What Is Intraday Trading?

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The stock market experiences considerable intraday volatility.
The stock market experiences considerable intraday volatility. (Image: stock market analysis screenshot image by .shock from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Intraday trading, often called simply "day trading," is the practice of buying and selling a financial product on the same day. It is often mentioned in reference to the stock market, but you can also day trade many other types of financial vehicles. It is a high-energy field that carries substantial risks but also offers considerable profit opportunities. Successful day traders can earn a good and consistent living.

Definition

Day trading is a tightly regulated practice in the stock market. Thus, it requires a strict definition. The Financial Industry Regulatory Authority, or FINRA, defines day trading as the buying and selling of a security on the same day. The buying and selling may occur in either order. If you "short" stock, which means you sell stock you do not yet own, and then buy it back later in the same day, this is also a day trade. Day traders can profit from intraday declines in any stock in this way.

Pattern Day Trading

People who day trade stocks, or securities, are subject to strict FINRA regulations. Anyone can day trade occasionally. But if you complete more than three day trades in a rolling five-day period, brokers must flag your account as a "pattern day trading" account.

Once this is done, new rules apply. First, your account is immediately suspended if it does not have at least $25,000 in assets, including cash and stock. Second, you must convert your account into a margin account if it does not already use margin. Margin is the process by which your broker lends you cash for every stock transaction. Thus, you can purchase more shares than your cash would normally allow.

Leverage

When your account is automatically converted into a pattern day trading account, you immediately get access to "4x" leverage. This means the margin allows you to purchase up to four times the stock shares as your cash balance allows. A $50,000 account can buy up to $200,000 shares.

Leverage allows day traders to meaningfully profit from small fluctuations in stock prices over short periods of time. However, as the potential for reward increases, so too do the risks. A bad trading decision that is highly leveraged can cause substantial loss very quickly.

Account Suspension

If you fail to close a day trade before the market's end at 4 p.m. New York time, your account is suspended until enough funds are deposited to cover the size of the trade without 4x leveraged margin. It is important for all day traders to thus make sure they close any large positions before the session's end. Smaller positions require less capital, and the cash in the account miht be enough to satisfy the margin demands.

Suspended accounts that do not receive a new cash deposit are reactivated after 90 days. Similarly, pattern day trading accounts can switch back to non-pattern accounts after 90 days.

Intraday Indicators

Day traders tackle the market differently than long-term investors do. They use information that is not applicable to long-term results. One of the most popular day trading indicators in the "Tick," a data stream distributed by the New York Stock Exchange. The Tick shows at any point, any time, the number of stocks that are advancing minus those declining.

When the Tick reaches extremes, day traders can often accurately predict a short reversal in prices across the market. But no day trading tool is foolproof, and the risks always remain high. It takes considerable experience to develop a winning strategy in day trading.

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