1. An introduction

Risks of Day Trading

For the average investor, day trading can be a daunting proposition because of the number of risks involved. The U.S. Securities and Exchange Commission (SEC) highlights some of the risks of day trading, which are summarized below:

  • Be prepared to suffer severe financial losses: Because day traders typically suffer severe financial losses in their first months of trading, and many of them never graduate to making profits, they should only risk money that they can afford to lose.
  • Day trading is an extremely stressful and expensive full-time job: Day trading is extremely difficult, and watching dozens of ticker quotes and price fluctuations to spot market trends demands great concentration. Day traders also incur high expenses, typically paying their firms large amounts for commissions, training, and computers.
  • Day traders depend heavily on borrowing money: Day-trading strategies use the leverage of borrowed money to make profits, which is why many day traders not only lose all of their money but also end up in debt.
  • Don’t believe claims of easy profits: Watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders and remember that educational seminars and classes about day trading may not be objective.

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