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Why Day Trade?

Given the volatile market environment which I have previously described, day trading offers many advantages over position trading, although day trading is not recommended for all traders. Several particВэularly cogent reasons support day trading as a viable orientation within the limitations which will be presented later.

1.Вр Maximized Equity

Day trading allows traders to maximize their trading capital by avoidВэing the need to post overnight margins. Many brokerage firms will allow traders to trade actively and very aggressively within the day time frame, provided these individuals have the financial resources, the demonstrated responsibility, and the maturity to do so. If your broker and/or brokerage firm has the confidence that you will not accumulate a large deficit, you will be permitted to trade many markets, and fairly large positions during the day, without needing to post the large margin requirements which would be necessary if the positions were held overnight.

It is therefore possible for a trader to maintain a relatively small cash balance in his or her account and to day trade considerably larger quanВэtities in terms of total number of contracts than might be the case were it not for day trading.

2. Reduced Risk Exposure

Although some individuals would vehemently argue this point, I mainВэtain that day trading affords less exposure to the risk of loss than does position trading. The position trader is often a victim of considerable price volatility which results from news or fundamental developments occurring after trading hours. It is not uncommon for a position trader to find that a trade which showed considerable profit at the end of the previous trading session shows a substantial loss on the opening of the next trading session as a result of overnight news or market-related developments.

This is, of course, a two-sided coin (it can work for you or against you), but it is far better to avoid the exposure of risk than to gamble on overnight news. Certainly news can occur during the trading day; howВэever, the day trader can respond within the day time frame, since the markets are open and the position can be closed out. In other words, news can be used to the advantage of the trader or to indicate that the day trade should be closed out.

Opening price gaps, although potentially negative for position traders can be used to the advantage of the day trader. Although these gaps freВэquently work to the disadvantage of the position trader, there are openВэing price gap methods (to be discussed later) which provide many profВэitable opportunities to the day trader, opportunities which are either unavailable to the position trader or which are actually injurious to the position trader.

3. Advantages of Forced Exit

Day trading forces traders who follow their rules to exit positions by the end of the day, win, lose, or draw. This, in effect, forces traders to take their losses no matter what excuses may be conjured up in favor of holdВэing positions. Consequently, a day trader who holds a position beyond the close of trading knows that he or she has broken one of the cardinal rules of day trading and that the consequences may be negative.

I do not suggest, by any means, that positions which show a loss at the end of the day and which are then held through to the next trading sesВэsion invariably show a loss the next day. The odds are probably 50/50.

However, losses are frequently larger than profits, and, furthermore, carВэrying a position overnight leaves the day trader uncertain as to what should be done the next day. This is why the day trader who follows the rules will be spared the pain of loss as well as the often debilitating anxiВэety and uncertainty which are part and parcel of riding losses.

Those who are committed to day trading and who follow the rules accordingly will not carry losing positions overnight and, in so doing, will avoid one of the most serious problems traders encounter in their speculative ventures. It is far better to close out a position, even at a loss, if this will prevent the loss from becoming larger the next day.