A day trader is a trader who adheres to a trading style called day trading. This involves buying and subsequently selling financial instruments (e.g. stocks, options, futures, derivatives, currencies) within the same trading day, such that all positions will usually be closed before the market close of the trading day. Depending on one’s trading strategy, trades may range from several to hundreds of orders a day.
Types
There are two types of day traders: institutional and retail. Both institutional and retail day traders are described as speculators, as opposed to investors.
Institutional day traders work for financial institutions and have certain advantages over retail traders due to their access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges, expensive and high-end trading and analytical software, support teams to help and more. These advantages give them certain edges over retail day traders.[1]
Retail day traders use retail brokerages and generally trade with their own capital.[2]
Auto traders use of computer programs and other tools to enter trading orders automatically. Because this all happens with the help of the computer algorithm, it is also called algorithmic trading.[3]
Pros and cons
Day traders’ objective is to make profits by taking advantage of price movements in highly liquid stocks or indexes. According to Adam Leitzes and Josh Solan (Bulls, Bears and Brains: Investing With the Best and Brightest of the Financial Internet), the more volatile the market, the more favorable the conditions for the day trader, regardless of the longer-term direction in the market. Unlike some fund managers and investors who hold positions over longer periods of time and are averse to selling equities short, the day trader is not committed to a position and can adapt to whatever condition the market is in, at any given moment.[4]
A day trader who wants to achieve success needs appropriate knowledge, equipment, tools and markets together with the ability to trade the right electronic trading platform. A day trader with the right information might be able to succeed, otherwise, success will go to the other person in the transaction or to the broker, if he happens to be the best informed person in the transaction.
Also, a successful day trader needs to know which stocks to trade, when to enter the trade, and when to get out of the trade. Part of this knowledge is to find those stocks with liquidity and volatility, in order to generate profits.[5]
Markets for day traders
There are many different markets for day trading, including futures, forex, stocks, options and etf’s[6]. Because of the short time horizon, day traders will look at the market with a different perspective than a long term trader but both types of traders can trade in the same markets.
Previously seen as a niche market, or something for institutional speculators, the foreign exchange market (forex) by 2010 had increased exponentially to an average daily volume of about $4 trillion USD worldwide,[7] with spot retail forex trades accounting for an estimated 10% of that volume.
Possible reasons for the surge in retail forex trading include the now high margin requirements in individual U.S. equities (stocks) for day traders imposed after 2001,[8] and apparent overt manipulation of commodities markets by banks,[9] making commodity futures markets a less desirable market in which to participate. However exchange-traded funds (ETFs) have gained rapidly in popularity, being seen as a less expensive way to trade all futures markets as well as some more exotic markets not otherwise available to retail day traders.
The amount of margin required by most retail forex brokers in contrast is negligible. With full size lots (100,000 units of currency), mini-lots (10,000) and even micro-lots (1,000) all with up to as much as 1000:1 leverage being available (although not in the US where the maximum is now 50:1 after a ruling by the CFTC[10]), means a retail day trader could in theory trade a single micro-lot of USD for the cost of $20. Realistically most brokers require a minimum deposit of $500. The sheer volume of the forex market makes it a difficult one to manipulate in any meaningful way, even with the money available to large proprietary and institutional trading interests.
See also
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References
- Davis, E. Philip; Steil, Benn (2001). “Part IV: Institutional Trading”. Institutional Investors. United States of America: MIT Press. p. 378. ISBN 0-262-04192-8. Retrieved 26 March 2012.
- “Retail Investor”. Investopedia. IAC. Retrieved 29 June 2016.
- “Automated Trading and What an Auto Trader does”. Archived from the original on July 23, 2010. Retrieved June 1, 2010.
- Leitzes, Adam; Solan, Josh (6 December 2000). “How Day Traders Survive”. Forbes.com. Retrieved 26 March 2012.
- “Day Trading Strategies For Beginners”. Retrieved June 1, 2010.
- Sarah., Potter,. How you can trade like a pro : breaking into options, futures, stocks, and ETFs. ISBN 9780071825498. OCLC 857402109.
- Daily forex trading hits $4 trillion a day
- “Day Trading Margin Requirements: Know the Rules”. FINRA.org.
- Gray, Michael (11 April 2010). “Metal$ are in the pits”. New York Post.
- Gary, R. David (2010-08-30). “CFTC Releases Final Rules Regarding Retail Forex Transactions”. CFTC.gov. Washington, D.C.: Commodity Futures Trading Commission. Retrieved 2016-04-26.