Stories of getting rich with securities trading, or losing everything due to the same activity, are everywhere. No type of trading, however, seems to capture the imagination like day trading. With it, the popular belief goes, fortunes can be made or lost during a single trading day. This leads many risk-taking investors to get into it with the hopes of being on the good side of the possibility coin. Is day trading really all that it’s made out to be, or is the reality more down-to-earth?
What Is Day Trading?
Day trading involves picking up (opening) positions in securities early in the day and then closing them out before trading ends the same day. While for some, early morning is a preferred time for taking on positions in stocks, futures, options, and other securities, they can actually be opened at any time during the day. Positions can also be closed at any time during the day, though the close of business is can be a popular time for some.
A trader will typically spend the day attentively watching a computer screen and opening or closing positions according to what the current stats are saying. The requirement for close attention makes it so that day trading isn’t nearly as easy as buying into a bunch of things in the morning and then selling them off in the early evening.
While many people think of this activity as being meant to try to get rich in a day at the cost of high risk, the reality is that some investors think of it in the exact opposite way. These investors are actually hoping to minimize risk by getting out of all positions before drastic overnight changes can affect prices, and they accept a lower chance of instant wealth as a consequence of lowered risk.
Which set of investors is correct? In reality, both could be said to be right (or wrong). The amount of risk is partially connected to the investing style used and which types of trades are made.
How Is Day Trading Done?
Different investors have different answers to the question of how to day trade. Typically, they will choose specific systems based on their personalities, goals, and overall knowledge of trade-based investing. Some of the most popular systems include:
Short-term trading. Also known as “scalping,” this method involves holding positions for as little as a few seconds all the way to a couple of minutes. The goal is to get out of a position the moment it shows a profit.
Swing or position trading. Investors using this style will keep their positions longer. They may hold a position throughout the entire trading day, but will still close it out by the end of it.
Types of Day Trades
The types of trades day traders make also vary. These include:
- Trend trades. These positions are opened with the assumption that the security will keep following its current trend. If prices are going up, stocks or other securities are purchased.
- Counter-trend trades. With these positions, the investor is betting that the current trend will reverse. In this case, securities are purchased if their prices are dropping in the hopes that the prices will significantly rise again by the close of business.
- Ranging trades. These are made when the market is sideways. Positions go between two prices that are intended to capitalize on the securities whether they rise or fall.
Day trading for beginners is often quite a bit different from that done by those who have been at it for years. That’s because it’s a good idea to master the basics before moving on to complex varieties. Another important thing to keep in mind is that not all trades make money. In fact, it’s possible to have days where every trade will be a loser. Because of this, many of those who have engaged in day trading recommend starting out with a significant amount of seed money so that one or two bad days don’t put an end to the endeavor.
What Type of Brokerage Should Be Used for Day Trading?
Since the volume of trades is so high, the fees of traditional brokerage firms will all but surely kill the profit. Therefore, day traders prefer discount online brokerages to do their trades. Their much-lower fees can be what makes the difference between success and failure. Trading online is also faster since there’s no need to talk in order to execute positions. Clicking takes a fraction of a second, while it can take several seconds just to communicate an order orally. This seems to make the online option the more efficient choice when it comes to day trading.