Day traders enter into and exit positions several times per day. The critical feature is that they never hold a position “overnight.”

A more appropriate term for traders executing multiple trades per day is “intra-day trader.”

Then there is the ultimate form of day traders called “intra-day scalp traders” who execute a particularly short-term form of day trading. This type of trading has elevated risk but has the potential for extraordinary return on investment (ROI). Intra-day scalp trading is generally based on technical analysis of indicators such as moving averages, moving average convergence divergence (MACD), momentum oscillators, Fibonacci sequences, etc. Trades are often held only for minutes at a time, and sometimes even shorter than that.

Definition of day traders

Day traders are investors who generally buy and sell the same stock in the same day. This type of trading is not limited to just buying stocks; day traders may also buy and sell stock options, currencies, or a whole range of futures. Typically day traders may hold a stock for a matter of seconds or minutes; additionally they may buy and sell the same stock several times during the course of a day.

A day trade, by definition, is a trade that is opened and closed on the same day.

Therefore, day traders tend to be out of the market (sell all of their stocks) before the trading day ends to avoid any possible after market gap downs (a situation where a stock may open the next day at a lower point than it closed the previous day). They avoid the risks of long-term buy and hold.

There are two main types of day traders: institutional and retail. Both institutional and retail day traders are described as speculators, as opposed to investors.

  • Institutional day traders work for financial institutions and have certain advantages over retail traders due to their access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges, expensive and high-end trading and analytical software, support teams to help and more. These advantages give them certain edges over retail day traders.
  • Retail day traders work for themselves or in partnership with a few other traders. Retail traders generally trade with their own capital, though they may also trade with other people's money. Laws may restrict the amount of other people's money a retail trader can manage. In the United States, day traders may not advertise as advisors or financial managers. Although not required, nearly all retail day traders use direct access brokers as they offer the fastest order entry to the exchanges, as well as superior software trading platforms.
Day trading requires a significant amount of time. Generally people who day trade are doing this for a living, spending their entire day at the computer buying and selling stocks. This type of strategy for stock market trading is only effective for day traders, who apply analysis rather than emotion to trading decisions.

Advantages and disadvantages of day trading

A day trader’s objective is to make profits by taking advantage of small price movements in highly liquid stocks or indexes. A more volatile market presents more favorable conditions for the day trader, regardless of the longer-term direction or the trend in the market. Unlike some fund managers and investors, who hold positions over longer periods of time and are averse to selling equities short, the day trader is not committed to a position and can adapt to whatever condition the market is in at any given moment.

An Example of day trading using breakouts - Green Mountain Coffee Roasters, Inc. (Nasdaq: GMCR)

An Example of day traders’ breakout rules:

  1. Stock gaps up or down on high volume.
  2. Wait for a trading range to develop - set time limits.
  3. Buy or sell short the breakout of the morning range either high/low.
  4. Have a predetermined profit target for the position. The profit target should be in alignment with the volatility of the stock.
  5. Have a stop loss order - such as a maximum stop of 2% - and look to exit trades if they are not profitable once a certain time is reached.
A day trader who wants to achieve success needs appropriate knowledge, equipment, tools and markets together with the ability to trade the right electronic trading platform.

Also, a successful day trader needs to know which stocks to trade, when to enter the trade, and when to get out of the trade. Part of this knowledge is how to find those stocks with liquidity and volatility, in order to generate profits.

Next: Pattern Day Traders »

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