You know I agree with this list but I’d also like to see what you think the disadvantages of day trading are as compared to swing trading. The biggest ones in my mind is missing out on gaps in your favor and periods when stocks just drift higher day after day.
It took me a while to think about some disadvantages, but here’s what I’ve come up with:
- Daytrading takes intense focus during market hours
If you have trouble focusing for lengthy periods of time or have obligations that prevent you from doing so, you’ll likely be frustrated. It’s true that a lot of the day is spent twiddling your thumbs, but with many trading systems it’s hard to tell when good setups might come along so you have to be on your toes for a lot of the trading day.
- You’ll miss out on overnight gaps
There’s a lot of money in those overnight gaps! Of course, this cuts both ways. As Mike had mentioned before, when you’re swing trading stocks seem to just drift day after day and you’ll miss out on these situations if you’re flat overnight.
- Sometimes the market will move alot, but your trades won’t
I’m sure this happens with swing trading, too, but it seems to happen more frequently and more noticeably when you’re day trading. How many times has the market made a big move and you ended up breakeven or with a loss. When you run into friends later, it’s almost guaranteed that they’ll say something like: “Did you see the market today? You must have made a killing.” A lot of people just can’t understand that.
- Market hours aren’t convenient for everyone
Us right coasters don’t think about this too much, but traders in other time zones might find it really inconvenient to trade the U.S. markets. Some really like the time difference, though. For example, pacific coasters seem to have a pretty sweet deal if you’re a morning person with the U.S. markets opening at 6:30AM PST and closing at 1:00PM PST.
I’m not sure how Eyal does it though – he is in Thailand where the time difference is exactly 12 hours. Wow.
- There are more opportunities to over trade
Over trading (either trading too big or taking too many opportunities) seems to be much more prevalent for day traders. If you lack self discipline you can always find another trade to make. The extra buying power that comes with daytrading certainly gives you a pretty loose leash. If you have hidden psychological issues, the temptation to overtrade while daytrading could easily lead to your trading demise.
- You’ll spend a lot in commissions and trading costs
This probably goes without saying, but when you move to a shorter timeframe your commissions will become more of an issue.
- You’ll need to have a plan for the “unexpected”
Power outages, platform problems, general computer problems, network connectivity – all these problems are magnified when you trade on a shorter timeframe. It’s critical that you have a plan because it’s not IF they happen, it’s WHEN.
- You’ll need more software
A good day trading broker, a good scanner, charting software – you’ll spend a lot of time evaluating the variety of choices out there which takes time and money.
I’m sure there are other disadvantages – can you think of others? Perhaps my rose colored glasses are preventing me from coming up with other reasons. 😉