How does Day trading work?

Day trading is a trading technique where no positions are left open over night. Instead of trying to predict longer-term price movements, the day trader focuses on intraday movements. Typically, a day trader will open a position and then close it again after just a small price movement, rather than holding out for major price changes.

  • Most day trading styles involve making a multitude of trades during the trading day.
  • Day traders tend to seek out markets characterized by high-volume and high-liquidity.
  • Rapid order execution is important for day traders.
  • Day trading will be less profitable (or not profitable at all) if you select a broker whose broker fee schedule is designed for longer-term investments.
  • Using leverage is common among day traders, but will add another type of risk since you can end up losing more money than you have. When you use leverage, you are putting borrowed money on the line and it is possible to lose more than what you have in your account.

Day trading strategies

Within the field of day trading, several different techniques have evolved. Here are a few examples of common ones:

  • Scalping. Scalping is intense even by day trading standards. Typically, this trader will open and close a very large number of positions within a very short timeframe – often within seconds or minutes. Scalpers only make a tiny profit from each profitable trade, but the accumulated profits can be substantial since they carry out so many trades. Scalpers do best in fairly calm markets, since they rely on miniscule price movements rather than strong trends in either direction.
  • News-based trading. These traders are ready to trade when news are released. It can be both planned news releases (such as information about corporate earnings) or sudden unplanned events that reach the news media. News have a tendency to create market volatility, and these traders know how to benefit from that.
  • Range trading. This is considered a part of the larger field Technical Analysis. Range traders know how to identify and exploit a trading range. An asset is said to have a trading range when it is traded between a fairly consistent high price and low price for a period of time.
  • High-frequency trading (HFT). This method requires a specialized computer program capable of carrying out a high number of orders in fractions of a second. The program will also utilize complex algorithms to analyze the market and execute orders based on market conditions. HFT have high turnover rates and order-to-trade ratios. Citadel, Virtue Financial and Tower Research are all examples of well-known companies in the HFT-field.

Do I need access to a trading desk to profit from day trading?

No. Having access to a trading desk (dealing desk) is great since it provides rapid order execution, but it is possible to make a profit from day trading using an ordinary trading platform for online retail traders.

It is typically only traders working for large institutions or corporations that have access to a trading desk. Trading desks are manned by licensed traders who use electronic trading systems and market makers to identify opportunities for their client. Trading desks charge a commission on trades transacted through them.

How can analytical software help with day trading?

Many day traders utilize analytical software, especially those who engage in technical analysis. Here are a few examples of what analytical software can help you with:

  • Spotting patterns in historical market data. For traders doing Technical Analysis, software can be very helpful in identifying technical indicators such as channels, flags, waves, etcetera on the charts.
  • Testing a trading strategy against historical data. In essence, you can tell the program what type of trading strategy you wish to employ, and the program can show you how that strategy would have worked out for a selected period of time in the past.
  • Genetic and neural applications are genetic algorithms and neural networks utilized to improve trading systems. The idea is to make more accurate predictions of future price data.

Some types of analytical software can be connected to your broker account, and you can give it instructions to carry out certain trades within certain parametres as soon as certain market conditions have been identified by the program. This can save time, which is important in a field where every fraction of a second may be of essence.

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