Day TradingHetvi Shah
While all trading is done with the objective of profit from the difference between the buying price and selling price, Day Trading differs as positions are rarely held overnight or when the market being traded is closed. It is about purchasing and selling the shares during the same trading day, unlike an equity investor who buys stocks with the intention of investing. It is also known as Intraday trading. Based on technical research and advanced charting systems, it includes executing hundreds of trades in a single day.
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What is Day Trading?
Day trading refers to the practice of purchasing and selling security within a single trading day. It is most common in the Foreign exchange (Forex) and Stock markets. Day traders use high amounts of leverage and short-term trading strategies to capitalize on small price movements that occur in highly liquid stocks or currencies. The level of profits, therefore, depends on the extent of the price fluctuations of the shares held by the trader in his portfolio. The fundamental purpose of initiating orders is to close them or square them off before the stock market closes.
How does it work?
In Day trading all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open. Volatility is the key factor for day-trading. In order to earn their profits, day traders rely heavily on stock or price volatility. Whatever the reason, they prefer stocks that swing around a lot during the day: a positive or negative update on results, news, or just general market sentiment. They also prefer incredibly liquid stocks, those that allow them to switch in and out of a position without impacting the price of the stock much.
Most of the Day trading systems/styles have a lot of flexibility as it can have open positions for anywhere from a few minutes to a few minutes to a few hours depending upon whether the trade is in a profitable state or not. Day traders can have access to all of the exchanges and their markets via direct access brokers i.e. the brokers who offer direct access to the exchange, which provides faster trade execution at a lower cost.
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Types of Strategies used:
There exist several styles to suit different personalities. These styles range from short-term trading such as scalping in which positions are only held for a few seconds or minutes, to longer-term swing and position trading where a position may be held throughout the trading day.
- Scalping: Scalping is a strategy in which trade positions are often held for a matter of seconds rather than hours or days. Scalping represents the shortest term trading style. Traders adopting this style is known as Scalper. Scalpers quickly enter and exit the market to skim small profits off of a large number of trades throughout the trading day.
- Range trading: Range trading is a trading strategy, often used in forex trading, which involves the identification of overbought and oversold currency. This is also known as areas of support and resistance. Range traders buy during oversold/support periods and sell during overbought/resistance periods.
- News-based trading: News based is the most traditional form of day trading. In this strategy, traders do not focus on the stock price and volume charts, they wait for the information which can/will drive the stock prices.
- High-frequency trading: High-frequency trading is an algorithmic financial trading practice in the stock market for placing and executing many trade orders at an extremely high- speed in the most profitable way.
Mean reversion: Mean reversal is based on the theory that prices, and indeed other valuation metrics, such as price-to-earnings (P/E) ratios, will often gradually shift back to the historical mean. The approach uses technical analysis, such as moving averages, to collect properties whose recent output differs significantly from their historical average.
Day trading plays an important role in the market place by keeping the market efficient and liquid. With appropriate skills, knowledge, strategy, and funds Day trading can be a viable way to earn a profit. However, it is quite risky and can lead in a very short period to major financial losses.
Author: Hetvi Shah
About the Author: Hetvi is a BBA(Finance) graduate. She is currently pursuing an MBA with Finance specialization. She has a keen interest in Financial Market, Financial Management, and Financial Analysis.