What is Day Trading?

Day Trading is a common form of trading where a trader is entering and exiting a market within a short period of time, usually within a few hours and sometimes even a few minutes.

Many investment banks and hedge funds employ Day Traders to trade economic news announcements over very short periods of time. The banking trader will usually be watching what is called a Bloomberg Terminal where they will receive the economic data around half a second before the rest of the market is informed. If the economic news is out of line with leading economists expectations the banking trader may buy or sell a market over a very short period of time. Let’s assume the latest US Retail Sales data is about to be released and leading economists are expecting US Retail Sales to have grown 1% over the previous month. When the data is released if it is out of line with what traders expect (growth of 1%) they may elect to buy or sell the US Dollar or US Futures markets with the expectation other traders will join their position. Economic news driven trades are usually entered and exited by banking traders within a matter of minutes and fall under the category of Day Trades. Novice traders who try and Day Trade News driven events are at high risk because an investment bank and hedge fund will always receive the economic data first and are often in and out before the novice trader can even take the trade.

What markets are used by Day Traders? Day Traders often trade financial markets such as Futures, CFD’s and Currencies however most derivative markets today offer the opportunity to Day Trade. It is common for novice investors to initially find out about Day Trading from a broker who offers the opportunity of leverage and gives clients access to an electronic trading platform where the Day Trader can place trades electronically from their computer, smartphone or tablet device. Day Traders as a general rule will not be calling their broker to place the trade as this is time-consuming and may reduce their profit potential. Time is of the essence when it comes to Day Trading. Contracts For Difference (CFD’s) is a good example of a financial product that Day Traders will often use to trade stocks over a very short period of time. With CFD’s you are able to have a relatively small amount of money in your trading account (eg $1000) and control as much as $10,000 worth of stock. The currency market is another financial market often used by Day Traders where they can have up to 100:1 leverage and electronically enter and exit a currency trade within seconds.

What sort of analysis do Day Traders use? Most novice Day Traders like to use technical analysis to make their decisions on when to buy and sell. They will also usually be using small time frame charts such as 1 minute, 5 minute and 15 minute looking to exploit technical patterns in the market that they believe offer profit opportunity over a short period of time. On the other hand, the biggest winners in financial markets usually use a combination of technical and fundamental analysis when deciding when to buy and sell. Looking at an economic calendar to see when the High Impacting economic news is going to be released is a vital piece of research all Day Traders must do. Most novice traders don’t do this, however, the professional investment banking trader will always know when the high impacting news is going to be released.

Why do investors like Day Trading? Investors are generally attracted to Day Trading because they believe there is an increased opportunity for quick profits. This is actually not true, there is no evidence to suggest that Day Trading is more profitable than any other form of trading and in fact, most novice traders will lose money trying to Day Trade without professional guidance. Day traders are often thrill seekers and love the adrenalin rush that short sharp moves in a market can provide. This, of course, increases emotion levels which can often be the downfall of a novice trader as their risk management goes out the window. If you do decide to become a Day Trader then applying strict risk management to your trades is critical and also applying a high degree of discipline to the trading approach.

Some of the benefits of Day Trading? One of the benefits of Day Trading is that you won’t be holding trading positions overnight. You will be entering and exiting over a short period of time eliminating emotion and anxiety when holding positions for days and weeks on end. Many traders who hold positions for days and weeks do get enticed into moving their profit and stop loss orders without justification. When you are Day Trading because you are in and out of the market very quickly the temptation to move a stop loss and profit target can be less. Staying with a trade to the profit or loss objective is very important to long-term success and for some traders, Day Trading avoids the “what if” thinking time that often leads to traders sabotaging their results. If you enjoy the thrill of the chase and you have a high degree of discipline then there is no reason why you could not become a successful Day Trader. Some of the best Day Trading techniques take place at the start of the stock market each day, meaning you can have a set time each day that you know you will get your trading done. In the case of the Australian stock market that may be between 10.00am and 10.30am AEDT, the first 30 minutes of the trading day.

Some of the negatives of Day Trading? If you are prone to getting anxious at the first signs of failure or if you are an emotional and undisciplined person then Day Trading is something that you should probably avoid. One of the negatives about being a Day Trader is that you may need to be at your computer screen for an extended period of time without being able to leave. For example, if a trade that is supposed to take 10 minutes drags on for 2 hours you may need to continue to watch the trade. Traders who trade positions over days and weeks usually don’t need to babysit their trades as much as a Day Trader. One of the biggest mistakes many novice Day Traders make is trying to trade high impacting economic data announcements. The price is most active post an economic data release and this is often viewed by Day Traders as their profit opportunity but as I explained earlier in this article investment banks and hedge funds will be in and out before the average novice Day Trader can push the buy or sell button. It is my strong recommendation that you do not try and Day Trade economic news announcements.

Is there an increased risk with Day Trading? Day Trading can be riskier than other longer-term trading techniques particularly if you are trying to use economic news announcements to enter and exit the market. If a Day Trader enters a stop loss and the economic news is out of line with expectations there is the potential for price to gap past the Day Traders stop loss level and thus increasing the loss size on the trade. Managing risk is the most important part of trading and many novice Day Traders do not manage their risk successfully when Day Trade.

Conclusion: If you want to try Day Trading can I strongly recommend you practise using a demo account first before investing any of your hard-earned money. If you do decide to begin Day Trading with real money please give risk management your utmost attention and trade a market such as currencies where the position sizing can be so small that a losing trade when you are learning could be less than a couple of lattes.


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