There is plenty of information, all over the internet, that talks about what day trading is, how it is done, and why it shouldn’t be done. Surprisingly, most of them are misconceptions that restrict readers from knowing what pattern day trading is all about.
In the most basic sense, a pattern day trader (PDT) is someone who executes four or more day trades in a span of five business days, using a margin account. Although the basics may seem simple to comprehend, there are many other aspects that define who a PDT is.
Such ambiguities are the primary reason for the majority of misconceptions revolving around PDTs. So, here are five common misconceptions that people have about PDTs, busted.
1. Day Trading Is a Scam
This is one of the biggest misconceptions propagated about day trading. This is primarily because many traders got into day trading without knowing much about how it works, which ultimately led to losses.
Since many traders lost their capital, they concluded that day trading is a total scam. In reality, day trading is a complex process that requires proper planning and understanding of the market to succeed. It is as simple as “if you fail to plan, you plan to fail.”
Just like any other business that offers a lifestyle above the average, day trading is also complicated. But, that doesn’t mean all traders lose. The problem is here that a majority of traders try out their luck in day trading without proper planning or study.
Although it wouldn’t be fair to say that all trading orders are meant to profit, there will surely be some instances where traders have to incur losses. But the percentage of losing can be significantly reduced with methods such as algo trading.
2. You Don’t Require Any Training to Day Trade
Unfortunately, no. Not anyone can become a successful trader without making efforts to learn and understand the market. Even though you don’t need a certificate to start as a day trader, you need proper training to understand each aspect of day trading.
There are several online courses available that let you practice the art of day trading. You can discover a lot from reading books and articles and listening to experts in the industry. Just like any other skill, day trading requires you to provide your efforts and attention, continually.
3. The Markets Are Rigged
For a layman’s eyes, the market may seem to be rigged, because how much ever they try to gain, they miserably fail. As a result, they conclude that high-frequency traders rigged the market against them.
But such statements are far from reality. Of course, high-frequency traders have a demanding power on the market, due to the high volume of stocks they hold.
But that doesn’t mean they have any control over what you hold. You just have to work on identifying which direction the market may move and tweak your orders accordingly.
Similarly, many assume that day traders can make a few transactions, and voila – they are fully financially freed. Although this seems too good to be true, it is far away from reality. Just like any other job or business, day trading requires your continuous efforts.
Also, having nothing less than profits is a myth. Every trader will have to face an endless cycle of ups and downs in the early stages of their career. Fortunately, many of the mistakes that you make will be abundant learning lessons in the long run.
4. Day Trading Is Gambling
Many often associate day trading with sheer luck and similar to gambling. In layman’s terms, trading may seem like placing bets and trying out your luck. Although there is a little amount of luck involved with the entire equation, it is nearly negligible.
Instead, day trading revolves around two significant parameters – probability and strategy. Every trader needs to have a plan, as in an estimate calculation of how much they can lose (or gain).
This will make it easier to evaluate the risks involved. Traders can also utilize the probability of each trade to determine whether a share price will change favorably.
Another misconception is that day traders require a substantial amount of money to start off. Indeed, traders with a limited budget can only place limited orders, but that doesn’t mean a trader can’t start lower than $25,000.
In fact, most experts suggest that beginners must start with a smaller budget and work their way up. This will ensure that if they incur some losses in the future, it won’t affect other financial aspects of their lives.
5. Day Trading Can’t Be Performed If You Are Working Full-Time
There are two sides to this. Firstly, just like any other job, trading requires your full attention throughout the market time. If you perform an order at the start of the day and leave it unattended till afternoon, you are making a grave mistake.
So, if your job restricts you from continually monitoring your trading ventures, maintaining both will be hard. However, several trading styles allow you to spend minimal time, but there are, of course, several limitations with them.
And secondly, most traders start as part-time traders with full-time jobs. This keeps their financial stability at the check and ensures that they have a paycheck to fall back on if things go wrong.
Another misconception about PDT is that tools are an essential part of becoming a trader. Of course, tools are integral for day trading, but having a fancy setup won’t make you successful.
Experience and a perpetual keenness to learn are what makes a trader effective. A trader has to spend more time planning and studying the market for better outcomes.
These are just a few of the numerous misconceptions people have about pattern day trading. If we are to pluck and examine each of them, there will be plenty enough to fill two volumes of a book. To be on the safer side, always discuss with an expert in the domain to avoid such common misconceptions.