Intraday trading is the trading activity done by traders who seek short-term returns in the stock market. In intraday trading, securities, like shares, are bought and sold on the same trading day to make potential profits. As trades must be closed within the same trading day in this method of trading, trading may appear risky due to the limited timeframe that traders have to close their positions.
Day traders or intraday traders have to make quick decisions in a dynamic trading session that lasts for a single day. They seek to make profits from short-term price shifts. Due to this, traders who engage in this form of trading often face the negative reality of losing money in their trades. Nonetheless, it is worth going into more detail about the specific actions of traders that result in losses in intraday trading activity.
Reasons Why Intraday Traders Make Losses
Day traders tend to enter trading to make potentially rapid profits in a single day of trading. These are short-term traders who may be content with small profits made at the end of a trading day. Traders that fall into the category of ‘day traders’ must consider some strategies and ground rules that can possibly mitigate risks associated with day trading. Anyway, intraday trading could still result in losses, and here are the key reasons for this:
Risks Involved
Intraday traders often fail to perceive the risk involved in intraday trading. If you compare intraday vs long-term trading, long-term trading may be considered less risky as you can hold your securities till any risk factors like market volatility stabilise. Intraday trading moves at a rapid pace and you may have to close your trades at a loss if profits are not realised by the end of a trading day due to trades not going according to expectations or estimates.
Stressful Trading Activity
Investors are people who typically employ a buy-and-hold strategy when it comes to investment, while traders may consider short-term gains. Intraday traders have to constantly monitor the market and track price movements, not to mention make quick decisions when opportunities arise, adapting to changes in the market. Such presence of mind may be lost on most traders and the activity of intraday trading can be stressful. In turn, this may result in impulsive and hurried decisions.
Volatility in the Market
No matter what an intraday trader has planned for, market volatility is hard to predict and markets may fluctuate in such a way as to go against an intraday trader’s strategies. This may lead to losses.
Increased Transaction Costs
Intraday trading involves frequent trading transactions which may prove costly for traders, especially when you compare intraday vs long-term investment. Intraday traders must consider transaction expenses related to spreads, commissions, and more.
Strategic Trading and Unique Skillset
Intraday trading requires unique skills and strategies to make informed and calculated decisions based on a thorough knowledge of day trading. Traders must be well-versed in trading support mechanisms like technical analysis, market indicators, chart patterns, and other trading tools. If intraday traders lack the knowledge and experience that comes with it, they may face losses.
Missing Out on Overnight Exposure
While overnight exposure can lead to losses, it can also lead to profits that may arise after markets have closed. Since intraday trading stipulates that traders must close their positions at the end of the trading day, such traders do not get the advantage of overnight exposure.
Rules and Regulations
For intraday trading, there are some regulatory restrictions in place, and traders may face losses due to these. For instance, pattern day trading is governed by rules and regulations that require traders to maintain a specified minimum balance in their trading accounts. This could result in losses if balances are not maintained.
Skill in Trading
Investors and traders fall into many categories and types based on their investment and trading activities and the methods they employ for trading. Intraday trading, in particular, requires a trading style that is dynamic, tolerant of risk, and adaptable to rapid market changes. Intraday traders enter the trading game with a unique skillset, backed by strategic planning and thorough knowledge to make trades successful and avoid potential losses.
