What Is Day Trading?
Billions of dollars change hands every day in global stock markets, and some people make their living taking a little out every day. Those who imagine they can get rich quickly by making a few hot trades, however, usually end up losing everything. The nature of markets is to offer long, uneventful periods punctuated by hair-raising moments of sheer excitement. And in the world of investment professionals, no one pays more attention to every up and down of the market than the day trader.
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Function
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Many different techniques can be utilized by the day trader, but the goal is always to profit from intraday volatility. Even if stocks close right around where they began, swings of several percent are not uncommon, and day traders exist to capture those points. The best traders usually assign themselves a fixed daily or weekly profit goal and only take as much risk as is necessary to achieve it.
Features
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The defining characteristic of day traders is buying a security and selling it that day, ultimately owning nothing. This kind of short-term trading can be very stressful and demands great concentration. Inevitably, it involves hours in front of a computer, or several computers, watching markets in real time, interpreting economic data and studying historic charts after hours. While some pure day traders exist, most dabble in day trading techniques through options or futures to hedge more long-term investments. And contrary to the popular perception of the lone trader in a home office, most day trading is conducted by professionals in large-scale operations.
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Types
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Almost all day trading strategies involve chart-based technical analysis of some kind. They seek prices that act as crucial pivot levels and patterns, such as candlestick formations or Elliott waves, that suggest future price changes. Some day traders will stick to one or two particular strategies with which they are comfortable; others attempt to be more opportunistic. For example, one of the few day trading approaches that doesn't involve chart-reading is simply chasing momentum, "following the herd" and piling into a popular trade for no reason other than that it's happening. Momentum traders look to identify intraday moves early on, possibly noting stocks in the news, and capture as much of a move as possible before selling.
Warning
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The Securities and Exchange Commission calls day trading "an extremely stressful and expensive full-time job." And despite the fact that some individual day traders make good money, the vast majority are eventually wiped out completely, losing all of their investment capital. Among the challenges of day trading is maintaining discipline among fast-moving markets with real money on the line. Some find it difficult to balance monitoring global 24-hour markets with other aspects of their lives.
Potential
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Pure day traders get a bad name on Wall Street because they're not interested in ownership or investment. Capital requirements are usually applied by stock brokers to "pattern day traders"--that is, those individual traders who complete several day trades in a short period. In general, though, it's impossible to limit day trading without hurting the whole market, because many large firms partake in the technique and the higher volume of trades helps maintain liquidity. It also runs contrary to the investment philosophy that risk should be balanced with potential reward. As one of the most risky trading styles, day trading will always be around in some form.
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