A trader’s approach toward trading and the market is crucially important in the outcome of the traders and whether they result in profits or losses. Day trading is one of the main types of trading styles that can be opted by traders. Being a day trader simply means you open and close positions during a single day and do not hold positions overnight.
However, when you are picking your trading style and strategy, you need to consider many factors and aspects of your situation. Because if you pick the trading type in a wrong manner, then it can be quite detrimental for your assets.
So to provide you with a better understanding of day trading, we want to analyze this trading style in this article with a detailed perspective of its different angles.
What Is Day Trading?
As we touched upon the basic definition in the introduction, day trading is a trading style that involves opening and closing positions in a day. In fact, everything happens during one day only. Meaning that traders do not keep their positions open overnight.
Because positions can only remain open within the timeframe of a day, then the profit margins are usually thin. Therefore, traders who have this style of trading tend to execute numerous trades in one day of their trading session. This way, the profits add up and their aggregate becomes something rather substantial.
The main aim of day trading is to obtain as much profits, even though thin and slim margins, from the trades as possible.
Furthermore, there are ways that traders can use to increase their chances of obtaining profits. One thing that is sure to increase your odds while trading is using leverage. Some forex brokers offer astoundingly high leverage rates. This way, even though your positions do not last too long and your profit margins are ultimately thin, you will be able to gain a considerable amount of profits, sometimes tens or hundreds of times more than what you would have otherwise gained.
Although, you ought to be careful because when you are trading with what you had, your chances of profit are manifold, but also are your chances of losses.
Of course not everyone has a tendency to use leverage while trading. Aside from leverage, there are many other techniques that can be implemented by day traders to have a higher degree of profitability from their trades.
Who Is the Day Trader?
But exactly, which traders can be classified as day traders? In fact, as it stands, many positions are opened and closed within a matter of a day. So can all of those trades, and of course by extensions all of those traders, be classified as day traders?
Well, the lines are a bit hazier here. There is no clear line dividing certain types of traders and certain types and classes of trading. What a day trader does might be similar to a lot of other forms of trading. But in general, there is a standard put in place. It is regarded by most that when a trader executes about 7 trades in a day, they can be considered a day trader.
So we can say the most important characteristics of a day trader are that they open and close positions over a period of the day only, they do not keep their positions open overnight, and they execute about 7 trades per day.
But still, there needs to be some contrast between day traders and other forms of trading that are opted by other traders, including scalping or swing trading. So, the way we can further distinguish between day traders and other types of traders is through the techniques and methods that they employ while trading. And this is exactly what we are going to discuss in the next section.
What Skills Are Needed for Day Trading?
The majority of the techniques and tools that are implemented by the day traders will depend on the financial market that they are active in. Certain financial markets are more stable than others. While other markets may exhibit a higher degree of volatility.
Since our scope of analysis falls more on the foreign exchange market, that is the default market we are going to consider.
So for forex day traders, one of the techniques that can be quite useful is news trading.
Because remember as we said day trading involved obtaining small margins of profit from even the smallest changes. This is how it goes down in the forex market. You don’t get to witness wild changes in the spread of bid and ask prices for any currency pair.
So important news events can make the prices wiggle a little bit. And that wiggle is all that takes to profit even a small margin of profit by trading a currency pair. Because of this reason forex day traders pay close attention to news events that could rock the market. News events such as the release of economic data like GDP, or inflation numbers, among others.
What Trading Strategies Are Involved in Day Trading?
What are the actual strategies that are incorporated by day traders? Well, there are certain strategies that stand out among others.
We already mentioned news trading, which is quite a bit of an important part of day trading. Since, as mentioned, news events can make prices exhibit volatilities and that is the stuff of profits for day traders.
Other than news trading, day traders may implement strategies such as scalping and high frequency trading. Both of these strategies share similar aspects. And they both involve trading, first and foremost on a high frequency, and opening and closing positions quickly. Naturally, when using HFT the profit margins can be narrow. But done enough times, they amount to something considerable.
What Are the Pros and Cons of Day Trading?
So what are the advantages and disadvantages of day trading?
Let’s start with the positives.
On the positive side, day trading has the advantage of not having to hold your positions overnight. When you have to hold your positions overnight, you have to pay a fee to your broker. Something that does not exist with day trading.
Furthermore, day trading is where you can gain the actual experience of trading. Because of the high intensity and hands-on experience that you learn, this is where the best opportunities for knowledge and experience are.
On the downside, however, with day trading you have to execute, as mentioned above, at least around 7 trades a day. With that comes all the added costs and fees related to execution of trades. Furthermore, because you do not hold positions long enough, chances are you get to lose some of the potential profits that you would have earned otherwise.
Day trading is the go to trading style for all the high intensity and seasoned traders. It might be a little bit difficult to get a handle on it at first, but if you want trading as your main job, then day trading is the way to go. A day trader would open and close positions through the course of only one day. This could amount to anything between 5 to 10 trades a day on average.