Advantages of Day Trading - dummies

By Barry Burns

Placing trade after trade throughout the day, actively monitoring every movement of the market, and making fast money are all exciting aspects of day trading. You can be in and out of a trade within a matter of 5 to 15 minutes. When successful, seeing that you made hundreds of dollars in a matter of minutes can provide an adrenaline rush like no other.

Day trading may also provide you with better leverage than holding positions over night (as in swing trading). At the time of this writing, day trading stocks can provide you with 4:1 leverage as long as you meet certain criteria.

Day trading also provides you with another type of leverage, which is that because you’re trading so frequently, you can use the same capital in your account to make many trades in a short period of time.

One of the best benefits of day trading is that you avoid overnight risk. Overnight risk refers to the fact that when you hold a position over night, your money is exposed to major unexpected moves while the market is closed and you’re sleeping. Such unexpected dramatic moves may be caused by surprise economic, political, or military news in your country or another.

These dramatic moves overnight may be caused by truly bad news, or simply rumors, or a change of sentiment about a stock, sector, or industry. These moves show up as gaps — significantly different opening prices than where the markets closed the day before — on your chart and can jump your stops, providing a huge loss for you when you wake up the next morning.

A stop is an order you place to be filled at a certain price if the market turns against your trade; jumping your stops occurs when the market gaps to a price that’s beyond where you placed your stop order.

A stop is often called a protective stop because it’s used as a protective measure with the intention of setting the level at which you want to exit a trade that’s not going your way. In this manner, you’re attempting to limit your risk in the trade.