What is Day Trading?
Day trading has a bad reputation. Old school investors shy away from the practice, dismissing it as a high-risk scheme with poorly justified reward machinations. Outsiders and news media outlet tend to hype the strategy as a can’t miss, “get rich quick” schematic that unwittingly helps scammers and con artists prey on suckers that fall for the hype. Some may even experiment with the practice with an approach that is not unlike what may be seen from a blackjack table in Vegas. Even with this vast multitude of baggage, those that look past it all will find day trading can be a useful tool to gain profits on the market, provided they go about things a proper, honorable way.
A Brief Description of Day Trading
As the name suggests, day trading is the buying and selling of stock within a single trading day. Investors that deploy this tactic will use significant amounts of leverage and various short-term trading strategies to take advantage of small price movements in stocks or currencies that are deemed to be highly liquid. While practitioners of the approach tend to do their thing on the stock market or the forex market, the strategy can be deployed anywhere in any marketplace around the globe.
What Day Traders Are Really Like
Day traders are frequently perceived to be loose Mavericks of ill repute. However, reality paints a decidedly different picture. Those that engage in day trading are usually well-educated, well-funded types whose presence keep the market running efficiently while they provide a great deal of the markets’ liquidity.
Drilling down a bit, serious day traders will typically have the following attributes:
Experience and solid knowledge in the marketplace – Day trading is not for those who are new to the world of the stock market, nor is it for those that don’t have a firm grasp on how things work. Investors that think they can waltz right in and use the practice to make gobs of cash simply won’t last too long.
A sufficient amount of capital – People that think of day trading as some get rich quick scheme is flubbing on one key element. That is, real day traders don’t enter into the practice expecting to make money. The pros use risk capital to get the job done, and they can afford to lose it should things go south. This does two things for serious day traders: Firstly, it protects them from experiencing severe financial damage; secondly, it keeps their emotions in check, which is a problem when it comes to the fast-paced world of day trading. The law dictates some of this element; there are various mandates the market has in place that make it somewhat easier to day trade when being backed by significant capital.
A clear cut strategy in place – Day trading success is not predicated on a hypothetical roll of the dice. Successful investors will use various strategies to not only find tradeable stocks but also to help them determine when they need to be bought and sold. Some of the strategies commonly used include trading news, arbitrage, and swing trading.
A lot of discipline – Perhaps the toughest part of being a successful day trader is to stick to the game plan you’ve created. Sticking to your plan is tough because day trading’s fast pace and associated thrills tend to dangle carrots that are tough not to chomp. However, lacking the discipline needed to prevent plan deviation will only lead to sorrow – and a depleted bank account.
Day traders will either work by themselves or for a larger institution, with most falling in the latter category. Those fortunate to work for more major organizations have the goods that individual traders usually don’t, like massive amounts of capital and pricey analytical software. They’re also the ones that typically pluck easy profits that can be found via news events or arbitrage opportunities. Because of the way things are set up, they tend to pounce on these less risky opportunities before individuals even have the chance to react. Because of this, individual will work on their own or use a brokerage to try and mine profits from riskier stock situations, using technical analysis, swing trades, and leverage to mitigate some of the risks while capturing a decent profit.
Day Trading Tools
Day trading may look like a whiz-bang operation because of its speed. However, it’s a complex beast that requires several tools to be successful. For instance, day traders will bury themselves in multiple news sources to feed off information; data that is essential to target good stocks and their potential entry and exit points.
Analytical software is also an enormous necessity for day traders. Scanning software is especially the case for day traders that rely on using technical indicators. The software may contain features like automatic pattern recognition, broker integration, and programs that utilize genetic algorithms and neural networks. As one may guess, this software costs a pretty penny. However, they also tend to hold up the principle of “pay a little now or pay a lot later.” Of course, in this case, the “little” is a lot and the “lot” is pretty disastrous.
Without these practical tools, day traders are just gambling. It’s important that the new day trader realizes that even if they don’t have the tools, the pros do. As such, jumping into the day trading game blind will end poorly.
Still Not the Most Respected Game in Town
Day trading is still a controversial practice, and its practitioners are still viewed with suspicion and disdain in some circles on Wall Street. The practice is undeniably here to stay, even if some of the people that try to use the tactic as a means to fill their pockets rapidly will disappear from the market sooner than later. If you’re a studious investor that has the willingness to seriously study the market and a strong sense of discipline in the face of fast action, you may find day trading to be a terrifically effective market strategy to use.
A Day Traders’ Daily Grind
If day trading resembles the Wild West to the untrained or uneducated eye, then it makes sense that the practice’s practitioners are viewed as cowboys. Because so many well-meaning and nefarious sources paint a picture of day trading as being a “get rich quick” schematic, there’s a tendency to think of the strategy as a conduit for lawlessness, undisciplined behavior, and other forms of shady shenanigans. All one needs to do is take a long, hard look at the daily grind of a serious day trader to know this is a false representation. Authentic day trading is hard work that demands a lot of time and effort to be successful.
A Jam-Packed Day
The first thing that must be realized about a day trader’s daily grind is that it’s an all-day commitment. Successful day trading is simply not designed to allow traders to randomly pop in to enter a stock and exit it a couple of hours later. Its right structure demands the development of a strong, smart strategy whose parameters stretch out well before the opening bell.
The Work Before the Market Opens
Savvy day trading investors will get their day started a few hours before the market even opens at 9:30 AM Eastern time. This time frame is where studious day traders open newspapers, surf various reputable financial news websites or turn their TVs to financial-driven channels like Bloomberg or CNBC to get the latest news on any market-shaking or shifting events. The information ascertained from these sources are vital for shaping day traders’ plan of attack, from honing in on particular stocks to getting a bead on how the market may move during the day.
Day traders will also tap into resources like futures markets and broad market indexes to help them anticipate market or sector trends. They’ll also scour economic calendars to determine what financial reports are being released during the day, and whether or not they will have an impact on their potential targets.
After gathering sufficient data, day traders will sit down at their workstations and use various analytical programs and platforms to help them make heads or tails of the info. There are several layers to this process, from connecting with their trading platform to making sure all tech peripherals are working properly. This last component is especially critical – one lagging mouse could spell the difference between a good trade and a great trade for a day trader. Once everything is set up and ready to go, day traders will start scanning the markets for profitable trading opportunities. The ones that are determined to match pre-determined criteria are put on the day traders’ watch list.
When the Opening Bell Rings
Because the market tends to be extremely volatile during its first half-hour of operation, day traders usually play a game of “hurry up and wait.” In other words, they’ll hold off on acting on their morning’s research until the market calms down and settles into its groove.
Once the market settles, it all becomes a matter of paying close attention to the market’s every move, as savvy day traders will hone in on trading opportunities. Their research obviously drives Their focus, but it’s also dictated in part by their experience and their intuition. There’s no time for second-guessing or doubt to creep in during these times – a few seconds is all it takes for a winning trade to turn into a losing trade.
There are plenty of moves that day traders make in the first hours of the market. For instance, traders will often submit orders for profit targets and stop losses at the same time to protect themselves against adverse price moves. As early morning shifts into late morning, a lot of day traders will begin targeting potential reversal opportunities. Because the market tends to slow to a crawl at around lunchtime, day traders are usually hopeful that their positions will hit their profit targets before lunch.
Leading Up to the Closing Bell
When the markets pick up the pace after lunch, day traders will attempt to seek out extra trading opportunities before the markets shut down at 4:00 PM Eastern time. It also becomes a bit of a race for them to close any positions entered during the morning, so they aren’t left “holding the bag” with a potential overnight loss. As the closing bell approaches, day traders will close all of their open positions and cancel all of their unfulfilled orders. When the market shuts down for the day, day traders will either have a profit, loss or will have broken even. Whatever the outcome, savvy day traders will take whatever happens in stride. Even in the breakneck world of day trading, wealth is not built in a day. It’s still built up over time.
Post Market Work
The time after the closing bell sees day traders in workshop mode, analyzing what went right, what didn’t work, and what could have been done better during the session. This information is typically kept in a trading journal, which could provide critical information that can be used to refine and grow strategies when kept properly. It’s also not uncommon during this time for day traders to turn on the TV or hit various financial websites to get a recap of the day’s market events. This information could be used to help them start gearing up for the next day.
Not an Easy Task
It takes a lot of diligent work to be a successful day trader. Without sufficient research and a commitment to analyze the market and personal performance in the hours before and after the market’s opening and closing bell, day traders will find themselves on the fast track to financial devastation. And just like any form of market strategy, putting in the work still, doesn’t guarantee you’ll be hauling in profit at the end of the day. Still, those that can commit to the grind that proper day trading demands may find the practice to be an excellent way of maximizing profit and minimizing risk in the long run.