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Day Trading: Advantage or Disadvantage?

For many years day trading has been considered to be the most speculative of futures trading activities. I believe that this is a market myth that has been perpetuated by those who are unable to day trade or who are afraid to do so. The fact is that the day trader is in an advantageous position. The successful day trader understands the limitations of what can be achieved within the day time frame. The day trader is, therefore, the quintessential speculator. While the task that confronts the day trade is a formidable one, the rewards can be fabulous.

I see the day trader as a skilled surgeon, a sharpshooter, a race car driver. The day trader is focused on finding the correct target, taking aim, pulling the trigger, and bagging the prey. As mercenary as this may sound, that's what all futures trading is about. The profitable futures trader will keep his or her powder dry, taking aim only at the most promising targets. But the most promising targets for the day trader are not always those that have the greatest profit potential. The day trader must be careful to take aim at opportunities that have both profit potential as well as a high probability of success. This necessity serves as an advantage to the day trader. It requires the day trader to be highly selective about the markets that are traded, as well as the trades that are entered.

The day trader is also at an advantage in terms of time frame. Since a day trade is, by definition, a trade that is completed within the time frame of one day, the day trader is forced to exit by the end of the day either at a loss, at a profit, or at breakeven. This limits the profit potential, but it also limits the potential loss. Since one of the worst blunders a trader can commit is to ride a loss beyond its required exit point, being forced to exit at the end of a day will limit losses better than any other method I know.

Traders have an inherent predisposition to ride their losses and to take their profits quickly. Examine your own trading history if you doubt what I am saying. You will likely find, as I have, that your worst losses are those that were not taken when they should have been taken. As a day trader you will take your losses quickly. Hence, the day trader has a distinct advantage over the position trader, and it is an advantage that may be considerably more important than any of us is willing to admit.

Another advantage of day trading is that it allows the more efficient and effective use of margin. Since positions are closed out at the end of the day, there is no overnight margin requirement. Provided that the day trader is using a profitable system, margin will not be a problem. This means that starting capital can be somewhat less than what is required for position trading.

Finally, the day trader benefits from the fact that overnight price swings will not affect the day trader. We live in a time of immense market volatility. An open profit of $5000 in an S&P 500 position can turn into a $4000 loss overnight. A profit of $5000 on a day trade that is closed out at the end of the day is a real profit: one that cannot disappear by a sharply higher or lower opening the next day as a result of national or international events. This, to my way of thinking, is one of the greatest advantages for the day trader. Not only does it prevent the loss of an open profit, but it also makes for good sleeping conditions for those of us who enjoy resting quietly in bed at night far niente.