Day trading involves sticking with stocks for the shortest period of time possible to make as many small profits as possible. Day trading often carries a stigma of wild gamblers or genius big shots playing or manipulating a system to make millions, but this usually isn’t the reality of this profession.
In reality the day trader is someone who knows how to make a consistent trading plan that has proved itself and he or she knows how to stick with it. Most day traders prefer highly volatile systems like the options and futures markets, but there is plenty of room in the realm of day trading penny stocks. Here are some reasons you should or shouldn’t day trade penny stocks.
The largest disadvantage of day trading is the extreme focus it requires. The majority of investors are more accustom to making investing decisions in weeks or even days. Those who are really mentally strong will make these decisions in hours. The day trader has to make good decisions every couple of minutes. Often that decision is simply to take no action, but they don’t get the luxury of saying I won’t do anything now, I’ll look at it again on Tuesday. The information you use to make a decision in one moment will likely change in the next moment. As long as you are invested you need to be focused on the information.
The next major disadvantage is the psychological strain on the day trader. When you’re an average investor you are simply buying and holding a collection of stocks. On the whole the stock market generally climbs and 99% of buy and holders do make money over their careers. Also, you’ll be winning the majority of years, just not very much. Most day traders only see a 50% to 60% success rate. That means almost every other trade you make is a losing proposition. The key to winning is managing your losses quickly so you have money to hit your bigger wins. These repeated losses can be very difficult when you need to make enough money to pay the rent.
Another barrier to day trading penny stocks is the financial barrier to entry. The SEC won’t allow anyone to day trade who has less than $25,000. You can probably legally get away with day trading on the pink sheets, or OTC market, where the risk is even higher. However, the money management aspect just screams to stay away from day trading until you have enough money to minimize the impact of commissions without risking more than 2% on any trade.
The main advantage to day trading is that you remove the risk of time. When you are only invested for short periods of time the impact of surprise reports, news, new companies, bad economies, and tax rule changes is all mitigated. As soon as any of these events happen you just adjust your trading strategy and continue on your merry way.
Once you have enough money to trade with the returns can be very lucrative and they can scale well, at least to a point. Obviously if you become too wealthy (if that’s possible) you can have difficulty moving too many shares of a penny stock. This issue is minimized by the fact that almost all day traders use trading as their sole source of income. Since you are pulling money out every month to make your bills, the growth of your investing account will be slowed.
Another advantage is that brokers cannot double charge you for trades that happen in the same day. So if you only get a partially filled order you can simply adjust your price to get out of the rest of the order. Normal investors never notice until the next day or later so they have to eat another commission to sell the rest of the stock._____________________________________