Some Of The Most Common Misconceptions About Day Trading Today
Over the years, day trading has emerged as a modern-day profession with a high yield of profits and a quick way to make money, if you are smart enough to trade intellectually. There is a plethora of day trading talks and knowledge on many media channels; however, the different voices and opinions can make it hard to segregate day trading myths from day trading reality. With so many opinions floating around, it becomes difficult to distinguish between myths and facts.
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Misconceptions About Day Trading
Here is a detailed guide that busts all myths and misconceptions about trading and establishes the actual practicalities of trading –
1. All Day Traders Fail
Many would-be traders steer clear of trading because they consider that day trading is a pipe dream. The ideology that all traders fail is not true. Most assessments of trading success are anecdotal, and thus, people believe that trading is bound to collapse and drive you into debt.
If you believe that all traders fail, then you are already preparing to fail ahead on the journey. Trading is a high-yielding industry if you are careful and well-informed of all the tactics and workarounds.
2. Trading Does Not Demand Prior Training
Even though you do not require a certificate to kick-start your career as a day trader, to presume that you do not need education is a huge misconception and can be gnarly for your financial stability. Trading is not a game of betting and luck, but calculated moves devised via implementing various strategies for different securities.
You can discover the basics of day trading online; however, you also need some real-life education on ways to succeed, including identifying patterns, finding your ideal system, and devising effective trading plans. You can achieve all this via paper-trading, which is a free simulated trading platform that allows a trader to practice purchasing and selling without risking actual money.
Alpaca is a technology company that modularizes asset management activities in the world. You can use it as your trading platform to gain competitive leverage over other traders. To gain insights into Algo trading, visit Alpaca, and follow their detailed guide to become an expert trader.
3. Trading Guarantees immediate success
The moment you open your account and select a few stocks, you are on the freeway heading towards financial success. This ideology is something that many people believe in; however, you cannot expect immediate success with trading within a week.
There might be some outliers in the domain of trading who have found incredible success in a truncated period; however, most traders experience plenty of trials early in their career. After a period of gaining profits and incurring some losses, traders make steady profits with assurance about their future trading strategies.
Earning high profits at the beginning of your career should not fill you with hubris, as without being scrupulous and calculative, you might end up losing more in the long run.
4. Trading is Just Gambling
People often compare trading to gambling, and at first glance, the two activities might seem similar to amateurs. Both involve executing risky ‘wagers’ that expose the wagerer to both profits and losses.
However, the primary distinction arises from the probabilities and strategies that go into making crucial decisions. Traders have more control over the probabilities of their ‘wagers’ as some setups have a higher chance of winning than losing.
It is safe to assume that a trade has a 50/50 outcome. A risk-conscious trader would implement a risk/reward ratio of at least 1:3, implying they risk $1 for every $3 in probable profit.
Consider that a trader places a $1,000 trade with a 5% stop loss as-well-as a 15% profit target. This trade would have a predicted value of $100 (Source).
You can improve this expected value you manage to –
- discover higher probability setups (with 75% chance of winning)
- find significant risk/reward ratios (1:4)
However, in gambling, the odds do not change and are not as flexible as they are in trading, considering traders have access to more information. Traders can minimize randomness better than gamblers because the markets are not subject to random fluctuations.
5. You Need Large Capital to Trade
It is not uncommon for traders to believe that they cannot trade if they have less than $25,000. These individuals probably read a single blog post or comment before completely disregarding trading. While traders with under $25,000 can only place a certain amount of trades per week, it is merely a limitation and not a hindrance to entry.
You can still boost your portfolio with restricted trading activity. Even if you execute three trades a week that yield 5% on $3,000 positions, you can make $450/week (Source).
6. Choose Either Trading or Work
Potential traders like you might dismiss day trading if you work a full-time job. People believe that trading requires 12 hours of glaring at computer screens to earn actual profits.
Trading is neither being glued to your computer screens nor being away from it throughout the day. You should not trade if you cannot monitor a security that demands your attention. For instance, if you invest in a low-float runner before rushing off for work, you are placing yourself in a hazardous situation.
If you work a full-time job, try building your trading style around your limitations and your work schedule. Having a job can benefit you alongside trading. Your full-time income can provide you with the security that is lacking in the world of day trading.
Considering that traders do not receive a fixed monthly salary, and sometimes even a negative salary if they sustain losses in trading. Your full-time job can compensate for these monetary gaps.
7. You Need to be a Mathematical Genius
Trading demands some understanding of the numbers and calculations to place your trade to yield profits; however, you are not developing an arduous auto-trading algorithm.
Most trading lessons do not require any prerequisite skills to help you on your journey to be a trader. You need not understand calculus to read a chart, and you need not memorize derivative models to know your risk.
The best traders are persistent, hard-working, modest, and adaptive with the volatility of the markets. There are a ton of day trading rules, which can easily baffle even the experienced traders, and thus, you should visit Alpaca to clarify all your misconceptions.
With the realm of trading gaining widespread popularity, it can get tedious to segregate the facts from the myths.
This article mentions some of these misconceptions in the above points to help you kick-start your journey as a day trader.
It is essential to choose a smart trading platform, as your preferred platform will provide you with tools that you can utilize to trade effectively and various other facilities to streamline your investments.