The buying and selling of a security within a single trading day is known as the day trading. This can occur in any marketplace but is most common in the foreign-exchange (forex) market and stock market. Typically, day traders are well educated and well funded.
The term day trading is a widely misused and misunderstood term. Real day trading means not holding on to your stock positions beyond the current trading day; in other words, not holding any position overnight.
This is really the safest way to do day trading because you are not exposed to the potential losses that can occur when the stock market is closed due to news that can affect the prices of your stocks.
Unfortunately, many people who claim to be day trading, hold stocks overnight because of fear or greed, thus setting themselves up for the catastrophic elimination of their capital.
When day trading currencies, the term day trading changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as overnight trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.
Limit your losses! This is one of the most important rules that a day trader must learn. There is no rule of thumb as to how a day trader should limit his or her losses, but there are basic steps that can be followed. One of the main reasons people lose money in day trading is because they do not limit their losses.
For example, a person that claims to be day trading buys a stock and when the stock starts dropping, he says to himself, I am going to wait because the stock is going to go back up. The stock then continues to drop and he realizes that he should have sold it earlier, when he was losing less.
When the traditional closing time (4:00 PM EST) of the stock market is near, he decides that he is going to hold the stock until the next day, when it will surely recover.
News is released overnight that is negative for the entire market. When the market opens the next morning, all stocks are lower, including the stock of our alleged day trader.
Don't day trade with all your investment money! This rule means that you will only use SOME of your investment money for day trading. The reason being that you do not know for sure if you will be successful in day trading or not.
Consequently, most of your investment money should be applied to longer-term investments that should be managed in a completely different way.
The bulk of your capital should be in very solid, fundamentally sound investments or managed accounts that were chosen for fundamentally correct reasons.
In order to capitalize on small price movements in highly liquid stocks or currencies they utilize high amounts of leverage and short-term trading strategies.
In the market place, day traders serve two critical functions - they keep the markets running effectively via arbitrage and they provide much of the markets' liquidity (particularly in the stock market).
Day trading online in the USA is a big business and a lot of people setting up online companies are making a lot of money, often through sign-up and service fees.
But the real winner can be the consumer--the one who signs up for the website: these people get into the online stock trading world and can make a real killing when they are buying and selling all the right kinds of stock.
Different types of day trading are classified depending on the time period for which the day trader retains the stocks with him or under his custody. They are:
- Basic Day Trading
- Swing Day Trading
- Position Trading
- Online Trading
Basic Day Trading
Day trader commences the day by collecting stocks keeps them for sometime and endeavors his best to sell all of them at the end of the day. His primary work constitutes the sale and purchase of stocks.
These transactions enable him to bag good short-term profits and mitigate the risk of sale of stocks in a fluster due to fluctuating price.
Swing Day Trading
The day trader preserves the stocks for relatively longer period of time such as for few hours and few days to accrue big profits. But swing trading runs the risk of unstable market prices of the stocks.
Position Trading
As the name suggests, the trader purchases the stocks and arrange the sales keeping in mind the position or the market value of the stocks. This may entail keeping the stocks for few weeks and even months, but good returns usually follow.
Online Trading
Online Trading can be of any of the three aforementioned types but the sale and purchase of stocks is done via the Internet. Since this trading is through the medium of computer, an efficient computer with a 24-hour Internet connection is an essential requirement.
Other Resources
TheTechTrader.com - Real-time diary for day traders of breakout stocks, featuring trade alerts and minute-by-minute market insights by Harry Boxer, award-winning and widely syndicated technical analyst. Dozens of trading entries each session, with instant audio alerts, plus weekly picks with intermediate-term model portfolio. Free 15-day trial.
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