Day Trading Explained

Day trading is the buying and selling of different financial instruments like currencies, stocks, options, and future to make a profit from the difference between the selling price and the buying price. However, day trading slightly differs from other forms of trading in that its positions are seldom held overnight or when markets are closed.

A while back, day trading was only available to financial institutions like banks as they were the only ones that had access to market data and the exchanges. However, recent technology — the internet in particular – has made it possible for individual traders to have direct access to market data and the exchanges and to trade at low costs.

Day Trading Styles

There are several day trading styles available and range from the longer term swing and position trading where positions are held throughout a trading day to shorter-term trading like scalping, which is where traders hold positions for no more than a few minutes. A majority of day trading systems are quite flexible and can have several open positions for anywhere between a couple of minutes to several hours, depending on how a particular trade is doing – that is if it is profitable.

While some traders use multiple trading styles, a majority of day traders prefer using a single type of trading and stick to it.

It is also worth noting that there are several types of trades in day trading. These include ranging trades, trend trades, and counter-trend trades.

  • Ranging trades go back and forth between a set of prices and are generally used when the market is on a sideways move.
  • Trend trades are made following the direction the current price movement is going – that is, buying when the price is going up.
  • Counter-trend trades, on the other hand, are trades made against the direction of current price movements – that is, selling when prices are going up.

A majority of day traders will pick a single style of trading while others prefer using several types and choose the best one to use depending on current market conditions.

Apart from type and style of day trading, there are a few more differences between day traders. Some prefer making many trades through the course of a trading day while others prefer waiting for the “right” conditions to trade and often make one trade a day. Regardless of the number of trades made per day, the trading process used and the goal, which is to make a profit, remain the same.

Day Trading Markets

There are lots of markets, or financial instruments, that can be used to day-trade, and are generally offered by exchanges from around the globe. The main markets when it comes to day trading include options markets, stock markets, futures, and currencies. Within these markets, there are “sub-markets” that are based on stock indexes (like the DAX and the Dow Jones), commodities (oil and gold), and currency exchange rates (e.g., Euro to US Dollar exchange rate). Day traders can gain access to all of these markets and exchanges via direct access brokers – they offer day traders direct access to the exchange of their choice, allowing them to trade much faster and at lower costs.

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