The term ‘day trading’ defines the act of rapidly buying and selling stocks within the period of one trading day. The activity involves securing a position in the forex market at the start of the day with the intention of multiplying that position prior to the closing of the day’s trading session. The object of day trading is to influence the value of the stocks, so that they may either climb or fall within the overall time that the investors own the stock. This slight upward or downward fluctuation in the value of the stock allows investors to reap a quick profit.
What is a Day Trader?
Day traders are the investors who carry out short-term trading in the forex market. The primary objective of day traders is to translate the slightest price movements within one trading day into profits. In general, day traders trade numerous times in a single trading day, seeking a few points per trade. However, regulations make it mandatory for all day traders to ‘close’ their positions by the end of the day. As a result, a day trader is allowed to hold a particular position for a minute, an hour, or a day, but never overnight.
What are The Types of Day Traders?
Day traders are generally classified according to the particular trading style they adopt when they are actively dealing in the forex market. The two most common types of day traders are discussed below:
Scalpers – This particular style of day trading is one in which traders rapidly and repeatedly purchase and sell large volumes of stock within a short period of time, usually within minutes or even seconds. The primary objective of Scalpers is to reap a small profit per share on every transaction that they make while keeping risk to a minimum.
Momentum Traders – This specific type of traders look out for those trading stocks that show strong unmistakable signs of following a moving pattern throughout the trading day. Therefore, the objective of momentum traders is to buy such stock when it is trading at the lowest price and sell it when it reaches its highest point.
Advantages of Day Trading
It is an established and irrefutable fact that day trading is among the high-risk low-yield investment ventures available in the forex market. Many investors have been reported to register substantial monetary losses in a matter of hours, minutes or even seconds. However, it is equally true that day trading offers retail investors some very unique benefits, some of which are detailed below:
Absolutely No Overnight Risk – In day trading, the trading positions close at the end of the trading day. This means that the investors’ portfolio remains largely immune to negative developments, news and events on that may greet them on the start of the following trading day.
Maximized Leverage – Day traders enjoy greater leverage on capital largely due to the fact that their trades that close in the same trading day. If exploited fully, increased leverage promises greater returns.
There are many other reasons why day trading has been the preferred style of forex trading for many investors. Apart from the obvious benefits that it promises, such as sizable earnings with minimal risk, there are other very significant advantages that day trading offers to investors, such as:
100% Cash at Beginning and Close – Day traders are able to sleep in peace through the night simply because of the fact that they dispose of all their stock positions at the end of the day. This comprehensively eliminates the likelihood that their positions will be subjected to fluctuations overnight that are usually the result of market changing factors and events.
Twice The Buying Power – Once the day traders have successfully refined their system, they are allowed roughly four times their account equity in intraday buying power which results in a significantly higher number of trading opportunities. This leverage can prove to be very useful for investors who have comprehensive knowledge on how to harness risks.
Interest on Overnight Cash Balance – Most forex trading brokers deposit investor money in an interest bearing account. Having cash in the account entitles investors to the interest which is generally paid on their overnight cash balance.
Collect a Statistically Meaningful Sample Size – Day traders enjoy a much higher number of trading opportunities which means that they are able to gather faster access to significantly larger sample size. This is vital for investors who want to learn how to trade well since handsome sample size is ideal for beginners to delve into in order to start learning.
You Can Completely Ignore the News – Most stock investors are mostly on their toes regarding latest news update and developing events in the market. Day traders are excused from such worries for the fact that a great majority of the news that potentially affects price movements is published after the close of trading hours. Therefore, where other investors would be devastated by negative news, day traders may simply see it as trivia for the fact that they never secure a position overnight.
Traders can start with small venture investment – Unlike other investment markets, day traders are not required to commit large sums of money simply to start trading. This makes the market’s profitability available to small-time investors who initially lack financial resources but are dedicated to increasing them over time.
Shorter trading time – Unlike other commodity trading markets, forex trading (day trading) is intraday, meaning that all the trades are disposed of in a single trading day. As a result, day traders do not need to pay attention to fundamental forex analyses and stringent research like a position trader does since day trades are typically closed within the day.
Higher Leverage – Day trading promises higher leverage to customers as compared to other investment markets. Day traders are allowed leverage of 50:1 to 500:1. This essentially means that a day trader has the potential to multiply returns on investment by a staggering 50 to 500 times in the event that the trade bears good fruit