Problems Faced When Starting a Trading Business (& Solutions)
Day trading is the practice of buying and selling financial assets with the goal of generating short-term profits. The most popular assets you can trade are stocks, commodities, cryptocurrencies, and bonds.
The main difference between trading and investing is that day traders don’t believe in holding their positions overnight.
Day traders can do it individually at home or corporately. Most of them are retail traders who do it using their laptops or smartphones. Other people are prop traders who use funds provided by companies to trade.
Starting a career as a trader can seem daunting, especially for those just getting started. While it can be an exciting journey with financial independence as a potential reward, there are many common pitfalls and problems that most new traders will face at the outset.
It is important to be aware of these issues in order to overcome them and develop sound trading strategies and practices.
In this article, we will explain some of the top challenges that people go through when starting their trading business.
A common challenge that most traders face is known as market volatility. Volatility is defined as the speed in which an asset’s price changes in a certain period. In most cases, advanced traders love highly volatile sessions.
However, for a beginner, this volatility can be highly dangerous since it can lead to bigger losses. This partly explains why most people who start day trading lose money and leave the business altogether.
There are several strategies you can use to solve this challenge. First, you can create a strategy that benefits when there is substantial volatility. One of this strategy is scalping.
Second, you can embrace position sizing, which means that you should ensure that your position sizes are not all that big. Higher position sizes will often lead to bigger losses, especially when you don’t have a good strategy.
The second major challenge that you will often go through is emotional stress. Most day traders go through this, especially when things are not going on well. All these issues could lead to substantial anxiety.
For example, assume that you have started trading with $10,000 and you execute a trade that loses $8,000, there is a high possibility that you will go through mental anguish.
Another cause of emotional stress is when things are not going on well. For example, when you are learning how to trade, things can fail to work. You can spend months in a demo account where things don’t work at all.
There are several things you can do to avoid this emotional challenge. For example, instead of working alone, start your career as part of a team such as in a trading floor or in an investment bank.
Also, you can create a trading strategy that doesn’t expose you to a lot of risk (this is an evergreen tip).
There are significant financial risks when it comes to day trading. It is often reported that more than 80% of all day traders lose money. In this, the unpredictability of markets plays a key role (as we already told you in the section on volatility).
Another risk is that many people find it difficult to raise the necessary capital to trade.
There are several strategies you can use to handle the financial risks in the market. First, the lack of capital can be handled by becoming a prop trader, where you use companies like DTTW cash to trade. Second, you can use companies that provide leverage to handle the trades.
Third, you can avoid losing money by having a good strategy and by using several risk management strategies.
Some of the top strategies that will help you prevent losing money are having a stop-loss and a take-profit, position sizing, and not leaving your trades open overnight.
The other challenge you will often find is information overload. This is defined as a situation where you are receiving too much information that you need to process before you execute a trade.
For example, you might receive the Fed interest rate decision, earnings, and M&A deals within a day. Also, you might be using too many sources of information.
Although it is important to trade knowing the right information, having too much has the opposite outcome: it puts you in a bind, possibly because some sources are conflicting, and this leads to analysis paralysis.
You can limit this challenge by creating your specific newsfeed and by using a watchlist that shows you tailored information. You can also create a trading journal that simplifies how you breakdown data and execute trades.
Another challenge that many traders go through relates to their technical issues. To be a good trader, you need to have access to faster internet and quality hardware. For most traders, it is relatively easy to use their smartphones to trade.
Your platform must meet certain minimum requirements, including minimized latency to avoid slippage (when the trade is executed at a different price than you wanted due to weak broker response)
There are several ways to handle technology issues when day trading. First, buy used computers instead of brand-new ones if you are short of funds. Second, subscribe to a reliable internet provider. Fortunately, the cost of internet has dropped rapidly in the past few months.
Finally, consider the PPRo8 platform provided by DTTW. It is a hardware that provides you access to most markets that you can trade.
The other challenge you will often go through relates with the time component. In most periods, especially when you are starting out, you might not have the time you need to be a good day trader.
This is a common challenge since most people who start their trading careers do it part time. The reality is that you need a lot of time, especially when you are a full-time day trader.
There are several ways to handle this challenge. First, instead of starting as a full-time trader, you can start as a part-time trader.
Second, you can start your career by implementing a few traders per day. Third, you can decide to trade the evening session after your 9-5 job.
Large trading companies have an army of lawyers that help them with regulatory issues. As a small trader, you don’t have this benefit, meaning that you will be trading without too much information on regulatory and tax issues.
One of the top regulatory issues you need to know is on the pattern day trader rule. Others are rules relating to halts.
You can avoid this issue by being informed about the popular regulatory rules in the financial industry.
In this article, we have looked at some of the most popular challenges you will go through when starting your day trading operations and how to handle them.
There will be other challenges that you will face. Taken together, the best approach is to start trading in a floor that has many experienced traders.