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Day Trading 101

Day Trading is the disciplined practice of buying and selling financial instruments such as stocks, bonds, forex, commodities and derivatives within the same trading day. A day trader closes all positions before market close at the end of the trading day. 

No positions are held overnight. This is a high-risk and aggressive form of trading that focuses on making profits within one trading day. The beginning of every trading day is a new start for the day trader.

Traditionally, day trading was the exclusive playground of large financial firms and professional investors and speculators. Many day traders work for banks or investment firms as specialists. However, times have changed and markets are more accessible. Day trading has become increasingly popular amongst home based traders also referred to as individual or retail traders.

Day traders are sometimes thought of as gamblers - making big profits and big losses. This is not true. Day trading requires extensive knowledge, discipline, skills and experience. Seasoned day traders often make huge profits.



1. Day Trading Characteristics


1.1. Frequency of Trading

Day trading comprises many different styles of trading. We often picture a day trader as being a high energy individual who remains tense and glued to the computer screen all day. This is not the case and a day trader is not necessarily very active. It all depends on the trader's individual personality, trading strategy and style.

The number of trades made in a day can range from one to hundreds depending on the trader's personal preferences. Some day traders are very short-term focused and their trades may last a few seconds to several minutes. They buy and sell during the trading day, trading high volumes to make profits from small gains.


1.2. Not Holding Overnight Positions

Day traders always settle their positions and close all open trades even if at a loss, before the market closes for the trading day. This is a day trading golden rule to be obeyed at all times and it prevents the risk of overnight price gaps. A price gap is the difference between the previous day's closing price and the next day's opening price. Some day traders bend the rules and keep their position open after market close. This is no longer classified as a day trade.

Day traders often use a margin account to borrow trading funds from their brokers. Since margin interests are typically only charged on overnight balances, the extra costs discourage day traders from holding overnight positions. Trading on margin amplifies gains within a very short period of time. Positions have to offset transaction costs and interest on margin accounts.


1.3. High Risk, High Profit

Day trading can be highly profitable due to the possibility of rapid gains. A high risk appetite combined with money management techniques and an unwavering discipline to follow the trading plan rules can generate huge returns. Globally, successful day traders earn millions every year. These individuals have strict discipline, effective risk management skills and control over their money.



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