Day Trader
A day trader is a trader who deals with profiting from very fast price movements in a short period of time. This trader works with price movements in the market during one day. During this time the trader manages a lot of short and long trades. In some cases, day traders use leverage. It allows to increase in profit, but the risk of huge losses also increases.
Day traders have many strategies, but their results are based on the temporary inefficiency of supply and demand in asset purchases and sales. Assets keep positions from milliseconds to several hours, then close. There is a huge risk in after-hours and nighttime trading.
Basics of a day trader
Day traders have no qualifications, but they vary in their trading frequency. The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission recognize day traders by the number of times they trade in a week (4 or more times in 5 days) and the percentage of day trades in a client/brokerage/investment firm's total trading activity (6% or more).
Day traders do not leave trades open at night time. Day traders should have broad knowledge and wide experience. The supply-demand spread, trading commissions, real-time news expenses and analytical software can significantly limit the day traders' efficiency. Some traders prefer to use computer technology, technical analysis and calculate trading patterns to discover favorable probabilities. Some day traders rely on intuition.
Investors consider fundamental information about a company because they analyze its long-term potential for growth. Only after that they decide whether to buy, hold, or sell the stock of the analyzed company. Day traders, on the other hand, primarily track the characteristics of stock price movements.
The day trader tracks the average daily range and price volatility. Price movements have to be significant in purpose to make a profit. Likewise, day traders rely on the volume and liquidity of the stock, due to the critical importance of entering and exiting quickly in order to make small profits on each trade. The day trader is not interested in a small daily range or small daily volume.
Pattern Day Trader designation
A pattern day trader (PDT) is the accepted designation for traders with a margin account who make 4 or more day trades in 5 working days.
The percentage of margin account participation in daily trades should be 6% or more of the total trading activity for 5 working days. If these conditions are met, the trader's account is marked with a PDT, which restricts further excessive trading.
Day Trader techniques
During one day there are short-term market movements due to some events. Day traders track these events, trading the news. This is one of the popular techniques. The markets always have some assumptions, predictions, expectations. Markets depend on expectations and respond to economic statistics, interest rates or company earnings. All this can bring profits to day traders.
If there is no news or gaps in the morning of the trading day, traders determine the direction of the market themselves. They are guided by the indicator of the gap between the previous day's close and today's open prices. After that, they take positions in the opposite direction, causing the gap fading. This is another popular technique - fading the gap at the open.
If market prices are increasing, day traders will buy strong securities, even if their prices are falling. If market prices are decreasing, they will buy weak short-term securities with little growth in their prices.
Independent day traders learn how to make trades for several months, practicing on models. They compare their decisions with the market, identifying their successes and failures, learning from their own experience. Only after getting a certain experience they move on to real trades. The working day of most day traders takes 2-5 hours.
Day Trader strategies
The strategies of day traders can include the following:
Scalping. It involves performing a lot of small intraday deals with getting a lot of small profits through small changes in prices. Also, this strategy allows to find short-term arbitrage opportunities.
Range trading. It is the same as a swing trading strategy. The difference is the term, the duration of trades. Range trading for day traders takes hours or a day. Swing trading can last for several weeks or more. The basis for making trading decisions in these strategies is the determination of support and resistance levels.
News-based trading. This strategy relies on news events and headlines, tracking volatility and trading opportunities.
High-frequency trading (HFT). The basis of this strategy is small short-term inefficiencies. They can occur in the market up to several thousand times a day. Based on them, certain algorithms are put together to help day traders make profits.
Pros and cons of Day Trading
The first key advantage of day trading is the absence of the negative effects of nighttime news (earnings reports, important economic reports, changes in broker ratings before the market opens or after its close) on prices of securities.
Another advantage can be an increase in stop-loss prices to reduce losses from long-term positions (using tight stop-loss orders).
The third significant advantage is the large leverage due to the extended access to margin. And also, day traders have more learning opportunities.
Despite the attractive benefits, day trading has a lot of risks. Day trading has a very limited time to increase profits.
The disadvantages also include high commission expenses due to the trading frequency (it reduces the trader's profit).
The use of margin to maintain long-term positions can cause rapidly growing losses. As a result, there are margin calls.
