Day Trading 101: What is Day Trading?


Day Trading 101: What is Day Trading?

Day Trading 101: What is Day Trading? 1024 527 Steven Dux

So, you’re interested in getting into the stock market business. You’re fully prepared to put everything on the line and get in on some high risk, high reward money-making. Well, what’s a good place to start? You may have heard of day trading and want to start there. Some good advice is to leave day trading to the well-seasoned traders until you’ve gotten your feet wet a bit more. 

What exactly is day trading, you ask? Day trading is active trading by executing intraday strategies to gain profit from price changes on an asset. In simple terms: You, the active trader would be taking part in the purchase and sale of a security within a single given day. Sounds simple enough, right? Well not exactly. This is where the warning to gain more experience before jumping head first into day trading comes in. 

Day trading can take place in any marketplace but it’s most prevalent in the foreign exchange, or forex, and stock markets. So, while it’s not advised to jump right into day trading if you have the funds and the know-how, go for it. But, just in case you don’t have the information, here are some tips and tricks to get the most out of your day trading adventures. 

You can use Scalping, which is accumulating small profits throughout the day based on small price changes that occur within that given day. These small price changes usually happen after a trade is executed and becomes profitable. It’s advised to have a strict exit strategy in place in the event that a huge loss takes place that wipes out all small profits made. 

There’s Range Trading, also known as Channel Trading, uses support and resistance levels to determine buy and sell decisions.  It requires the recent trading history of a security and understanding of that history. You’d basically be working within normal low and high movements during the day as well as the typical difference between the two prices. It’s the act of buying low and selling high.

News-Based Trading, which as the name implies, means that you seize the opportunities from the heightened volatility during highly publicized news events. This is known as one of the most traditional strategies for day trading. This type of day trader normally doesn’t pay attention to stock price and/or volume charts. They instead move through company announcements like new products or big changes within the company that draws attention. While news based trading is a very traditional form of day trading, it’s not a very stable one and most traders have other forms of profit in between occurrences of big news. Like scalping or the above-mentioned range trading. Seeing as how really good events or announcements might be few and far in between, it’s not recommended to hang your entire stock career on news-based trading. 

High-Frequency Trading or HFT, are strategies that use sophisticated algorithms to exploit small or short term market inefficiencies. These automated trading platforms are mostly used by investment banks, hedge funds, and institutional investors. This normally utilizes powerful computers to run and execute these large transactions at high speed. Thus allowing traders to execute millions of orders at once. They can also scan multiple markets and exchanges in seconds, giving traders who use these strategies an upper hand in the open market. These algorithms can also pick out and identify emerging trends in seconds. It’s a powerful tool but most retail trader (you) cannot do HFT. 

So what does a day trader normally look like? Well, they’re normally long term traders who’ve been at it for a while. Well established in the field and have an in-depth knowledge of the marketplace as well. They either work alone or with a larger institution. For those who work for larger institutions, they have access to more tools of the trade. Like, a direct line, a trading desk, more capital and leverage, and expensive analytical software (HFT). 

Without an in-depth knowledge of the marketplace a day trader stands to lose a lot of money. Technical analysis and chart reading are good skills to have if one wants to be a successful day trader. So know your marketplace and the assets that exist in that market, because the charts can be deceiving. It’s up to the trader to do their due diligence and understand the ins and outs of the product they’re trading. 

It’s also recommended to have some risk capital that you’re prepared to lose. Leave your cushion or needed funds alone. You need something to fall back on if things don’t pan out and trades go wrong. This protects the trader from financial ruin and eliminates those pesky emotions from getting in the way. So put away a large amount of risk capital, that will come in handy for the intraday price movements. 

As mentioned before, day trading is best left to the seasoned traders and that’s recommended because it’s a highly controversial form of trading. What makes day trading so controversial and highly debated is the appearance of day trading scams that have lured in amateur traders by promising large profits and returns in a short period of time. The myth that day trading is some get rich quick scheme is one that persists and gets some first-time traders into a lot of trouble. So those who are unaware of the risks will jump right into day trading and lose a lot of money without the proper background and knowledge. So, while there are successful day traders, it’s important to have a plan in place, an exit strategy in case things go wrong, and to know the risks. 

A lot of professional money managers and financial advisors shy away from day trading due to not believing the risk is worth the reward. However, for those who have found success in day trading would argue that because there is money to be made in the practice, it’s a justified risk. The keyword here is perspective, perspective, perspective. What works for one trader, might not be a good fit for another. Weigh your options before diving headfirst into something that you’ve seen bring another trader a lot of profit and luck. Your journey as a trader might be a little, or a lot, different. 

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    If you’re new to all of this and have limited knowledge as to how the stock market works, I highly recommend you invest in The Freedom Challenge.