What is Day Trading

Day trading refers to the speculative buying and selling of financial instruments, such as stocks, futures, options and currencies, within the same trading day. Open positions are rarely (almost never) held overnight, over the weekend or when the market is closed for a holiday.

At first, day trading was available solely to financial companies, mainly banks and investment firms, but with the speedy development of electronic trading, which gave outsiders access to exchanges and market data, day trading became very popular among freelancers as well (from now on referred to as day traders).

As with any other type of trading, day trading carries a significant risk and ones results may vary from a persistent and satisfying profitability to huge losses. This is especially true when it comes to trading highly-leveraged financial instruments where depending on the size of the position the net result can swing by thousands of dollars within seconds.

Day trading styles

Day trading is a trading style and it itself is comprised of several different sub-trading styles. They range from short-term trading, i.e. scalping, which involves high-frequent entering and exiting of positions, to swing trading, where a position might be held open throughout the day in order to benefit from a strong trend (milk the trend). Some day traders use a mix of trading styles to achieve the best performance, but this requires a lot of experience and constant focus – two things novice traders rarely possess. This is why most day traders choose a single trading style and focus on certain types of trades.

Some traders enter only with-trend trades, thus they practice trend following (best for inexperienced traders), while others do range trading – enter positions in both directions as the price swings in a channel between strong support and resistance levels.

There are also highly skilled and some very inexperienced traders who play against the market, thus placing counter-trend trades. However, while the skilled market players are able to profit from these high-risk entries, the newbies are simply incurring heavy losses that will eventually wipe clean their trading account. The professional traders are doing the so-called “contrarian investing”, knowing that the price will eventually reverse on the base of years of experience and advanced analysis techniques. At the same time, newbie traders are caught in losing counter-trend trades by not knowing that a trend is strong and much more likely to continue, instead of reversing.

News

Many of the day traders base their decisions on news that come out during the current trading session, including economic indicators which can be found in the economic calendar, as well as policy meetings outcomes and speeches of central bankers, ministers etc. These events, especially from the major economies, create huge volatility and give day traders a good chance of satisfying profits, and especially scalpers. Day traders usually trade the news in conjunction with a set of indicators, such as the Relative Strength Index, Average Directional Movement Index etc., to boost their performance.

Some other day traders however argue that simplifying things is bound to yield better results. They practice the so-called “price action trading“. This is a technique based on technical analysis, in which traders assess whether they should enter a trade or not based on a combination of price movement (they read charts bar by bar), patterns (such as flags, triangles, wedges, head and shoulders), volume and other raw market data. In contrast to the previously described day trading styles, price action traders do not use the otherwise vastly utilized indicators. Price action traders tend to ignore all fundamental factors that may affect price movement but rely heavily on the ability to understand human psychology and crowd behavior, which is reflected in the general publics positioning. This makes price action trading universal for all markets (Forex, stocks, commodities, futures etc) but is more difficult to master compared to other more conventional trading techniques (such as news trading).