What Is Day Trading?

by Manny Backus, Day Trading Strategy Expert

According to the SEC, the definition of day trading is “the buying and selling of stocks throughout the day by those who hope that stocks will continue climbing or falling for the little time they own the stock.”  Generally speaking, holding a stock for a matter of seconds to minutes is what drives the day trader to hopefully amass a quick profit.                             

What does the day trader buy?  Usually futures, options, currencies, and stocks that have the potential, within one’s day time, of either rising or falling as it relates to the buying and selling of said stock. 

With software and technology, day traders have the ability to access the same information as those who trade in the Stock Exchange on a daily basis.  Day traders often work from home and can have the market data to be able to make the same type of trades as their counterparts.  Thus, the difference between day traders and investors is quite different.

How is day trading implemented?  Most day traders incorporate two LCD monitors, one which will have chart analysis data and the other used for actual trading.  It is estimated that day traders make over one hundred trades per day and it is typical for a day trader to work with stock within the day and not hang on to it until the next.  As mentioned earlier, the stock may be held for seconds to minutes. 

Here is an example of a typical trade.  A trader may purchase 500 shares of ABC stock at the start of the bell.  Within seconds or minutes, or as soon as the price rises – whether it’s ¼ or a ½; the trader will sell the stock.  Thus, depending upon the success of a day trader and his interest in this particular endeavor, he or she may sit at the computer all day or part of the day scrutinizing and analyzing the market’s progress.

Most traders deal with the NASDAQ market, since the stocks tend to be less expensive than NYSE or AMEX, but there is also more risk to these stocks.  Therefore, a stock could move in either direction in the blink of an eye or if the trader steps away from the computer.  Basically, while there are day trader’s whose interest is not in one particular company or its forecast of earnings but rather in the movement of the stock from second to second, there are other day traders who research the company, look at charts and technical analysis and base their buy or sell on the results.

Just as there are different types of markets in which to trade, there are as many types of trades as well.  For example, a day trader who watches the direction of the stock as it relates to price movement is known as a trend trade.  So too, for those who depend upon the market condition on any particular day, especially when it is fluctuating, this is known as ranging trade.  Counter-trend trades are those made in direction opposition to the market movement.

In addition, while there are some day traders who enjoy a multitude of trades per day, others will analyze and choose specific times and conditions conducive to making a profit, thus may only perform one or two trades per day.

Day trading is not for the meek, but is geared toward those who understand market trends, have the capital to invest in stocks and currencies, and know their limitations.  While there are certain risks to day trading, knowing how to trade; and understanding the risks involved is crucial for anyone considering day trading as a full time “job.”  According to the SEC, “day traders typically suffer financial losses in their first months of trading.”
Thus it is advised only to trade that which you can afford to lose, and not dip into life savings or retirement benefits, or other savings that may have been accrued over the years.

While stock investors own the stocks, day traders are making a determination whether or not a stock will rise or fall on any given day.  In addition, vigilance must be utilized on a continuous basis to ensure a rise in stock prices is not missed by a phone call or other interruptions that can have a disastrous effect on the buying or selling of the stock.

Day trading should be embarked upon with a sufficient knowledge base of the market, a keen awareness of one’s own financial status, and dealing with a brokerage firm that has a proven track record of success.  These tools are important to a day trader’s profit margin, and should not be entered into lightly.

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