Day trading is a trading style where no positions are left open over night. Day traders are intraday traders and they earn their money from fairly small price movements.
To make sure that a position actually closes as soon as the close order has been given, day traders tend to select markets characterized by high liquidity and high volume. They do not want to get stuck with an open position over night because of a lack of buyers. Day trading is especially common on the forex market, cryptocurrency market and stock market.
It should also be noted that many modern day traders utilize products where they don´t have to rely on any buyer to close the position, such as Contracts for Difference (CFDs). Through such products, they can gain exposure to a wide range of underlying assets (e.g. commodities) without ever owning these assets.
Technical analysis
Day trading isn´t about identifying a company that you want to invest in for the future, or buying into a fund with the idea of holding on to that investment for a few years.
Day traders exploit small intraday price changes and exit all positions before the trading day is over.
Because of this, technical analysis has become very popular among day traders. Technical analysis is based on the notion that historic market data can be used to predict the future. Typically, a person using techinal analysis will look at historic data in the form of charts and try to spot certain patterns.
If you want to learn more about technical analysis, a lot of information and tutorials (both text and video) are available online for free. Tools for technical analysis are also included in many trading platforms.
What is leveraged day trading?
As mentioned above, day traders tend to make their money from fairly small price movements, since they never keep positions open over night.
In order to earn substantial amounts of money on a small price movement, they typically buy a lot of units.
Examples:
- You buy a 10 shares at $15 and sell them at $16. You have made a $10 profit.
- You buy a 1,000 shares at $15 and sell them at $16. You have made a $1,000 profit.
Leveraged trading is when you borrow money from the broker to open a position. You want to buy 1,000 shares for a total of $15,000 but you only have enough money to buy 100 shares ($1,500). Your broker lends you $13,500 to make it possible for you to open the position. If you open a Forex trading account with a broker regulated in the US or the EU, leverage will be capped at a low level. However, it is possible to leverage up to 500 times your initial deposit with a high leverage forex broker regulated in a more favourable jurisdiction.
Using leverage is of course tempting, since it increases the possible uside of a trade. It is important to remember that it also increases the possible downside, and you can lose more money than you ever had in your account. You are risking borrowed money that you are obliged to repay.
- Never risk money you can not afford to lose.
- We recommend that inexperienced traders stay away from leverage.
Are scalpers day traders?
Yes, scalpers are a type of day traders since they do not leave positions open over night. When we talk about day traders in everyday speech, we do however usually make a distinctions between these two trader types. Scalpers open and close a multitude (typically hundreds or thousands) of positions within a very short timeframe, usually a few seconds or minutes. Traditional day traders tend to keep their positions open longer than this. Scalpers capitalize from exceedingly small price swings and often do best in stable markets. They only earn a tiny amount on each profitable trade, but the accumulated profits can be substantial, and they can trade around the same price point throughout the day, reaping a small reward each time.
Is day trading right for me?
Many day traders appreciate the sharp contrast between being ”on” and being ”off”. When they are actively trading they are fully absorbed into that, and they like the high-adrenaline environment that comes with this form of short-term speculation. When the trading day is over, they can relax and remove themselves from the trading world, because all positions have been closed and there are no open positions to worry about.
Other traders hate day trading, for roughly the same reasons. They do not fare well in intense trading environments, and find the sharp contracts discombobulating. Instead, they prefer to carefully study and analyze possible investment opportunities before they open any position, and then hold their position open for quite some time. They do not need to fret over intraday market swings and can instead keep their eye on longer term trends. If this sounds more like you, we suggest you look into swing trading or long-term investments.
Interestingly, some people who dislike normal day trading acutally do well with scalping, since they can get all their trading done in a super short timeframe and then step away from the trading screen. Having positions stay open longer, like a typical daytrader, makes them stressed in a negative way.
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