Day Trading
In day trading, financial instruments are bought or sold during the same trading day. Here all positions are closed before the market closes for the day. A day trader buys and sells rapidly over a short span, taking advantage of the price swings. A day trader is also known as an active trader. Futures, stocks, options, and currencies are some of the common financial instruments which are traded in this manner.
How is Day Trading done?
At first only financial companies had access to stock exchanges. Hence, day trading was an option that was open only to them. But now due to the technological advancements, individual investors can also practice day trading.
A typical day trading session involves some simple steps. One needs to have access to a computer and Internet. The next step is to register yourself with an online broker. Investors can then start looking for real-time quotes online. This allows them to decide whether to buy or sell and settle the deals online with a click of the mouse.
Benefits of Day Trading
- In order to do day trading one only needs to invest in a computer and trading software, which is rather inexpensive.
- Day trading provides traders the flexibility of the timing of investing.
- A trader or investor has the freedom to adopt his/her own style, strategy and technique of investing, based on the trading objectives.
- Day traders need not worry about overnight uncertainties. Deals are settled during the business hours and closed positions.
Risks of Day Trading
- Day trading can be very stressful, since decisions are to be made quickly.
- When money is involved, then emotions often take over. Day traders may suffer as a result of fear or greed or ignorance
- Often investors make decisions hastily, resulting in increasing the risk.
Types of Day Trading
There are three types of day trading -
- Trend trade (that involves buying the shares when prices are showing upward trend)
- Counter trade (that involves selling the shares when prices are rising) and
- Ranging trade (that involves trades moving in a back and forth manner between 2 prices).
While the trend trade moves in the same direction as the price, counter trade moves against it. Ranging trades are trades that are executed during a sideways movement in the market.
Characteristics of a Day Trader
Day traders are typically well-established in the particular field and have in-depth knowledge of the marketplace. Following are some of the prerequisites for day trading:
- Knowledge and Experience in the Marketplace:
Good knowledge about the market and market trends is very essential while day trading. Individuals attempting to day trade without the basic knowledge and understanding of the basics of market often end up losing money.
- Sufficient Capital:
One should not expect to make money by day trading. Day traders use only risk capital that they can afford to lose. Not only does this protect them from financial crisis, but also helps eliminate emotion from their trading. A large amount of capital is necessary to capitalize effectively on the intra-day price movements.
- A Strategy:
A trader needs to have an edge over the rest of the market. There are several different strategies that day traders make use of, such as: swing trading, arbitrage as well as trading news, among the rest. These strategies are refined until they result in making consistent profits and effectively limit the losses.
|
