The day trading has a mystical itself – there is a glamor and excitement in this trading style that has a unique appeal. However, this mystique has also led to a number of common misconceptions about intraday trading. Experienced traders know that these ideas simply are not true, but less experienced traders are often misled by these myths about daytrading.
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Myth 1: The day trading do not work
Some people – including some prominent researchers – have said that it is impossible to make money consistently from intraday trading. They conclude that high frequency trading at intraday level can not produce profits once commissions and slippage are taken into account – the slippage is when trades are executed at a less favorable price than expected when the trader enter the market.
However, a pragmatic look will show that this is not the case. Many hedge funds and banks use full-time intraday traders and these traders make their living entirely from commissions on their profits. If they were not profitable, they would not earn money and eat. In fact, transaction fees have become incredibly low, and traders have learned to recognize repetitive patterns that can exploit over and over again. Being a successful trader requires skill and the right temperament, but can be very profitable.
Myth 2: Intraday trading is a zero-sum game
Another myth about daytrading is that it is a zero sum game. In other words, for every trader who makes money, there is another who loses. The idea behind a zero-sum game is that when all the victories and defeats add up, everything balances to zero. Traders and individual traders can win, but only at the expense of others.
There is nothing further from the truth. Financial markets in general are not a zero-sum game, the assets prices rise and the total market value increases. The fact that intraday traders work at short intervals does not mean that the market ceases to gain in value. Gains in daily individual trades may be smaller than the long-term positions due to the difference in timing, but overall, net profits are generated.