What is Day Trading?
Day trading is the buying and selling of securities or financial instruments within the same day with the purpose of earning profit using margin leverage. These investors are also known as speculators as they do speculation in securities or financial instruments.
How Does it Work?
In this, an investor buys at a low price and sells at a high price. For e.g., an investor buys 500 shares in the share market at $10 per share at the opening of the stock market. After the half, an hour price starts increasing, and the investor decides to sell it at $11.5 per share and makes out a profit of $750 [(11.5-10) *500].
In the below graphic representation of the above scenario, the x-axis shows the share price, and the y-axis shows the time at which the price is recorded.
Strategies of Day Trading
There are different types of strategies that an individual investor applies for this trading in the stock market. Some of them are as follows:
#1 – Scalping
Through this strategy, investor reaps out the profit through small changes in the prices of the securities in a single trading day.
#2 – News Based Trading
Through this strategy, investors take benefit out of their knowledge of the market by buying and selling securities on the basis of the news or any announcement relating to them, which could impact their prices.
#3 – Range Trading
This strategy is based on utilizing support (oversold areas) and resistance (overbought) areas. The investors purchase from support areas and sell from the resistance area. It is basically based on the logic that the securities whose prices are below or above their average as per the trend will go back to their average market price eventually.
#4 – High-Frequency Trading (HFT)
Through this strategy, Investors decide for the purchase or sale of the stocks on the basis of complex algorithms calculated by computer programs.
Types of Day Trading Market
Lest discuss the following types.
- Stock Market: In this market, investors buy and sell the shares of the companies and exit their position before closing the market at the end of the day.
- Forex Market: In this market, investors buy and sell or exchange global currencies and reap the benefit or make a loss due to relative changeRelative ChangeRelative change shows the change of a value of an indicator in the first period and in percentage terms, i.e. Relative change is calculated by subtracting the value of the indicator in the first period from the value of the indicator in the second period which is then divided by the value of the indicator in the first period and the result is taken out in percentage terms. Relative change = (Final value – Initial value)/Initial value * 100 in that currency’s value.
- Future Market: In this market, investors make a profit out of the increase or decrease in the price of futures contracts from the time of purchase and time when day tradersDay TradersThe day trader is an individual who trades in the financial markets daily to earn profits by exploiting the inefficiencies present in the market. The three types of traders are - individual traders, financial institution traders, scalpers and momentum traders. close or exist the position, i.e., end of the day when the market closes down.
This trading needs a lot of time from the trader’s end and cannot be done as a recreational activity. There is a reason it is called a day trading. Such a trader has to catch up with all the news, track the performance trend of the securities, and capture the profitable opportunities in a single trading day. Therefore, they can be called almost a full-time activity for serious investors who want to reap maximum profits out of their day trading.
- No certification or license is required for this trading; if you have a laptop and internet connection, you can easily start day trading.
- No overnight risks are involved as these traders close their position before the end of the day.
- Independency and flexible working hours are there aligned with the opening and closing time of the market.
- They reap out good profit on a daily basis, which serves as a daily income to them.
- It requires a lot of discipline and may become very stressful.
- Individual investors involved in this trading often make losses as they are competing with firms employing high-frequency trading techniques.
- Day traders are often flagged as a pattern trader and need to maintain minimum funds as required in their trading account.
- Investors with insufficient knowledge and resources may lose a lot of money.
Day Trading seems like a very lucrative opportunity. It looks like a scheme to earn a lot of money in a short amount of time. But one should trade with the utmost care, discipline, and strategies because day traders may lose a lot of money and sometimes may go bankrupt due to carrying out of this trading without proper market knowledge and awareness.
This article has been a guide to what is Day Trading and its definition. Here we discuss strategies of day trading with their working, requirements, and differences. You may learn more about Financing from the following articles –