Day trading is a trading technique where you leave no positions open over night. Several different trading techniques have developed within the field of day trading, and they all have that one thing in common – all positions are closed before the trading day is over.
The typical day trader will make money from small price movements instead of relying on major price shifts.
Which assets are suitable for day trading?
Day trading can be done with a lot of different assets, but currency and stocks are the most common types.
Day traders typically seek out assets characterized by:
− High-volume trading
For a day trader, it is important to be able to close a position very quickly after giving the sell order. If the market doesn´t have enough liquidity and volume, you risk being stuck with positions open for longer than you planned, and this can easily turn a possible profit into a loss.
In recent years, many retail traders have begun to opt for trading products where a quick close is more or less guaranteed, such as Contracts for Difference (CFDs). With a CFD, you can gain exposure to assets (currency, cryptocurrency, company shares, options, commodities, etc) without actually owning the asset.
Day trading strategies
Here are a few examples of common day trading strategies.
Range trading is common among day traders that utilize technical analysis. An asset has a range when the price movements tend to move up and down but stay within roughly the same high point and low point for a period of time. The low point is known as support (as prices are reluctant to go lower) and the high point is called resistance (since prices are reluctant to move higher).
Identifying when there is an increased risk of the price breaking through its support and/or resistance is also important for range traders.
News have a tendency to cause volatility; either only for a certain asset, for market segments or for a whole market. Certain news may for instance only impact the price of a certain company share, other news impact a whole industry, and some new just cause a general upset for the whole stock market.
There are day traders that have learned how to utilize these various types of volatility to yield a profit. They pay special attention to planned news releases (e.g. quarterly reports, governmental policy changes, etc) but are also on the alert for unplanned news events.
Scalping is a technique where the day trader opens a very large number of positions and closes them again within a few seconds or minutes. Scalpers seek to profit from minute price changes, and this technique was developed as a way to reap profits in fairly stagnant markets.
A scalper will typically make only a tiny profit on each profitable trade, but the accumulated profits can be large due to the high number of trades.
High-frequency trading requires a specialized computer program capable of carring out very rapid transactions based on analytical data from complex algorithms. When market conditions line up with the assigned preferences, the trades will take place automatically.
Can I use leverage for day trading?
Using leverage is very common among day traders and a lot of online brokers offer leverage for day traders.
When you use leverage, you borrow money from your broker to open a position. You put some of your own money into the transaction, and the rest is borrowed from the broker. This means that you risk losing money you never had, and end up in debt.
Using leverage for day trading is very tempting, since opening large positions make it easier to make substantial profits from small intraday price movements.
• You buy 10 shares at $48 and sell them at $49. You risked $480. The profit is $10.
• You buy 1,000 shares at $48 and sell them at $49. You risked $48,000. The profit is $1,000.
Can I use technical analysis for day trading?
Yes, technical analysis is commonly used among day traders. Since day traders aren´t long-term investors, they are chiefly interested in short-term market movements, and many will use technical analysis to spot market patterns.