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What is Day Trading?
Popularized during the bull market of the late 1990s, day trading is the practice of buying and selling stocks over a very short period of time, typically one day. Once the domain of floor traders and investment banks, the availability of inexpensive computers and fast Internet access has brought day trading to the masses.
Day trading strategies typically follow one of two approaches: beating the spread or attempting to catch short term trends. The spread is the difference between what is being offered for a stock (the bid) and the price being asked for the stock (the ask). Spread trading attempts to buy at the bid and sell at the ask, over and over again. Spread traders may make hundreds or even thousands of such trades a day. With the advent of spreads as low as one penny, spread trading has become much less profitable than it once was.
Catching short term trends, or swing trading, generally involves following technical indicators to suggest when a trend may be starting or coming to an end. Technical indicators are a mathematical simplification of market movements that some traders feel provides them with insight into future market direction. Swing trading requires far fewer trades than spread trading, with the expectation that any given swing trade will generate a larger profit than one would see in a successful spread trade.
A recent development in day trading is the concept of the ECN rebate. ECNs are completely electronic exchanges with extremely low commissions and very fast execution of trading orders. To encourage traders to execute orders on their networks, ECNs may offer incentives to traders in the form of a rebate. In some cases, this allows a day trading individual to profit from simply buying and selling a stock at the same price.
With the collapse of the US equity markets in 2000, day trading garnered a reputation as being inherently risky. In response, the Securities and Exchange Commission (SEC) moved to restrict day trading of stocks to accounts of over $25,000. In response, day trading activity moved to futures and commodities markets where the restrictions do not apply.
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![Day trading is the practice of buying and selling stocks over a very short period of time, typically one day.]()
By: Jasmin MerdanDay trading is the practice of buying and selling stocks over a very short period of time, typically one day. -
![In day trading, the investor will buy and then quickly sell the asset; although the potential return is small, the risk is also restricted.]()
By: cheekywemonkeyIn day trading, the investor will buy and then quickly sell the asset; although the potential return is small, the risk is also restricted.
Discussion Comments
I think the restrictions that were made on day trading by the SEC were for the better. I know with my discount brokerage account I can only do a few day trades within a 7 day period. It is nice to have the option to make a day trade once in awhile if you need to, but I think it should be for those experienced investors if you are going to try and make a living day trading.
Many inexperienced investors who tried day trading on margin really got in trouble. It doesn't take long for that to happen if your position moves against you - especially if you have borrowed money to make the trade in the first place.
I would not recommend beginning traders to start out doing day trading. You should get a much better understanding of the overall market before you start with something as risky and volatile as day trading. If you get to the point where you want to invest some money in day trading, I would start out with a small amount to see how you do before investing a larger amount of money.
There are many day trading sites available on the web where you can do research and learn about the process. Many sites also offer virtual trading where you can practice with virtual money so you get a good idea of how it works before starting out with your cash.
To be successful at day trading, you must commit to watching the market the whole time you have an open position. The market can change so quickly in one day and several times during the day, that it is hard to have much success if you take your eyes off what is going on.
I certainly don't have any day trading secrets like you see many programs offering you - just the school of hard knocks. Day trading can be profitable, exciting, and frustrating, all in one. You will never be profitable on every trade, but if your losses out number your profits for very long, you might want to look at another way of trading.
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