Day trading is a trading technique where you never leave positions open over night. Day traders seek to profit from short-term price movements instead of doing longer-term investments.
Day trading is usually very intense during the active parts of the trading day, but you close all positions before the trading day is over so there is no need to lay awake at night worrying about some investment that might be going sour.
Which assets should i day trade?
Since immediate order execution is very important for day traders, they tend to select assets characterized by high liquidity and high volume. When they give a close order, they want the whole position to sell in the blink of an eye. High liquidity and high volume assets are also more likely to produce market movements that are beneficial to day traders.
Day trading is especially common on the stock market and the forex market.
Selecting a broker and platform for day trading
The need for super rapid order execution is important to keep in mind when you select a broker and platform for your day trading. Do not stick with brokers and platforms that slow you down – they can cost you a lot in the long run since day trading is a trading style where every instant can be of essence.
The nature of day trading also means that you shouldn´t use a broker who charges you a hefty flat-free each time you open or close a position, unless you are trading with huge amounts of money and make big profits on each profitable trade. For the avarge hobby retail day trader, it is important to select a broker and broker account type that wont eat up all the small profits from each profitable trade.
It is important to learn about applicable tax law before you start day trading. You need to be smart and do things the right way to avoid certain costly pitfalls.
Is scalping day trading?
Yes, scalping is a form of day trading since no positions are kept open over night. In everyday speech, however, the term day trader is typically used for a trader who keeps their positions open a bit longer than the typical scalper.
A scalper opens and closes a large number of positions within a very short time frame, typically seconds or minutes. Scalpers profit from minute price changes and make a miniscule profit on each individual profitable trade. Due to the large number of trades, the combined profits can be large. Unlike many other traders, scalpers tend to do best in fairly stagnant market conditions where not much is going on in either direction.
What is high-frequency trading?
High-frequency trading (HFT) is a type of day trading where a specialized computer program opens and closes a very high number of positions in a very short time. The program doesn´t just carry out the trades; it is also responsible for continously analyzing the market and utilize complex algorithms to identify the right moments for high-frequency trading.
Can day traders use leverage?
Yes, day traders can use leverage, and many of them do.
When you use leverage, you borrow money from the broker to carry out a trade.
Example: You buy 1,000 shares at $20 for a total of $20,000 but you only contribute with $500 from your trading account. The rest of the money ($19,500) you borrow from the broker.
Since day traders typically exploit small price changes, they like to open big positions, and many use leverage to make this possible.
Of course, leverage adds a new element of risk for the trader, since it means putting borrowed money at risk. If you never trade on credit, you can never lose more than what you have in your account. When you start using leverage or other forms of credit, you can end up losing more money than you ever had in your account.
It is very important to never risk money you can´t afford to lose. Not only is it dangerous for your personal finances, but it is also likely to make you a worse trader since you will be emotionally invested in a different way compared to the traders who are risking money they can afford to lose.
Novice day traders should, in our opinion, stay away from leverage. Also remember that an experienced swing trader or long-term investor can be an inexperienced day trader.