Understanding Day Trading

Technically, anyone can engage in day trading and both individual traders and financial services firms frequently do so. Day trading is not for everyone because it carries a lot of risks. Profit margins are often fragile, and you might lose a considerable sum of money quickly if the market moves quickly. Additionally, you should budget a lot of time for planning, conducting research, and engaging in deals.

How Day Trading Works

Day trading comes in a variety of forms, each with qualities appropriate for a particular sort of trader. They span the spectrum from short-term trading, such as scalping, when assets are only held for a few seconds or minutes to longer-term swing and position trading, where an asset may be kept throughout the trading day but not held overnight.

The majority of day trading systems are adaptable and permit positions to be held open for any amount of time, from a few minutes to a few hours. The performance of the transaction or whether there are forthcoming events that have not yet reached the market may affect how long the trade is left open. Futures, options, currencies, and stock markets are the primary financial instruments for day trading.

Day trading is not for everyone because it carries a lot of risks. Profit margins are often fragile, and you might lose a considerable sum of money quickly if the market moves quickly.

Advantages and Disadvantages of Day Trading

Advantages

• Day trading is unaffected by overnight risks.
• Day traders can make a lot of money in a relatively quick amount of time.
• Numerous trades can increase the traders' experience.

Disadvantages

• Day trading requires a high degree of technical analysis and self-discipline.
• Day trading is a full-time trading strategy that is often stressful and expensive.
• Day trading may miss the long-term investment value.

Day traders are attuned to events that cause short-term market moves. Trading based on the news is one popular technique. Scheduled announcements such as the release of economic statistics, corporate earnings, or interest rate announcements are subject to market expectations and market psychology. That is, markets react when those expectations are not met or are exceeded — usually with sudden, significant moves which can greatly benefit day traders.

Day traders are attuned to events that cause short-term market moves, which can greatly benefit day traders.

Day traders use numerous intraday strategies. These strategies include:

• Scalping: This strategy focuses on making numerous small profits on ephemeral price changes that occur throughout the day.

• Range trading: This strategy uses pre-determined support and resistance levels in prices to determine the trader's buy and sell decisions.

• News-based trading: This strategy seizes trading opportunities from the heightened volatility that occurs around news events.

• High-frequency trading (HTF): These strategies use sophisticated algorithms to exploit small or short-term market inefficiencies.1

Why Day Trading Is Controversial

The profit potential of day trading is an oft-debated topic on Wall Street. Internet day-trading scams have lured amateurs by promising enormous returns in a short period of time. Some people day-trade without sufficient knowledge. But there are day traders who make a successful living despite — or perhaps because of — the risks.

Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Moreover, many economists and financial practitioners argue that active trading strategies of any kind tend to underperform a more basic passive index strategy over time especially after fees and taxes are taken into account.

How does a day trader get started?

Profiting from day trading is possible, but the success rate is inherently lower because it is risky and requires considerable skill. And don’t underestimate the role that luck and good timing play. A stroke of bad luck can sink even the most experienced day trader.

Knowledge and Experience in the Marketplace 

Professional day traders — those who trade for a living rather than as a hobby — are typically well established in the field. They usually have in-depth knowledge of the marketplace, too. Individuals who attempt to day-trade without an understanding of market fundamentals often lose money. A working knowledge of technical analysis and chart reading is a good start, but without a deep understanding of the market and its unique risks, charts can be deceiving. Do your due diligence and understand the particular ins and outs of the products you trade.

Individuals who attempt to day-trade without an understanding of market fundamentals often lose money; a working knowledge of technical analysis and chart reading is a good start, but without a deep understanding of the market and its unique risks, charts can be deceiving.

Sufficient Capital 

Wise day traders use only risk capital that they can afford to lose. This protects them from financial ruin and helps eliminate emotion from their trading decisions.

A large amount of capital is often necessary to capitalize effectively on intraday price movements, which can be in pennies or fractions of a cent.

Adequate cash is required for day traders who intend to use leverage in margin accounts. Volatile market swings can trigger big margin calls on short notice.

Day Trading Strategies 

A trader needs to have an edge over the rest of the market. Day traders use any of a number of strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they produce consistent profits and limit their losses.

There also are some basic rules of day trading that are wise to follow: Pick your trading choices wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in the trading activities of your choices in advance.

Key Takeaways

• When traders buy and sell securities multiple times within the same trading day, it is called day trading. 

• Day trading includes a variety of securities, including stocks, commodities, and currencies.

• Day traders can make significant profits, but are also at risk of severe losses, since the market can move against them quickly.

• Day traders buy and sell stocks or other assets during the trading day in order to profit from the rapid fluctuations in prices.

• Day trading employs a wide variety of techniques and strategies to capitalize on these perceived market inefficiencies.

• Day trading is often informed by technical analysis of price movements and requires a high degree of self-discipline and objectivity.

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