Day to Day Trading Guide
4 min read
Ask questions about this lesson and get instant answers.
Day to day trading refers to the practice of buying and selling stocks and other financial securities within the same trading day. All the positions are closed before the end of the trading day. This is more commonly referred to as just day trading.
Day traders continuously buy and sell stocks throughout the day with the hope that they will make a quick profit from the small changes in the values of their stocks as the stock prices rise or fall during the day. Day traders are not interested in taking a long-term position in any stock. They are interested in quick gains from small changes in the stock prices. Day trading is extremely risky and is not meant for all types of investors. If you are not prepared, you can suffer substantial financial losses in a very short period of time.
Some of the most common day to day traded financial instruments are stocks, stock options, currencies (foreign exchange), and various futures contracts.
In the earlier times, day trading was available only to financial institutions such as banks as only they has access to markets and exchanges. However, with the advances in technology, availability for real-time market data and low transaction costs, even individuals actively participate in day trading.
Scalping involves holding a position for only a few seconds or minutes and taking small profits on small changes in the prices.
Shaving allows the trader to jump ahead by a tenth of a cent. A full round trip, that is, a buy and a sell order, is often completed within one few seconds. As an example, assume that a bid for a stock is entered at $5.15. Instead of bidding $5.15 for the stock, the day trader will jump the bid at $5.151. Since this becomes the best bid for the stock, they will the first in queue to be able to purchase the stock.
Day traders also take advantage of rebate trading. This involves trading directly with an Electronic Communications Network (ECN) where the ECN provides a rebate instead of charging commission as day traders bring liquidity to the market.
While some traders focus on very short term trading, in which the trade lasts for only a few minutes, some traders focus on others things such as price movements, technical patterns, and many other strategies that can be profitable.
Many day trading strategies demand using the leverage of borrowed money to make profits. This also adds to the risk involved in day trading.
Apart from the style of trading, there are also different types of day trades. These are trend trades, counter-trend trades, and ranging trades
Trend trades are trades on the direction of the price movement. It assumes that if the price is rising, it will continue to rise steadily, and vice verse. Under this strategy, traders will buy stocks if the price is moving up, and short sell if the prices are moving down.
Counter-trend trades are trades against the direction of the price movement. It assumes that if the price is rising, it will start to fall, and vice verse. Under this strategy, traders will sell stocks if the price is moving up, and buy if the prices are moving down.
Ranging trading is a trading style in which the stocks are observed for the range in which they are trading. A price range (high and low) is identified. So, every time the stock hits a high, it falls back to the low, and vice versa. So, a range trader will typically buy the stock at or near the low price, and sells the stock at the high price..
Generally, each day trader will use one of the above types of trade, however, some may choose different trade types depending on the current market conditions.
Since most of the trading now a days happens electronically via Internet, traders can work from anywhere in the world using a few tools and services. The key tools required for day trading are:
Hardware and software: A trading computer (ranges from simple PCs to powerful multi-CPU and multi-screen custom computers), a fast internet connection, a telephone, a trading software, and a charting software.
Services: A brokerage account and access to real time market data. These services are also available via Internet.