Even when I had been day trading a few weeks and felt like I was in a nice routine, it still didn’t dawn on me until later just how many benefits there are to day trading (that is, being flat at the beginning and end of every trading day). Like many people, I thought day trading was way too risky and there was no way to make money doing it. (In fact, you’d be surprised just how many people continue to tell me that – I just have to laugh.)
Some of these benefits will be obvious to a lot of you, but some might not.
- You’re 100% Cash at the Beginning and End of Every Day!
What a feeling! It’s easy to sleep well at night when you’re in 100% cash. Even though this is often touted as a good reason to day trade, you still won’t appreciate it until you experience it. Imagine waking up in the morning and something comes up that will keep you away from the markets that day (sickness, errands, whatever). If you’re swing trading, being away from the markets will take its toll – it will always be in the back of your mind. If you’re day trading, you’re sitting in cash so just take a day off.
- You’ll Have Twice as Much Buying Power
Once you refine your system, this is a big benefit. You’ll be able to trade more opportunities because you’ll have 4 times your account equity in intraday buying power. This startles a lot of newcomers, but if you have a handle on your risk this leverage is very valuable.
- You Actually Earn Interest on your Overnight Cash Balance
This one was very surprising to me. One of the reasons most non-day traders shy away from using margin is because you actually have to PAY interest when you use it. Most brokers leave your cash account in an interest bearing account, so when you have cash in it you’ll actually be making money. Here’s the important point: interest is paid on the overnight cash balance, so because you’re 100% cash you’ll be earning interest just as if you had your money in a savings account. Last I checked my CyberTrader account earned 5% interest or so. This is like earning the better part of 1R each month for doing nothing.
- You’ll Gather a Statistically Meaningful Sample Size Far More Quickly
Because you’ll have more opportunities to trade, you’ll gather a much larger sample size much more quickly. This is vitally important for good trading. Let’s say you make 30 trades in a month. That’s a decent sample size to begin delving into and to start learning from. If you’re trading on a longer time frame, it could take you much longer to make 30 trades so it will take far longer to learn how your system really works.
- You Can Completely Ignore the News
The vast majority of price affecting news like earnings reports is released after market hours. You don’t have to worry about holding overnight when a company is releasing earnings or when, let’s say, the FBI raids a company’s headquarters (d’oh!). You don’t need to worry about how you’re going to react to the news – you can just let other people worry about the news and trade their reactions.
- Day Trading Can Actually Be Less Risky
Because you’ll be avoiding those overnight gaps, with proper money management you can really have better control of your risk. Losses of greater than 2R are fairly common when holding overnight, but they are quite rare when day trading.
Day trading is not for everyone, but there are some not-so-obvious benefits that make it very enticing and perfect for a lot of traders. Are there other benefits that I’ve forgotten?