What is DAY TRADING? What does DAY TRADING mean? DAY TRADING meaning - DAY TRADING definition - DAY TRADING explanation.
Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.
Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day. Strictly, day trading is trading only within a day, such that all positions are closed before the market closes for the trading day. Many traders may not be so strict or may have day trading as one component of an overall strategy. Traders who participate in day trading are called day traders. Traders who trade in this capacity with the motive of profit are therefore speculators. The methods of quick trading contrast with the long-term trades underlying buy and hold and value investing strategies.
Some of the more commonly day-traded financial instruments are stocks, options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, currency futures and commodity futures.
Day trading was once an activity that was exclusive to financial firms and professional speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. However, with the advent of electronic trading and margin trading, day trading is available to private individuals.
Some day traders use an intra-day technique known as scalping that usually has the trader holding a position for a few minutes or even seconds.
Most day traders exit positions before the market closes to avoid unmanageable risks—negative price gaps between one day's close and the next day's price at the open. Other traders believe they should let the profits run, so it is acceptable to stay with a position after the market closes.
Day traders sometimes borrow money to trade. This is called margin trading. Since margin interests are typically only charged on overnight balances, the trader may pay no fees for the margin benefit, though still running the risk of a margin call. The margin interest rate is usually based on the broker's call.
Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable, and high-risk profile traders can generate either huge percentage returns or huge percentage losses. Because of the high profits (and losses) that day trading makes possible, these traders are sometimes portrayed as "bandits" or "gamblers" by other investors.
Day trading is risky, especially if any of the following is present while trading:
trading a loser's game/system rather than a game that's at least winnable,
inadequate risk capital with the accompanying excess stress of having to "survive",
incompetent money management (i.e. executing trades poorly).
The common use of buying on margin (using borrowed funds) amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, brokers usually allow bigger margins for day traders. In the USA for example, while the overnight margins required to hold a stock position are normally 50% of the stock's value, many brokers allow pattern day trader accounts to use levels as low as 25% for intraday purchases. This means a day trader with the legal minimum $25,000 in his or her account can buy $100,000 (4x leverage) worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his or her original investment, or even larger than his or her total assets.
The following are several basic strategies by which day traders attempt to make profits. Besides these, some day traders also use contrarian (reverse) strategies (more commonly seen in algorithmic trading) to trade specifically against irrational behavior from day traders using these approaches. It is important for a trader to remain flexible and adjust their techniques to match changing market conditions.