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What Is Day Trading?

Day trading is a strategy where the traders open and close positions the same day. Day traders do not hold their positions overnight, and that is why they close their positions in the evening and open them again in the following day.

Basically, day trading makes small profits, and it's, therefore, a short time strategy with intraday price fluctuations.

Day trading is a direct contrast to the traditional techniques where investors buy low, hold them then sell high. Day trading strategies force traders to think differently from the other investors by focusing more on their currencies price action instead of its long-term potential. Day trading requires vast technical analysis, and it also needs the trader to stay updated with news announcements which might fluctuate the market prices.

Day trading description

The main aim of day traders is to benefit from the small changes in price. When the market becomes volatile, it becomes favourable for the day trader. A successful day trader must possess excellent knowledge of stocks, the tools needed for the trading as well as the platforms. Day traders make profits by finding the difference between the bids and ask spread. They should sense an imminent movement for their products and then decide to buy it above or sell it below the ask or the bid price.

There are two main types of day traders: those who work with a financial institution and those who trade individually. The individual day traders manage other traders' money or use their own cash to do so. They, however, lack enough resources which prevent them from competing with the financial institutions day traders.

Popular day trading strategies

  • Scalping- most day traders sell once the trade becomes profitable, that is after they cover the interest costs, overheads, and the commission.
  • Fading- traders short sell their stocks with the anticipation that other day traders will take an extended position.
  • Daily pivots- in this strategy, traders anticipate that the daily trade range will make the majority of the traders to buy at low prices and sell at high prices
  • Momentum- day traders purchase a particular commodity if its volume is moving upwards. They then sell it when the price trends downwards with the volume.

Pros and cons of day trading

Pros

  • Traders can speculate on different types of markets such as forex, futures, commodities, and stocks. Shares are especially popular in day trading because they close their positions at the end of the day to reduce the risk of overnight market gaps.
  • Day trading causes independence since people who have the online trading accounts are real entrepreneurs, reaping benefits of their decisions.
  • The expert day traders can reap very high profits if they maintain the right trading attitude and discipline

Cons

  • Day trading is most suitable for part-time traders. This is because it involves quick decisions and completing a large number of trades per day. It requires dedication and focus hence it's only suitable for the full-time traders.
  • Day trading is subject to market risks which become substantial when leveraged instruments are used.
  • Day trading causes a psychological addiction since it's similar to gambling. Some of them try to be competitive and try to stay above intelligent. By so doing, they develop a psychological addiction.

Final word

In the past, this type of trading was only done by the large investment firms. However, the increased margin trading prominence and technology amplifies both losses and profits, therefore, making it one of the most famous trades. Several derivative products allow the day traders to capitalize on the negatively performing markets and the positive ones too. However, while many traders are attracted by the possibility of becoming wealthy within a short time, the unfortunate fact is that financial loss, depression, and failure are the possible outcomes. A day trader should first understand the basics so that they can learn how to manage the risks involved.

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