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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.




2. Day Trading Strategies

Day traders use several strategies:

  • Trading trends

  • Trading the news

  • Trading ranges

  • Scalping


2.1. Trading Trends

Trend trading, is a trend following strategy that can be appiled to all trading time frames, not just day trading. Trend traders assume that rising prices in an uptrend will continue to rise and vice versa i.e. the trend follower buys an instrument which is rising, expecting that the trend will continue. 

Trend trading is a high probability strategy - it is easier to make money in a trade that is in the direction of the dominant trend. How does one know what the dominant trend direction is?  Using technical indicators on price charts such as moving averages is widely used to gauge trend direction.


2.2. Trading the News

Trading the news is one of the main day trading techniques. The strategy is to buy when good news is announced, and sell when there is bad news. Major news events cause high volatility in the financial markets. This provides a good opportunity for quick profits. Very often, the effects of good or bad news can be seen immediately in price action on the trading instrument's price chart.

The price often moves even before the news broadcasts any announcements. This happens when rumours and estimates by market and industry analysts of the event spreads and circulates before the official news release. In many cases, you will find that the prices have already moved in anticipation. If price does not move much after a major news release, it often means the news was already priced into the instrument.


2.3. Range Trading

Range trading can be considered as opposite to trend trading and is recognised as a lack of a trend. A trading range occurs when price trades within a horizontal channel for an extended period - there is no trend. 

Range traders look for price rising from significant support levels and falling from resistance levels. Support levels are where there is high buying pressure, and resistance is where high selling pressure takes place. Range traders buy at support and sell at resistance. Ranges offer the most trading opportunities because markets tend to be range bound most of the time. 


2.4. Scalping

Scalping is a trading style where small price gaps created by the bid-ask spreads are exploited. Scalping is also commonly referred to as spread trading. It usually involves establishing and liquidating a position quickly, within minutes or even seconds. Scalpers look for highly liquid instruments where they can take quick profits while minimising risk by keeping the exposure short.

This form of day trading applies technical analysis tools such as over-under bought, support and resistance levels, trend lines and trading channels. The market is entered at key points to make quick profits from small moves. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and trading ranges expand.


3. Trading Systems and Software

Some day trading strategies such as scalping requires relatively sophisticated trading systems and charting software. Many day traders use multiple monitors or even multiple computers to execute their orders. A fast internet connection is essential for day trading. Day traders do not use brokers that are slow to execute trades. They also steer away from brokers that charge high commissions. Direct access trading such as an online trading account offers substantial improvements in transaction speed, better trade execution prices and lower trading costs.

Having access to real time market price feeds is necessary for day traders. The time span for making trading decisions is short and delayed prices are not very useful. In addition to real time market data, some traders purchase more advanced data feeds that include historical data, order flow and features such as scanning large numbers of instruments for unusual activity. Complicated analysis and charting software are other popular additions. 


4. Conclusion

Being a day trader is exciting but there is high risk of losing a lot of money in a short period of time. If you trade with discipline, keep emotions in check and follow your trading rules, the profit potential is endless.




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