What is Day Trading, How to Day Trade and How to Become a Day Trader
The title of a Day Trader is somewhat self explanatory. A day trader, or active trader, is not interested in long term investing and makes their profits in a very short period of time through buying and selling positions in the course of one day. A day trader may buy a stock and hold it for hours, minutes, and even seconds, letting them control exactly how much profit or loss they gain. A day trader is constantly in and out of different stocks simultaneously, never staying in a position for a long time, and not even overnight. A day trader watches stock quotes like a hawk and is looking for trends that are on a rise and buy into those types of trends and then get out before the trend changes. In this process a day trader can make sufficient profits in a quick manner, but just as quickly as a stock grows in value, it can drop, resulting in a swift and hard-hitting loss. A day trader should do diligent research to predict when a stock will go up in value, but this is difficult when a day trader is constantly watching their quotes and stocks jumping up and down.
Disadvantages of Day Trading
In the past, day traders typically worked for investment or bank firms, but due to the availability of technology, a rise in at home day traders has occurred. Many people are allured by the promise of high profits in a quick and easy fashion, but the realities of the ‘job’ are not as glamorous. Day traders are thought of as gamblers or betters by serious investors and are not considered professional by many in the business because some of the techniques used by day traders are detrimental to the market, like short selling. Yet it is possible to make a good living by being a level-headed and well prepared day trader. Day traders should never risk more money than what they have or ever jeopardize their savings or any other imperative type of personal funds. When investing in positions, it is a reality that its possible to not only lose the amount invested, but experience a monstrous loss where entire assets or amount of personal capital could be lost, all in a very short period of time, which could create disastrous living conditions. Day traders need to free themselves from emotional tendencies, greed, and fear when trading. A trader should find what techniques work for them and stick to them, experimenting could prove unfavorable. Day trading can also be very time consuming, one must constantly watch several different quotes at once, while also trying to find trends and complete research. It is hard or even impossible for day-traders to break even as well, making the job incredibly stressful, making it a constant battle for profits. Day traders have to pay trading commissions, subscriptions to trading services, subscriptions to newsletters or other informational sources, and pay for high-tech real-time stock quote software. There is a huge lack of job security as a day trader, as one can lose everything they have in a matter of seconds.
Types of Day Trading Strategies
- Margin trading- This is when day traders enter positions with borrowed money. Interest on the margin is only charged overnight, another reason why many day traders sell before the market closes.
- Contrarian Trading- Instead of following a trend, a day trader will go against the grain by investing in a stock that he/she believes will start doing the opposite of its current activity.
- Trend Trading- Investing in a stock on its current trend, a stock that is rising will continue, similarly, a stock falling will continue to fall.
- Scalping- Also known as Spread Trading, Scalping uses highly technical and speed trades to create quick profits. These types of trades can happen in one second.
- News Playing- This involves buying or selling of positions when good or bad news hits the internet wire.
Day Trading Rules
Some brokerage programs will suspend your account if you buy and sell in an aggressive manner. There are various regulations like needing to hold a stock for a specific amount of time otherwise a trader may be flagged as a day trader. The rules and regulations are beginning to become more complex to keep day traders from using their unfavorable techniques in the market place. Do your research so you do not get suspended from trading.
By: Eva Cantillo