is less chance of a market failing in one day than across ten days. Similarly, each individual position needs only to gain slightly in order to make it worthwhile. This means more opportunities can be caught up in the day trader's net that might otherwise be rejected as being insufficiently profitable, while more capital is available for spreading thinly around alternative positions.
For these reasons, day trading is generally (and perhaps erroneously) considered to be 'easier' than extending the timeframe of the transaction. But without a full consideration of the downsides, traders will find it difficult to make this assessment.
Disadvantages of Day Trading
Day trading is a lot of work. Whereas with long-term strategies you'll open one position, day trading needs 10. More numerous positions are usually the answer to offsetting the dampened returns (that come with the dampened risks of a short timeframe), this also incurs additional trading costs in the form of leverage. This combines to make day trading more effort, more expensive, and less rewarding on a transaction-by-transaction basis.
While the risks might be comparatively lower transaction by transaction, the odds are stacked against day traders from the off, given the need for consistent, repeatable success in an unpredictable, often volatile trading environment. Before deciding whether or not to day trade a position, it's worthwhile knowing and understanding how your decision might affect your trading behaviour and outcomes.