Explaining the trading style which keeps positions open only for a single day
Day trading has become a popular term used to describe how some individual and institutional investors prefer to trade on the markets. Its fans claim that once mastered, it is the less risky way to trade and provides quicker returns. There are however opponents who say that daily movements don’t represent real supply and demand changes and can’t be predicted reliably making them a trap for more the more risk-prone.
What is the definition of day trading?
The definition of day trading is when positions are opened and closed within the same trading day (for forex) or trading session (for stocks, indexes and commodities). Their number can vary from a single trade per day to as many as possible for traders who engage in scalping. Exceptions happen at traders’ discretion and are more frequently made for currency trading.
What is the point of day trading?
Many investors, but not traders, claim that daily movements of a percent or less are merely static in terms of the price of different instruments. It’s quite possible that they don’t even pay attention to the markets unless there is some large move. Those usually happen around major announcements like earnings reports or central bank conferences, which respectively see the largest volumes coming from banks, investment funds and large individual investors like George Soros, Carl Icahn and Warren Buffet.
While investors rarely make trades, as their philosophy is usually to buy and hold in the mid to long-term, traders on the other hand are a short-term oriented animal. A more predatory mind-set is required to be able to stalk and poach for when an instrument is “vulnerable” and can be taken advantage of.
Who practices day trading?
A large number of small individual traders prefer day trading, as well as some institutional traders. For the former this comes on the back of having relatively small accounts that need to have more turnover in order to reach a good profit. With the assumption that (almost) every day offers the chance for profits, this sounds like a good foundation for achieving it.
What are the advantages of day trading?
The main attraction of day trading is the opportunity to make more trades, hypothetically increasing potential profit. Large volatility in the beginning and end of trading sessions provides ample opportunity for profits if predicted correctly. Likewise for daily trends. If predicted correctly and often enough, the percentages add up without all the waiting involved in long-term trading.
Another advantage is the access to funds. Long-term trading entails the locking of money in a trade and waiting for it to pan out. In day trading different amounts can be used for different trades and deployed when suitable opportunities arise. At the end of the day all positions are closed and you can do something else – choose different instruments, trade sizes and durations.
A more subjective benefit of day trading is the ability to predict price movements based on observation. Just like spending time with someone, the more time spent trading and/or simply looking at how an instrument behaves can let you predict certain situations that you have now become familiar with.
What are the disadvantages of day trading?
For some the risk in day trading is actually greater compared to long term trades. With price fluctuations that aren’t based on anything fundamental or technical, the opponents of day trading don’t see a valid reason on which to base their trades.
Although account sizes can be small for day trading, they still have to be well managed, as swings in prices can happen in short amounts of time and increase the potential loss.
And a bad day would probably make this song ring in your mind.