Day trading is a specific form of trading which involves the purchase and sale of financial instruments on the same trading day. Formerly the exclusive domain of banks and investment companies, day trading has now become available to anybody with a computer, some basic trading knowledge, and funds to spare.
All day traders are united by a single goal – to gain maximum profit; however, they use different techniques when trying to reach it. Here are some of the more popular ones:
When this trading technique is used, financial instruments are bought and sold within a very short period of time, typically ranging from a few seconds to several minutes. Scalping traders attempt to buy an instrument at its Bid price and sell it at its Ask price. As instruments are held only for a limited time, traders are exposed to little risk of loss; however, their profit per single instrument is also minimized.
This style is common not just to day trading, but to all other types of trading. Trend traders base their activity on the assumption that a particular trend will continue to develop steadily as it has done so far, e.g. if an instrument’s price has been rising, it will continue to rise, and if it has been falling, it will continue to fall. Accordingly, traders who use this strategy tend to buy instruments with an increasing price and short-sell stocks whose value is dropping.
Individuals who employ this technique act contrary to the current market conditions, expecting these to change in the opposite direction at some point in the near future. Such traders will buy instruments with price that has been decreasing and will sell instruments with value that is rising.
Range traders follow instruments with price that does not move in one continuous direction, but rises and falls intermittently. Traders will buy a stock when it hits a low, and will sell it at a profit once it reaches its high value.
News trading basically means acting in accordance with the news aired about a particular instrument, e.g. buying stock when the news is good, or selling it when the news is bad. Whether a piece of news is good or bad depends not so much on its actual contents, but on the movements it causes on trade markets.
With this style, the major source of revenue and profits is associated with ECN rebates. Rebate traders aim to generate profit from the rebates by trading high volume, low priced stocks. In this way, they are able to trade a larger number of shares, contributing to better liquidity with a fixed amount of capital. At the same time, they limit the risk of not exiting a position in the stock.
Other techniques used for day trading include price action (relying on technical analysis) and artificial intelligence, with stock trades being generated by high-frequency trading and automatic algorithms. The increasing reliance on quantitative techniques and algorithms has resulted in a greater competition and consequently – fewer profits.
Due to the possible quick returns and the nature of financial leverage, day trading may be very profitable or unprofitable. It can be very risky, especially if the trader does not follow any day trading rules, and strategies. Another risk is associated with poor executing of trades or incompetent money management.
Available Financial Instruments
Day traders can trade with a number of financial instruments, the most popular being stocks, options, currencies, and futures contracts. All of these have their own peculiarities, which warrant a thorough research before one decides to invest.
Free charting webinar
Mon, Nov 18th, 2013 12:00 PM - 1:00 PM EST
During the 60 minute session Paul Coghlan, founder of Coghlan Capital, looks at current charts for currencies, precious metals, US indices, highlighting turns and low risk entry points using the Median line analysis methodology.
Median line analysis reduces risk and increases the chartists ability to see trend direction, trend strength and highlight entry and exit levels.
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