Day Trading

What is Day Trading?

With the rise of the internet, trading has matured into being more than just the old boys club where only institutional or high-net worth persons would participate. Everyday individuals can now operate the markets as more and more online brokers have lessened the requirements needed in order to be involved. 

Everyday individuals, who may not be full-time traders look to adapt their work/life schedule to their trading, and use shorter term strategies in trying to find and take trading related opportunities. This is where day trading comes in. Day trading is essentially where a trader will only be involved in trades which last no longer than a trading day, meaning there are not being carried forward.

Below we analyse the different types of day trading.

Types of Day Trading

Day traders are a particular breed of individual, mainly looking at quick, volatile and short-term opportunities. In having this approach, and especially in having to deal with the intraday volatility the markets offer, day traders often have a set strategies they use in entering and exiting trades.  So of the main types of these strategies are listed below.

High Frequency Trading 

HFTs are usually a very sophisticated type of day traders, they usually are very technical and come from a programming or mathematics background. As a result they create algorithms which trade as robots (like centobot), and look for very small incremental moves in the markets which usually last no longer than a few microseconds.

This type of trading requires you to have a broker which firstly provides you access to such high execution speeds, otherwise the opportunity your algorithm has spotted would not be triggered, and will end up on the wrong side of the desired trade. 

Fundamental/News Traders

Fundamental day traders usually look at forecasted news announcements via an economic calendar to spot events they feel will move markets. Economic calendars show day traders daily events that are to occur , and the potential impact they will hold on a certain region. There are 3 types of news levels in terms of impact. High, Medium and Low. The higher the level of impact the greater the level of volatility meaning the greater the potential of the opportunity.

 

In being a news trader, you will be exposed to a significant level of uncertainty, meaning that you will need to be careful of widening spreads which would either see you enter or exit a trade prematurely. 

Scalping

Scalpers are similar to high frequency traders minus the algorithms. Day traders who identify as scalpers, usually look for several low returning trades through the trading days, and usually do so whilst looking at short-term charts, between 1 minute – 30 minute time frames. In order to be a scalper you will likely require a significant amount of your own time dedicated to open and manually close trades, so this may not be efficient for those who have other commitments. Not every broker allows scalping however, so if this is a strategy you would want to follow, it is key you ensure that your broker doesn’t have restrictions on scalping.  

How to be a Day Trader?

This is the easy part, anyone can be a day trader. They key here is to identify and put a plan together on what you are hoping to achieve. Once you have identified your overall plans and aims, it is then down to you to pursue them using the below points as a guiding light.

Strategy

In having an aim or objective the first step would be to have a plan in place which can be used in trying to see this achieved. This strategy will be firstly what type of trader will you like to be, fundamental, technical, scalper, high frequency etc. What markets would you want to be trading? How many trades would you be placing on a daily basis? Answering these questions will give way to you know not only what you want to achieve, but also, knowing the process in which you will follow to do so.

Practice

The benefit of being a trader is you do not need to have all the answers and be proven right immediately. Most brokers offer practice or demo accounts where some of these theories and strategies can be tested and if proven you can can take this onto the live account. I it however always essentially that you practice and test any ideas you may have. 

Day trading isn’t for everyone, it does require time and effort, it is accessible and with some markets open 24 hours during weekdays, there is always going to be an opportunity. 

How to avoid pitfalls of Day Trading?

Close to 80% of traders fail and or lose money whilst in the markets. The majority of these are new, inexperienced and usually always often fall for the same traps and pitfalls. Trading is sometimes sold or shown to be the vehicle to drive you to your financial successes, in a very short period of time. This narrative is easily embraced by most, as we hold hope that there is the holy-grail available to us, and solving all of our concerns in a short span of time. This is false, but how does a trader avoid falling for this trap?

Being overly optimistic and setting unrealistic goals rank high in the reasons why traders fail. Day traders often set huge profit targets, and in doing so risk far too much of their capital per trade to be able to achieve them. To avoid this, there needs to be the understanding that trading is not gambling, and getting a correct trade isn’t like winning the lottery. Trading is essentially a grand war. You will have numerous battles, some won, some lost, however, the longer you have soldiers in play, the more opportunities you will have to win more battles than lose.

 

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