In day trading, traders buy and sell financial instruments on the same trading day to liquidate all positions before the market closes. Their goal is to avoid uncontrollable risks and the negative price gap between the closing price of one day and the next day’s opening price.
Traders who trade in this capacity are usually classified as speculators. Day trading contrasts with long-term trading of potential buy and hold and value investment strategies.
Although it can occur in any market, it is most common in foreign exchange and stock markets. Day traders are usually well-educated and well-funded. They tend to trade with higher leverages and short-term trading strategies to benefit from small price fluctuations in highly liquid stocks or currencies.
Day traders adapt to events that cause short-term market volatility. News-based trading is a widespread technique. Market expectations and market psychology affect scheduled announcements such as economic statistics, corporate earnings, or interest rates.
When these expectations do not meet or exceed expectations, the market will react, significantly benefiting the traders.
Widely used day trading strategies
- Scalping: This strategy attempts to make a lot of small profits through small price changes throughout the day
- Range trading: This strategy mainly uses support and resistance levels to determine to buy and sell decisions.
- News-based trading: This strategy usually seizes trading opportunities from the high volatility surrounding news events.
- High-Frequency Trading (HFT): These strategies use complex algorithms to take advantage of small or short-term market inefficiencies
What are the risks of day trading?
The online day trading scam promises enormous returns in a short period, thus attracting amateurs.
Unfortunately, the idea that this transaction is some kind of “get rich quick” plan still exists. Some people conduct day trading without sufficient knowledge. But some traders ignore risk—or maybe because of—risk and lead successful lives.
Many professional money managers and financial advisors avoid day trading. They argued that in most cases, rewards do not justify the risk. On the contrary, those who engage in day trading insist that it can be profitable. Profitable day trading is possible, but the success rate is inherently low.
What skills should day traders have?
Professional day traders, who make a living from trading, are usually well-established in the field. They usually also have a deep understanding of the market.
Market knowledge and experience
Individuals who try to conduct day trading without understanding the fundamentals of the market usually lose money. Technical analysis and chart reading are good skills for day traders.
However, without a deeper understanding of the market you are in and the assets that exist in that market, the chart can be deceptive.
Sufficient funds and risk management
Successful day traders also have a good risk appetite, meaning that they only risk the funds that are affordable for them to lose. This not only protects them from financial losses but also helps to eliminate emotions in the transaction. It usually takes a lot of money to make effective use of intraday price changes. Access to the margin account is also critical because volatility may cause margin calls in a short time.
Strategy and planning
Traders need to take advantage of other parts of the market. Day traders use a variety of different strategies. These strategies will continue to improve until they produce consistent profits and effectively limit losses.
Patience and discipline
Without discipline, profitable strategies are useless. Many day traders lose a lot of money because they cannot conduct transactions that meet their standards. Success is impossible without discipline.
To make a profit, day traders rely heavily on market fluctuations. If a stock fluctuates significantly during the day, it may be attractive to day traders. There are many reasons for this, including earnings reports, investor sentiment, and even general economic or company news.
Day traders also like liquid stocks because they can change their positions without changing the stock price. If the stock price goes higher, traders may buy. If the price falls, the trader may decide to sell short of making a profit when the price drops.
No matter what technology day traders use, they usually want to trade volatile stocks.
Day trading has become a controversial phenomenon. However, at the same time, it might be a viable way to profit. Institutional and individual day traders play an essential role in the market by maintaining market efficiency and liquidity.
Thus, above mentioned strategies and characteristics are key tips you should consider while day trading.