by Amanda Harvey
Introduction
Stock market day trading is a style of trading which centers on the
buying and selling of an asset within a single trading day. In addition
to stocks, day trading is also practiced by traders of options, foreign
currency exchange, and futures. This type of trading typically requires a
substantial time commitment, and is often seen as a job by those who
are involved.
Many day traders will enter and exit a number of positions within a
trading day, and positions are held for a period of time which may be as
short as a few seconds, and not longer than the length of the day. A
trader may also repeatedly invest in the same stock, however, if a
margin account is used, this may result in being classed as a pattern day trader which incurs specific regulations.
Principles of Stock Market Day Trading
Stock market day trading aims to garner quick profits from price
movements which are often incremental. Substantial gain can be achieved
by repeatedly making these
small percentage increases, and/or by using leverage from a margin
account to magnify return on capital. To be able to benefit from these
price fluctuations quickly, a trader must have access to a high-speed
trading platform that facilitates instant trading.
The basic premise of stock market day trading is timing the market;
buying at a time when a price is expected to go up, and then selling at a
point before it begins to go back down. When day trading options, the
reverse of this holds true in the case of buying put options. These are
purchased when a price is poised to drop, and selling before the price
starts to rise again.
One of the concepts behind day trading is that by closing all positions
before the end of the trading day, any losses which could be sustained
by overnight gaps down can be avoided. These gaps occur when a security
opens at a price lower than it closed at the previous day. These gaps
often result from unexpected news relating to the company or the
political or economic climate, or simply a change in investor sentiment.
Techniques for Stock Market Day Trading
Successful stock market day trading relies heavily on technical
analysis. Fundamental analysis is useful for longer-term investing, as a
company with a solid business and financial structure should eventually
see this reflected in their stock price, however, these fundamentals
are less relevant to the constant fluctuations in price that form the
basis of day trading. These fluctuations can be predicted by using
methods of technical analysis including chart patterns and indicators,
as well as by observing trading volume.
Aside from choosing stocks that show signals of trending in a particular
direction, day traders tend to favor stocks that show signs of both
liquidity and volatility. Liquidity is important, as a stock that is
‘liquid’ is trading substantially, and allows better prospects for
buying and selling at a fair price. Volatility is also a key to
profiting from day trading, as a price that is sluggish will not allow
the amount of movement required in the short period of time to achieve
the desired increase.
Stock Market Day Trading Strategies
A popular strategy for day trading is known as arbitrage, which involves
identifying a discrepancy in price, and buying a security on one market
which may then be resold right away on another market at a higher
price, generating an immediate profit.
Another strategy day traders frequently employ is known as scalping. As
the name implies, this technique involves exiting a trade as close to
the bone as possible, as soon as the trade becomes profitable. In order
to receive a viable amount of revenue, most ‘scalper traders’ execute a
large number of trades within a session, on the premise that many small
increases are quicker and easier to achieve, and can add up to a healthy
return.
Momentum trading
can be successfully implemented as a day trading strategy. Momentum
trading involves identifying a trending stock, and trading in the
direction of the trend. Using this as a day trading strategy, a trader
will not necessarily ride the momentum until it shows signs of
reversing. They will close out their position near the end of the
trading day, even if the trend still appears to be going strong.
Conclusion
Stock market day trading is not suitable for everyone, but for an
individual who likes to take an active part in their trading activities,
has a good understanding of technical analysis, and is methodical and
disciplined in their approach, day trading can be both challenging and
rewarding. It is vital to understand the potential pitfalls and benefits
of day trading, and to have and to implement a clear plan which
includes a solid risk-management strategy.