by Amanda Harvey
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.
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.