The Myth of Day Trading: Is U.S. Stock Intraday Trading Right for You?

Online, we often see various “myths” and misunderstandings about day trading. These myths often exaggerate the benefits and ease of day trading, which may mislead novice traders.

“Day trading can make you rich quickly.”

“Everyone can easily become a day trader.”

Day trading doesn’t require too much capital.

“Day trading can rely entirely on automated trading systems.”

We often see some intraday trading experts sharing their achievements. But what is the actual situation? Let’s take a look.

What is day trading?

Day trading mainly refers to a trading method where the position is held for a short period of time, entering and exiting on the same day without holding overnight positions. Day trading captures trading opportunities that can quickly profit after entering the market and then exit. If you cannot profit, you should also prepare to exit quickly. Due to the short position holding time, the corresponding volatility risk that needs to be borne in day trading is relatively small. Day trading can refer to periods such as 4H, 1H, 30m, 15m, 5m, and even 1m. Usually, day traders observe trends through large periods, judge entry points through small periods, and determine the effectiveness of trading through resonance between different periods and intraday volatility trends.

Day trading, as a fast in and out trading method, has obvious advantages and disadvantages. Understanding its advantages and disadvantages in detail can help traders make better judgments and choices.

The advantages of day trading

Risk is easy to control - Frequent trading may sound risky, but its advantage is that risk is easier to control in the hands of traders.

When traders find that the market situation is unfavorable to them, they can quickly exit. At the same time, there are many sudden news events that can cause violent market fluctuations, which occur at night or during periods of light trading. Day trading does not require overnight positions, and traders can also pay attention to the market during the trading process, which can effectively avoid forced stop-loss or liquidation caused by major market trends.

Timely feedback on results

Day trading means entering and exiting the market on the same day, and the trading results will be quickly reflected. For medium to long-term swing trading, profits may have to wait for several days, weeks, or months, but day trading may have results in a few minutes. For some impatient traders who want to quickly know whether their strategies are effective, day trading is more in line with their expectations.

Profitable quickly, satisfying the psychological pursuit of excitement

The transaction of intraday trading is very fast. You can make several or even more than ten trades a day. It is very satisfying to watch the money in your account rise rapidly while trading, but it may also fall rapidly. The higher trading frequency of intraday trading is more exciting than other trading methods, and some traders are willing to pursue this excitement. However, for manual traders, it is not recommended to trade too frequently because there are many automated systems competing with traders, and their reactions are more rapid and accurate. Ordinary traders generally trade 2-3 times a day, and higher trading frequency can easily cause losses.

Disadvantages of day trading

Speaking of sleeping, it’s okay if trading Hong Kong stocks, but if you want to do intraday trading of US stocks, due to the time difference between Asia and the US, you may need to rely on automated trading strategies to maintain a normal schedule. The trading hours of US stocks are based on US Eastern Time (ET), and the specific times are as follows:

Normal trading hours

- Eastern Time (ET) 9:30 am to 4:00 pm

- Hong Kong Time (HKT) 9:30 pm to 4:00 am the next day

Pre-market trading

- Eastern Time (ET) 4:00 am to 9:30 am

- 4:00 pm to 9:30 pm Hong Kong Time (HKT)

After-hours trading

- Eastern Time (ET) 4:00 PM to 8:00 PM

- Hong Kong Time (HKT) 4:00 am to 8:00 am the next day

Pre-market and post-market trading hours are relatively less used, with low liquidity and large price fluctuations.

In addition,

The proportion of single profit is small

“Thin profit” is the basic idea of day trading, because the cycle of day trading is short, and the profit of each transaction is also relatively small, usually between a few percentage points. The most important thing in day trading is not how much profit a single transaction can make, but the winning rate of the transaction. If operated properly, a winning rate of about 50% can lead to a certain profit.

High transaction costs

The trading frequency of intraday trading is much higher than that of swing trading, and each transaction requires payment of corresponding spreads and commissions, as well as more slippage. Therefore, the trading cost of intraday trading is relatively high, and too frequent trading may exhaust profits or even lead to losses.

Time and effort consuming

Day trading has higher requirements for traders. If swing trading can be done as a part-time job, day trading is undoubtedly a full-time job. Day traders must be fully focused during the trading period, always pay attention to the market trend, and react quickly to make profits. During the day trading period, traders often cannot take care of other things, and day trading requires traders to react quickly, which can also be quite stressful.

Therefore, intraday trading in the US stock market is more suitable for financial professionals rather than newcomers.

Also, the US stock market adopts the T + 1 system, which means settlement is completed on one working day after the trading day. For example, if trading is conducted on Monday, settlement will be completed on Tuesday. This means that investors need to prepare settlement funds within one day after the transaction.

According to the regulations of the US Financial Industry Regulatory Authority (FINRA), if the account balance is less than $25,000, investors can only conduct three intraday trades every five trading days. Exceeding this limit will be marked as a “day trader” and requires maintaining at least $25,000 in equity in the account.

This restriction only applies to domestic securities firms in the US, such as Interactive Brokers and Charles Schwab. If you use Asian securities firms such as Tiger Securities, BiyaPay, and Futu Securities, you are not subject to this restriction. If you want to try day trading, you can choose the above platforms.

Below are several commonly used day trading strategies.

Meaning Reversion Meaning reversion

The value of assets usually has a “normal” or average price point around which they fluctuate. Although some assets may experience fluctuations far from the average, some day traders believe that after extreme fluctuations, the value of assets usually returns to the average price at the end of the day.

When asset prices deviate from their historical averages, some day traders enter the market. The Moving Average indicator can help find tools that deviate significantly from these historical averages, and day traders expect to return to past price trajectories. This strategy is called Mean Reversion.

Scalping

Scalping is the shortest of all-day trading strategies. It attempts to make small but regular profits based on significant fulfillment rates. Scalpers are highly disciplined because they need appropriate stops to limit losses relative to potential profits. Scalping is most common in foreign exchange trading , which has the most liquid market on both sides of the order.

Monitor transaction orders

Monitoring the order flow and the weight of funds entering the market can also affect day trading. The order flow indicator signal can identify when assets are “overbought”, that is, the number of traders seeking to buy has dried up. They can also detect “oversold” assets, that is, when the number of trades seeking to sell has also dried up.

Trend Trading

Day traders also want to ride on market momentum. As long as an asset shows a series of higher highs or lower lows, this is a clear signal for trend traders to go long (buy) or short (sell). Using a wealth of technical indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) , the momentum of stock trading can be accurately determined.

Trading with Momentum

Day traders who trade market momentum will closely monitor price trends and movements, rather than fundamental analysis. Momentum day traders will look for assets with high liquidity so that they can enter and exit the market without slippage.

Finally, and most importantly, one of the main reasons why traders get into trouble is the lack of a risk management plan . Fundamentally, make sure that you only bear 1% of the overall trading bank risk in each trade. This ensures that you must experience losses from 100 trades to bankrupt your bank. Wishing you ideal returns in the process of trading.