Is dabbling in day trading worth it? Most financial advisors would say no. Why? Day trading -- buying and selling stocks rapidly over the course of a day -- is time and resource intensive. Traditional investment advice says you are far better seeking solid, long-term performance opportunities than the quick rush of day trading. This advice isn’t wrong, but it ignores the fact that some day traders do make a profit.
Recently, binary options have been taking the trading world by storm, diversifying portfolios with this new high-return investment. Binary options are replacing Forex as a hot trading option.
I’m not a financial expert, so I decided to dig deeper into the day trading world to better understand the risks and rewards. Here’s what I learned.
The case against day trading -- high risk, low reward.
While the fast-paced action can be quite the rush at first, most folks who get into day trading lack the base knowledge and tools to be successful. As a result, roughly 80 percent of day traders end up in the red, reports Motley Fool. Additionally, since the IRS taxes day-trading profits at ordinary income tax rates rather than long-term capital gains, if you do make a profit, you’ll end up handing a hefty chunk back to the IRS.
Day traders who want to make money look for stocks with high “betas.” A beta quantifies how fast a stock can rise or fall within a given market. Essentially, these are businesses that are more volatile than the surrounding market. Motley Fool did an analysis of common day trading stocks in 2014, looking specifically at betas to determine whether these stocks were a good investment. At the time, Weight Watchers, for example, had a beta of 3.34. This means that the stock could rise (or fall) 3.34 times as fast as the market. Get in on the bottom of a fast rise and then sell high, and you could make a lot of money very quickly. Day traders go after stocks like these that offer speedy gains thanks to high trading volume.
Day traders also look at penny stocks. While penny stocks trade for $5 or less per share, due to high trading volume, these stocks can nonetheless lead to a big profit. Of course, a tremendous amount of research -- and sheer luck -- is involved in following this approach to day trading. The average American just doesn’t have the time to engage in the market this way, which is why investment professionals generally recommend the “slow and steady” approach to investing.
Let’s say you invested $10,000 in Texas Instruments or Pfizer 20 years ago. Today, those investments would be worth $145,700 and $113,400, respectively. Invest $10,000 in day trading, and you might end up with nothing. Then again, had you invested in a company like Eastman Kodak, your $10,000 would have evaporated to $3,500. There's risk with every investment!
The case for day trading -- binary option trading strategies.
Binary options are a financial investment tool day traders use to hold a position on the future direction of an asset, like a stock, commodity or currency exchange rate. In short, a binary option is a way to “place a bet” that the value of the asset in question will increase or decrease. Investors don’t actually own the underlying asset.
AnyOption is a new online tool offering educational resources to help investors learn more about trading binary options and the best ways to make money off these options. According to AnyOption, in binary trading you will first choose an underlying asset and then choose an “expiry time,” -- the length of time that the trade is open. You will then choose a “call” or “put” action, and invest your money. While there are a number of different binary option strategies, all offer speedy returns. Most importantly, since you are taking a position on an asset with binary option trading rather than investing in the asset itself, you can make money in both rising and falling markets.
To trade binary options, you’ll need to use a trading platform. Look for platforms that are broker-regulated, offer a range of underlying assets and have real customer reviews. While you can’t make everyone happy all the time, a trustworthy and reliable platform should have an abundance of positive reviews!
Related: How to Deal With a Bad Trading Day