Day Trading in the financial market can take many forms and each one of them is different. The objective is to buy and sell assets and hold them for a duration that is enough and based on the duration of the trades entered into. You could buy and hold on to a stock for years, months or for weeks before selling it off. Or you could indulge in short term trading where you hold on to your trade for as short a period as the same day.
If that is what interests you and is your calling, you are a day trader.
Day Trading, In Brief
Day trading is all about opening and closing your trade on the very same day. The buy and the sell orders, or vice versa, are placed between the market opening and closing on the same day itself.
Like the longer duration trading forms, the shorter forms too have the very same objective of making profits. But, unlike the long term trading process, the shorter ones like day trading stand out for various reasons.
Day trading can be quite challenging, especially for a beginner, as the profile involves making many trades in a trading session, often having to take up multiple positions concurrently. It requires high levels of knowledge and access to continuous updates from the market, industry and specific companies. All this demands access to both advanced hardware and software, besides stable internet connections and even subscriptions to trading related information and updates.
Besides, the feverish pitch of action and the need to make spot decisions while constantly monitoring the market trends and price variations call for expertise and experience. Day trading, it is safe to surmise, is a profession that takes not just physical but also mental stamina to handle the pressure.
But for all this, the opportunities to grow one’s day trading skills and wealth is immense. Let us take a look at a day trader’s profile and what it takes to become a successful one.
Check Out: Day Trading – An Introduction
Who Is A Day Trader?
A day trader, as we examined above, is someone who conducts trading positions that he opens and closes in the same day. To make up for the short day-long window he has to maximise his chances to record a handsome profit, as he makes several trades throughout the day.
The way to do this is to, typically, always be on the lookout for stocks whose prices are constantly moving up and down and trade in large volumes. It is these movements that a day trader should exploit to enter low and exit high to make gains. As the positions are only held for the day, the range of movement in the price will be limited. But a smart day trader ensures that these price variations are utilised to his benefit. Even if the gains from each trade are small, they all add up over the many that he does all day.
How To Succeed As A Day Trader?
But a day trader also faces multiple challenges and risks and needs to be both ready and prepared. The job calls for high levels of both knowledge and soft skills that he will have to draw on for such a hectic, fast-paced and risk-filled profession.
Do you want to be a day trader
Even before you take the plunge, try to find out whether you want to be a day trader. Day trading, with its extremely high pressure and risk levels, can be difficult and not necessarily suit you.
Day trading is no child’s play; it requires high levels of knowledge. You need to be well aware of the concepts and understand the practical side of this job. It is not just about the basic trading procedures, you also need to understand what causes fluctuations in the market, what the major influencing factors are and where it is headed. Study about the various stocks and industries you intend to buy or sell, follow financial news and read articles from a variety of sources.
Ability to analyse
A day trader needs to be well versed in interpreting data and analysing technical information to take unhurried decisions. As the duration of holding on to trade is very short and the price movements are based on trends and patterns, for day trading you need to analyse markets to buy/sell shares within a matter of seconds.
Have a solid trading plan
Trades in day trading happen in no seconds, so you need to devise a plan to succeed.
Do not make haste decisions. It is a better idea to start slow before you understand the whole concept and strategies. You could open a demo account first before going live and practise before trading live.
Don't Miss: 10 Steps to Becoming a Day Trader
Techniques Used By Day Traders
Day traders employ a range of techniques and strategies while in the market. These are usually more specific for intraday trading alone and not relevant for the longer duration forms.
Here are a few of the proven tools of the trade used by day traders.
Even for a short duration trading form like day trading, scalping presents a much shorter time frame. When a trader detects the possibility of the minutest movement in the price of a stock, he expects that variation to benefit him. So, when he attempts to scalp even the lowest of gains off that trade, he is said to be employing the technique of scalping.
But for scalping to be successful in terms of recording a day’s profits, a trader would need to make several such trades.
Day trading, unlike the longer duration forms, is less dependent on developments related to the fundamentals of a business. The basis for the variation in prices during a given day is usually not a function of the performance of the company and its long term prospects. It is, instead, influenced by the trends and patterns of the share price that is usually seen in range-bound price variation.
Range trading uses tried and tested concepts like support and resistance levels as the basis for deciding which stock to buy and sell and at what levels.
News based trading
Again, unlike long term trading or investing, day trading can be very sensitive to news developments and instant updates regarding a company or even the industry it belongs to. It is common for stocks to come in for some hammering on the price front if the news is negative. Similarly, if the update is positive, everyone would be buying the stock and driving the price up.
So, it helps for day traders to keep a close watch on news and updates about the companies they are following and trading in.
As day trading is predominantly a form that thrives on technical analysis rather than fundamental information, there is a dependency on technology and data processing. There are complex algorithms deployed to interpret historical data against existing market deviations that point out opportunities to a trader.
This helps day traders make the most of the fluctuations in prices and take favourable positions and exit them with the best results.
Read Also: 10 Day Trading Strategies for Beginners
A Day Trader’s Advantages
The innumerable trading opportunities that a day trader is required to do in a day helps him learn faster than a position trader who only gets to do limited trades.
✅ Not vulnerable to overnight developments
One of the best things that work for a day trader is that there are no risks associated with holding a position overnight. For traders, who normally hold their positions overnight, a business upheaval or a news event that comes during the night can cause the market to open significantly lower or higher the next trading day. As day traders close out their trading positions before the close of each trading day, they do not need to worry about this.
✅ More access to margins and using them to one’s advantage
If you make profits in day trading, you can make use of the profits and trade a larger position the following day and generate even greater profits.
✅ Using risk measures like stop losses
Day traders can take advantage of a stop-loss order and close the trade to avoid substantial losses. It eventually reduces the risk of higher loss.
A Day Trader’s Challenges
❌ Overheads - more trades mean more commissions
Though you can trade more often, frequent trading means higher trading costs, i.e., commissions, brokerage and fees. The extra charges may eat into your profitability significantly.
❌ Does not work with all assets
Day trading does not work with all asset types; it only works with shares and not mutual funds.
❌ Inherently risky
Though day trading gives the opportunity to generate much higher investment returns, sometimes, there are extensive risks involved. This could be due to an ineffective decision or a poorly executed exit or entry strategy.
❌ Margin trading can be a double edged sword
For a day trader, margin trading is risky as it involves borrowing money from the broker. Taking on debt for the day means you must buy and sell the stock within the same day, even if you have to sell the share at a loss.
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