| Day trading refers to the practice of buying | | | | |
| and selling financial instruments within the | | | | Nevertheless day trading can become very |
| same trading day such that all positions will | | | | risky, especially if one has poor discipline, |
| usually (not necessarily always) be closed | | | | risk or money management[3]. The common use |
| before the market close of the trading day. | | | | of buying on margin (using borrowed funds) |
| Traders performing day trading are called day | | | | amplifies gains and losses, such that |
| traders. | | | | substantial losses or gains can occur in a |
| | | | very short period of time. In addition, a |
| Some of the more commonly day-traded | | | | broker usually allow more margins for |
| financial instruments are stocks, stock | | | | daytraders. Where overnight margin required |
| options, currencies, and a host of futures | | | | to hold a stock position is normally 50% of |
| contracts such as equity index futures, | | | | the stock's value, many brokers allow pattern |
| interest rate futures, and commodity futures. | | | | day trader accounts to use levels as low as |
| | | | 25% for intraday purchases. That means even a |
| Trade frequency | | | | day trader with the minimum $25,000 in his |
| | | | account can buy $100,000 worth of stock |
| Although collectively called day trading, | | | | during the day, as long as half of those |
| there are many sub-trading styles within the | | | | positions are exited before the market close. |
| whole "day trading" tree. A day trader is not | | | | Thus a day trader has to admit mistakes |
| necessarily very active. Depending on one's | | | | quickly and cut losses fast when the market |
| trading strategy, it may range from several | | | | goes against a position. Even when a position |
| to even a hundred orders a day. | | | | is in profit the day-trader needs to be |
| | | | careful since the profit plus any dividend |
| Some day traders focus on very short or | | | | has to offset the transaction costs and the |
| short-term trading, in which a trade may last | | | | interest on the margin[4]. |
| seconds to a few minutes. They buy and sell | | | | |
| for many times, making very high trading | | | | It is commonly stated that 80-90% of day |
| volume daily and receiving very deep | | | | traders lose money. An analysis of the |
| discounts from the brokerage. | | | | Taiwanese stock market suggests that "less |
| | | | than 20% of day traders earn profits net of |
| Some day traders focus on momentum or trend | | | | transaction costs". |
| only. They are more patient and wait for a | | | | |
| ride on the strong move which may occur on | | | | Popularity |
| that day. They make far fewer trades than the | | | | |
| abovesaid day traders. | | | | Day trading used to be the preserve of |
| | | | financial firms, professionals, some savvy |
| Overnight position | | | | private investors and speculators. Many day |
| | | | traders are professional bank or investment |
| Traditionally it is suggested day traders | | | | firms employees working as specialists in |
| should always settle their positions before | | | | equity investment and fund management. |
| the market close of the trading day to avoid | | | | |
| the risk of price gaps (price differences | | | | One of the first steps made day trading of |
| between previous close and next day open that | | | | shares potentially more profitable is to |
| it looks like a "gap" between price | | | | change commission scheme. In 1975, the |
| activities) at the open. Some day traders | | | | Securities and Exchange Commission made fixed |
| consider this as a golden rule which have to | | | | commissions illegal, giving rise to discount |
| stick with firmly and strictly all the time. | | | | brokers offering much reduced commission |
| | | | rates. |
| It is thought this rule goes against | | | | |
| traditional market wisdom, "let the profit | | | | Electronic developments further helped to |
| run". Prematurely closing a position is equal | | | | promote day trading. One important step in |
| to not letting your profits run. Thus some | | | | facilitating day trading was, therefore, the |
| day traders advocate it is okay to stay with | | | | founding in 1971 of NASDAQ -- a virtual stock |
| a position after the market close as long as | | | | exchange on which orders were transmitted |
| it is still in a winning position with the | | | | electronically. Moving from paper share |
| trend on your side. | | | | certificates and written share registers to |
| | | | "dematerialized" shares, computerized trading |
| Some day traders borrow money to day trade. | | | | and registration required not only extensive |
| Since margin interests are typically only | | | | changes to legislation but also the |
| charged on overnight balances, the extra | | | | development of the necessary technology: |
| costs discourage them to hold positions | | | | online and real time systems rather than |
| overnight. | | | | batch; electronic communications rather than |
| | | | the postal service, telex or the physical |
| Profit and Risk | | | | shipment of computer tapes; the development |
| | | | of secure cryptographic algorithms etc. All |
| Due to the nature of leverage and rapid | | | | have been materialized. |
| returns, day trading can be extremely | | | | |
| profitable and high-risk profile traders can | | | | Day trading has become increasingly popular |
| generate huge percentage returns. Some day | | | | among casual traders due to the advance in |
| traders can manage to earn millions per year | | | | technology, new facilities offered cheaply, |
| solely by day trading.[2] | | | | and the popularity of the Internet. |