The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.
What Is Day Trading?
Day trading is the opening and closing of your trading positions within a short period, typically the same day. Also known as intraday trading, the goal of using this trading style is usually to take small profits which eventually add up to bigger gains over time.
Naturally, the aim is to rake in profits – but the possibility of incurring losses is perpetual. However, if things don’t add up for you, you could limit your losses through the signature same-day exit.
Day trading can also help you dodge costs required to keep your position open into the next day and any unfavorable overnight market movements. So, calling it a day might just mean that time is not money.
Day Trading And Overnight Positions
As per its definition, day trading means you’re holding positions for the day, ie within the same trading day or market session. But, there’s an exception; if you decide to add to a position you held overnight, keep in mind that if you decide to close any of that position the same day, it will count as a day trade.
So, why not sleep on it if you don’t want to start entirely fresh the next day?
How Does Day Trading Work?
Day trading works, ordinarily, by capitalizing on small market movements. Rapid market fluctuations, when the level of volatility is high, present more opportunities for this. With more trades per day, come increased potential for profit. But, this is also the case for possible losses.
Indeed, if the rewards are high, so are the risks.
Another aspect that affects both the profits and losses of day traders is leverage, which refers to getting full exposure while only committing a fraction of the amount. This is called margin trading. You get to open your position using only an initial deposit, but both profits and losses are increased to reflect the full value of the trade.
While day trading equities is particularly popular, you can also buy and short-sell across markets at certain brokerage firms. Further, the time limit means certain trader characteristics and skills are needed to better the chances of success. Increasing the likelihood of profiting and – in the cases where it’s a successful trade – the amount earned, a trader would need focus, dedication, fast but careful decision-making, to name a few.
Day trading is often considered to be the opposite of investment strategies, where the aim is to make profits from the sale of assets that were owned over a long time.
How To Start Day Trading
Best Day Trading Strategies For Beginners
Finding some of the best day trading strategies for beginners can make a world of a difference in your long-term success. So, what better way to kick off and follow through on your day trading journey than with a strategy that can guide you to success? Some popular day trading strategies include:
1. Trend Trading
Bull markets and bear markets can present the perfect opportunity to ride the wave of the trend. While bull markets can be characterized by higher highs and lower lows over a prolonged period of time, a bear market is typically indicated by a 20% drop in price following recent highs. But these might not affect price movements when put into context – within the space of one day. In fact, the day might fall within a market correction stage, which would mean a loss for day traders who are trying to ride the trend wave. The good news, though, is that the trend doesn’t have to be classified as a bull or a bear market. Shorter trends could also benefit day traders. Learn more about trend trading
2. News Trading
As its name suggests, news trading involves taking positions based on news stories that are likely to affect the financial markets. These often include binary events such as inventory reports, Federal Open Market Committee (FOMC) meetings, earnings announcements and elections.
Whichever market is making the headlines, any publicity is good publicity – at least for traders. If sentiments are bullish due to good news, traders can go long. Conversely, if they are bearish as a result of bad news, traders have the opportunity to go short.
News runs round the clock across various mediums such as TV channels, websites, radio stations and different social media platforms. So, day traders who opt for the news trading strategy will have no problem finding an information source of their preference.
Remember, while it’s likely for news broadcasts to have a certain impact on the markets, there’s still a chance that market performance doesn’t measure up to the expectations.
4. Mean Reversion
Mean reversion is focused on the theory that the price of an asset will eventually return to its historical average level. So, the trader will make decisions based on the speculation that prices will go back to that average.
Not to worry – you don’t have to be a mathematician to find the mean of an asset’s price. Technical analysis tools such moving average (MA) can be used for this – from there, you can determine how far off, whether higher or lower, the price is from the mean.
5. Money Flows
This strategy is based on the money flow index (MFI), a technical indicator that shows whether an asset is currently overbought or oversold. Instead of looking at price alone, the money flow indicator considers volume too, based on the previous day’s number of trades.
The indicator signals an asset as overbought with a reading of at least 80 – traders using the money flows strategy will sell in this case. On the other hand, an oversold market condition is reflected by a reading of 20 and below – a signal to buy.
Day Trading vs Swing Trading: What Are The Differences?
Day trading and swing trading have some notable differences, even though traders often use a technical analysis to identify patterns, trends and key price points in both.
Here are some of the differences between day trading and swing trading:
Let’s take a closer look at swing trading…
Swing trading involves holding a position for days, or weeks, in an effort to lock in profits from short- and medium-term market movements.
The assumption that an asset’s price rarely has consistent movement in the same direction at any given time rings true in most instances. Swing traders use this as their basis for decision-making – they aim to spot a pattern, watching the swings closely to choose their entry and exit points.
All this can happen in the space of a day. Even though it’s typical for traders to use this style over several days or weeks, trends can also occur within minutes or hours – making it possible to swing trade and day trade simultaneously.
Day Trading Rules
Day trading rules have been created by the Financial Industry Regulatory Authority (FINRA). In addition to regulating the practice, the rules also serve to educate traders on the significant risk that’s involved. They are called pattern day trader (PDT) rules.
It’s important to know the day trading requirements before you get started. This will depend on your account type as well as the brokerage firm where your account is held, so it's always best to confirm based on your specific situation. While cash account rules are based on good faith violations (GFV), margin accounts are subject to PDT rules. For margin accounts, these include:
These rules will differ from GFVs. For instance, you aren’t limited to a number of trades when using a cash account, but you can’t trade with unsettled funds.
Day Trading Summed Up
Day Trading FAQs
It's always best to double check requirements at your personal brokerage firm.
As a rule of thumb, you will need enough funds in your account to cover the cost of the position plus the opening commission fee.
Nope. Day trading is legal, though it's important to keep in mind that intraday trading is regulated with a set of rules as there’s significant risk of losses involved.
Day trading isn’t like gambling. Trading and investing in general requires skill and knowledge – the same applies to day trading. For example, spotting trends and finding the moving average through technical analysis can be of big help to a day trader.
But we don’t leave it to traders to find their feet and their way around trading on their own. Check out some tastytrade shows to boost knowledge and develop day trading skills.
The truth is that you can make a profit or a loss when day trading. In both cases, it can be small or big. Remember to always manage your risk appropriately.
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