A day trader is a person that buys and sells a position within a day, therefore reducing the risk of overnight volatility. In doing so, he or she takes in a high risk in exchange for a high reward. However, is day trading bad for the economy?
Day traders aren’t bad for the economy. Day trading can be beneficial in an indirect way. It helps markets regulate their prices as well as bring liquidity to investors. If done correctly, it can also help local economies by increasing the demand for products and services.
Today we’ll help you understand what makes someone a day trader. We also explain how day trading can impact national and international economies.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Does a Day Trader Do?
A day trader is someone who buys or sells positions within a single trading day. They do this to minimize the market’s overnight risk and maximize the profits from a single position. However, day trading is considered a high-risk level of trading, and not many day traders succeed.
Day traders monitor the stock market and work with different plans and strategies to make the most of every position. They require full knowledge of the economy, stock, utilities, and everything related to trading.
One other fundamental requirement of a day trader is the understanding that you can make a lot of money, but there is a risk of losing it all.
Here are some key details you need to know about day trading:
- Day trading is not investing. Investors keep their stocks for a long time, while day traders won’t hold a position for more than a day or two.
- Day trading does not guarantee success. Day trading is more complicated than other types of trading strategies. The reward is higher, but also the danger. So, there is no guarantee that you will succeed by performing day trades.
- Day trading is highly stressful. Day trading needs constancy and knowledge. Most day traders work all trading hours and read about the market when they are not working. This lifestyle can be stressful, and it is not a good option if you’d like a more peaceful way of living.
What Are the Economic Benefits of Day Trading?
Day trading can be rewarding if you are a smart person that knows how the market works. Let’s discuss the principal arguments in favor of day trading.
The Role of Day Trading in International Markets
Day trading is essential for the development of markets around the world. By buying and selling positions within a day, day traders ensure the prices of a stock change. The change creates a balance between the demand and supply of a specific position. However, it is only a short to middle-term solution for emerging markets.
Day trading can also help companies by guaranteeing buyers daily. For a day trader to sell a position, he first needs to buy it. Day trading benefits the company because it makes other people decide to buy the stocks, which pushes prices up.
You can learn more about how day trading helps the economy in this video:
Successful Day Traders Are Good for Local Economies
The statement is true for every professional or worker. A successful person will invest more money in food, transport, clothing, and more. Therefore, this helps create more demand for products and services, which creates more jobs.
More jobs mean less poverty, and less poverty means a better economy.
Day Trading Brings Liquidity to the Market
The more people involved in a market, the more cash flow there is. By buying stocks daily, day traders make sure that investors and other traders can liquidate their assets almost immediately. It means that people will be able to cash out their stocks thanks to the cash brought in by day traders.
People investing in gold or long-term stocks benefit from day trading without knowing it is happening.
Here is a more visual explanation of how day trading helps society in general:
The Economic Disadvantages of Day Trading
Although day trading is a lucrative trading strategy, it can also bring many problems to the trader. Here we list the principal arguments against day trading.
The Human Factor
One of the most common arguments against day trading is the human factor. The idea behind this argument is that most humans consider luck a part of their strategy. However, relying on luck for trading is a bad idea and is even worse for day trading as the risk is higher.
People tend to overestimate their abilities when things are going well. This leads to people taking more significant risks believing that nothing wrong can happen.
The Problem of Trading Platforms
The internet has broken many barriers for average users. A person can release a single without a label company or a book without a publisher. This trend has also caught the trading industry.
Nowadays, you can invest and day trade with as little as 200 USD through the many trading platforms and apps. However, these platforms are not as free as many would think. They need a constant cash flow, and that’s why they incentivize any user to keep investing.
These platforms have turned trading into a game and keep users interested by giving them a win now and then. By doing this, they have turned trading into a slot machine that relies on luck to keep going.
This way of trading is dangerous as it can lead to significant losses for many users and an increase in poverty is always bad for any economy.
The Truth About Day Trading
Most day traders will lose money, while only 1% gets better returns than investing in a low-cost index fund. Inexperienced day traders may believe they are part of the 1% when things go well, but once the market turns on them, they might have a rude awakening.
Stocks Don’t Always Go Up
Investing in stocks is an excellent idea in the long-term. However, it is only recommended if you can take on the downturns. Day traders usually buy and sell positions within a day, but this method makes the downturns even more dangerous.
You can start a new position on a stock because you heard or thought it would go up that day, and you wait for it to grow, and it just keeps going down before you know that stock is worth zero.
Is Day Trading Bad for the Economy or Not?
Day trading is indirectly beneficial for the economy. It allows markets to regulate their prices and brings liquidity to their trades. Successful day traders also help the economy by spending their earnings locally. However, there are direct negative consequences of day trading.
Day trading can be dangerous for inexperienced traders, as it can lead to significant debt. When people cannot pay a debt, it creates a problem for the economy, and it is worse when there is a lot of unpaid debt. Considering that only 1% of day traders succeed, you could argue that day trading can become a problem for the long-term economy.
Overall, it is a highly controversial topic, but there’s nothing wrong with day trading if done correctly. Minimizing the risk for the trader means minimizing the risk for the economy too.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Although it is risky for the trader and the economy, day trading can be beneficial too. It allows markets to bring balance between supply and demand. It can also help the same markets to increase their liquidity.
As with every trading strategy, it will only help those that understand the market and are consistent with their work. If not done correctly, day trading can be harmful to the trader and the economy.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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