Day Trader Definition
The day trader is an individual who trades in the financial markets daily to earn profits by exploiting the inefficiencies present in the market.
Types of Day Trader
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#1 – Individual Trader
They are the ones who utilise their own money, funds, and resources to trade in the financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more. They may trade on instincts or trading strategies devised by them. However, an individual trader with a proven track record of implementing successful strategies and delivering good returns may handle individual high net worth accounts as well.
#2 – Financial Institution Trader
The financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more are dynamically engaged in the financial markets. They have separate departments under their ambit that undertakes strategies to squeeze some money out of the financial markets on an intraday basis. They, therefore, hire individuals who specialised in day trading.
All the necessary resources and funds are allocated to the day trader. They are hired by financial institutions to utilise the resources to provide returns to the financial institutions.
#3 – Scalpers and Momentum Traders
Scalpers are defined as the individuals who derive small profits by manipulating the volumes on the financial instruments. The momentum traders are those who devise trading strategies basis the current market sentiments, trend and momentum inherent in the financial markets.
Features of Day Trading
#1 – Size of Capital
A day trader who is at beginner levels may have limited capital to undertake. Therefore, trading capital can be defined as the resources and funds hold in hand to be employed specifically for trading purposes. They have to adapt to careful planning and strategy to make the best use of the resources in hand.
#2 – Trading Strategies
Each one has its own trading strategies that he may use to manipulate inefficiencies in the financial marketsInefficiencies In The Financial MarketsAn inefficient market represents the one which fails to exhibit the actual value of the assets. Such a market doesn't provide transparent information and is unavoidable in the real world, but it benefits arbitrage traders.read more and derive profits from them. Some of the strategies are based on the technical analysis, trends and the guts instincts of the traders.
#3 – Technical Analysis
The technical analysis is defined as the analysis of the price movements of the financial assets present in the financial markets. They analyse the upward and downward trends in the markets to predict the best price to enter or exit from the financial markets. There are a large variety of tools such as moving averagesMoving AveragesThe moving average calculates the average of the data set's averages. The data analysis tab in the analysis part of Excel has an inbuilt feature for calculating a moving average. read more and charting methods that help the day traders to devise a comprehensive trading strategy.
#4 – Trading Platform and Highspeed Internet
They utilise high-speed internet and engaging high-end trading platforms to drive fast intraday positions. Due to exponential improvement in technology and with the advent of the information age, there has been an emergence of discount brokersDiscount BrokersDiscount Broker is an online stock broker that assists investors in trading securities on the stock exchange by charging a relatively low rate compared to conventional brokerage firms. However, it does not offer any additional services like trading tips or wealth management. read more who charge zero brokerages simultaneously provide high-end optimised trading platforms that helps the day traders to drive trades. They take up the services of discount brokers and try to gain small profits from the intraday positions.
Example
Suppose a day trader has taken a long intraday position in ABC stock at 10 am. The price of entry is $15.
At 11 am, the price of ABC reaches the level of $25 per share. The trader squares off his position at $25 to earn a gain of $10 per share. The trader would have to then pay $3 towards the transaction costs and commissions for facilitating intraday trades.
After deducting the costs, the trader net gain is $7 per share.
Advantages
- Since they maintain intraday positions, their returns are not harmed by any news on an overnight basis.
- A specialised day trader can always analyse his current position in the financial markets and trigger stop-loss functions at critical junctures to reduce and mitigate any potential losses arising out of the positions undertaken.
- There is the presence of individual brokerage houses that tend to provide extensive margins and leverages, which can then be used to leverage on them to derive good profits and returns.
- Due to the vast uncertainties in the financial markets, day trading becomes a very dynamic job. Due to this inherent nature, they learn something new daily.
- The day trader having a good attention span with a perfect grip on technical analysis skills can earn high returns on the intraday positions.
Disadvantages
- The trader who performs two to four trades daily also has to bear higher commission and transaction costs.
- There are certain types of assets on which day trading cannot be completed and hence becomes out of scope for the day trader itself.
- If positions are derived using margins, then there is a high probability that the trader may incur huge losses on such positions.
- There would be a situation wherein the trader may not get enough time to manipulate the positions undertaken and hence may not be able to derive returns on such positions.
- An individual trader who is new to day trading would have access to limited funds and resources.
- An inexperienced trader may lack the understanding of technical analysis techniques.
Limitations
The performance of the day trader is always limited by the transaction costs, commissions, dynamic changes in the bid-ask spread as well as any expenses borne by taking up automated trading software.
There may be a situation wherein the trades performed by the trader may not provide any substantial gains since there may be limited volumes or less liquidity along with reduced price volatility in the financial markets as a whole.
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This has been a guide to what is Day Trader and its definition. Here we discuss their types, features along with the example. You can learn more from the following articles –
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