What is Day Trading?
We know that you can buy and sell securities (like shares, currency etc.) whenever you like, or whenever you find that the price is appropriate. This buying and selling of securities is what is called trading.
- When a person buys and sells securities within the same day i.e. when she/he closes a transactional cycle in one day, traders call it day trading.
- For a person to qualify as a day trader, he must have solid knowledge and experience of the market.
- Day traders use some strategies to make profits. A day trader must be flexible in using strategies, because as any new or experienced investor or trader knows: the stock market is an unstable place.
But when a person buys and sells securities within the same day – when he closes a transactional cycle in one day – we call it day trading. The person can go through the process multiple times in any given day. Day trading can occur in any marketplace, but it is more commonly seen in the stock market and the foreign exchange market (forex). People who perform day trading are known as intraday traders. The day traders who intend to hold on to their shares for a little while longer (say, a couple of days) are called swing traders – riding on the momentum of the stock’s movement.
How does a Day Trader Work?
A typical day trader who is serious about her work and earns her living through day trading has some qualities which makes her an expert in the field.
Let us observe some characteristics of a day trader:
- The most important one is knowledge and expertise. For a person to qualify as a day trader, he must have solid knowledge and experience of the market. Day traders know market fundamentals, but they constantly keep on researching on dynamic technicals because the stock market is an unstable place.
- One cannot make money without sufficient capital. A good amount of capital is absolutely necessary, otherwise the return will be small and of no use. Day traders use risk capital for day trading which they can afford to lose. They often borrow money too (called leverage) because a huge amount of capital is not always readily available.
- A good blueprint is important keeping in mind the risk involved. To have an edge over other day traders, a strategy proves to be worthwhile. Day traders use different strategies like, arbitrage, swing trading, etc.
- Proper discipline is always the key to success, be it any field. A day trader will often end up losing a huge amount of capital invested if discipline is missing.
- A day trader uses proper technology to perform all tasks since everything happens electronically.
Day Trading Strategies
Day traders use some strategies to make profits. A day trader must be flexible in using strategies, because as we already mentioned, the stock market is an unstable place. Here are some common strategies used by day traders:
- Scalping: Scalping used to be called spread-trading, and is a technique based on real time technical analysis. Purchasing and selling is performed by holding a position for a very short duration of time for small profits.
- Range Trading: ‘Trading in a range’ stocks are analysed. They are stocks which on reaching high, fall low. Therefore, the day trader buys them at low price and sells at high.
- Trend Following: Trend following can be considered one of the most basic strategies for day traders. It assumes that the stocks that are rising will keep on rising and vice versa. Hence, the trader buys the rising stocks and sells the falling ones.
Day trading for a living
There are basically two types of day traders – those who work for an institution and those who work alone. Most of the people who perform day trading for a living are those working for some institution.
Here are some of the reasons why most traders work with institutions:
- A large amount of capital needs to be invested which might not always be available at an individual trader’s disposal.
- Expensive analytical software might be required that can be provided at an institute.
Even though most day traders traditionally worked with institutions, with the advent of internet and light-weight trading platforms that provide real time information, individual traders can also become day traders.
- People who attempt to day trade without proper knowledge and experience tend to fail in their attempt and end up losing large amount of money.
- Proper strategy and discipline is key to a day trader’s success.