What is day trading
You will learn about the following concepts
- What is day trading
- Different types of day trading styles
Day trading refers to the speculative buying and selling of financial instruments – such as stocks, futures, options and currencies – within the same trading day. Positions are seldom, if ever, held overnight, over the weekend, or when the market is closed for a holiday.
Initially, day trading was available only to financial companies – mainly banks and investment firms – but the rapid development of electronic trading, which provided outsiders with access to exchanges and market data, made day trading popular among freelancers as well (hereafter referred to as day traders).
As with any other type of trading, day trading carries significant risk, and one’s results may range from consistent profitability to huge losses. This is especially true when trading highly leveraged financial instruments, where, depending on the size of the position, the net result can swing by thousands of dollars within seconds.
Day trading styles
Day trading is a trading style in its own right, and it comprises several sub-trading styles. They range from short-term trading – i.e., scalping, which involves frequent entry and exit of positions – to swing trading, where a position might be held throughout the day in order to ‘milk’ a strong trend. Some day traders use a mix of trading styles to achieve the best performance, but this requires a lot of experience and constant focus – two things novice traders rarely possess. This is why most day traders choose a single trading style and focus on certain types of trades.
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
Some traders take only trend-following trades, which is best for inexperienced traders, while others engage in range trading – opening positions in both directions as the price oscillates within a channel between strong support and resistance levels.
There are also both highly skilled and very inexperienced traders who trade against the market by placing counter-trend positions. However, whereas the skilled market players can profit from these high-risk entries, beginners often incur heavy losses that will eventually wipe out their trading accounts. Professional traders practise so-called ‘contrarian investing’, relying on years of experience and advanced analytical techniques to anticipate eventual price reversals. By contrast, novice traders are caught in losing counter-trend trades because they do not realise that a strong trend is far more likely to continue than to reverse.
News
Many day traders base their decisions on news released during the current trading session, including economic indicators (which can be found in the economic calendar) as well as the outcomes of policy meetings and speeches by central bankers, ministers, etc. These events, especially those originating from the major economies, create considerable volatility and give day traders – particularly scalpers – a good chance of generating profits. Day traders usually trade the news in conjunction with a set of indicators – such as the Relative Strength Index, Average Directional Movement Index, etc. – to boost their performance.
Some day traders, however, argue that simplifying things is bound to yield better results. They practise the so-called price action trading. This technique, which is rooted in technical analysis, requires traders to decide whether to enter a trade based on a combination of price movement (reading charts bar by bar), patterns (such as flags, triangles, wedges, head-and-shoulders formations), volume, and other raw market data. In contrast to the styles described above, price action traders do not use the commonly employed indicators. Price action traders tend to ignore fundamental factors that may affect price movement and instead rely heavily on their ability to understand human psychology and crowd behaviour, as reflected in the public’s positioning. This makes price action trading applicable to all markets – Forex, stocks, commodities, futures, etc. – but it is more difficult to master than more conventional techniques such as news trading.