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Day Traders & Short Sellers (Stocks)
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What Is a Day Trader? 2 weeks 2 days ago #213

A day trader is a type of trader who executes a relatively large volume of short and long trades to capitalize on intraday market price action. The goal is to profit from very short-term price movements. Day traders can also use leverage to amplify returns, which can also amplify losses.


While many strategies are employed by day traders, the price action sought after is a result of temporary supply and demand inefficiencies caused due to purchases and sales of the asset. Typically positions are held from periods of milliseconds to hours and are generally closed out before the end of the day, so that no risk is held after hours or overnight.

Basics of a Day Trader
There is no special qualification required to become a day trader. Instead, day traders are classified based on the frequency of their trading. The Financial Industry Regulatory Authority (FINRA) and New York Stock Exchange (NYSE) classify day traders based on whether they trade four or more times during a five-day span, provided the number of day trades is more than 6% of the customer's total trading activity during that period or the brokerage/investment firm where they have opened an account considers them a day trader.

A day trader often closes all trades before the end of the trading day, so as not to hold open positions overnight. A day traders' effectiveness may be limited by the bid-ask spread, trading commissions, as well as expenses for real-time news feeds and analytics software. Successful day trading requires extensive knowledge and experience. Day traders employ a variety of methods to make trading decisions. Some traders employ computer trading models that use technical analysis to calculate favorable probabilities, while some trade on their instinct.

A day trader is primarily concerned with the price action characteristics of a stock. This is unlike investors, who use fundamental data to analyze the long-term growth potential of a company to decide whether to buy, sell or hold its stock.


Price volatility and average day range are critical to a day trader. A security must have sufficient price movement for a day trader to achieve a profit. Volume and liquidity are also crucial because entering and exiting trades quickly is vital to capturing small profits per trade. Securities with a small daily range or light daily volume would not be of interest to a day trader.

Pattern Day Trader Designation
A pattern day trader (PDT) is a regulatory designation for those traders or investors that execute four or more day trades over the span of five business days using a margin account.

The number of day trades must constitute more than 6% of the margin account's total trade activity during that five-day window. If this occurs, the trader's account will be flagged as a PDT by their broker. The PDT designation places certain restrictions on further trading; this designation is put in place to discourage investors from trading excessively.

Day Trader Techniques
Day traders are attuned to events that cause short-term market moves. Trading the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings, or interest rates are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded, usually with sudden, significant moves, which can benefit day traders.

Another trading method is known as fading the gap at the open. When the opening price shows a gap from the previous day’s close, taking a position in the opposite direction of the gap is known as fading the gap. For days when there is no news or there are no gaps, early in the morning, day traders will take a view on the general direction of the market.

If they expect the market to move up, they would buy securities that exhibit strength when their prices dip. If the market is trending down, they would short securities that exhibit weakness when their prices bounce.

Most independent day traders have short days, working two to five hours per day. Often they will practice making simulated trades for several months before beginning to make live trades. They track their successes and failures versus the market, aiming to learn by experience.

Day Trader Strategies
Day traders use several intraday strategies. These may include:

Scalping: this strategy attempts to make numerous small profits on small price changes throughout the day, and may also include identifying short-lived arbitrage opportunities.
Range trading: this strategy primarily uses support and resistance levels to determine buy and sell decisions. This trading style may also go by the name swing trading if positions are held for weeks rather than hours or days.
News-based trading: this strategy typically seizes trading opportunities from the heightened volatility around news events and headlines.
High-frequency trading (HFT): these strategies use sophisticated algorithms to exploit small or short-term market inefficiencies up to several thousand times in a single day.
Advantages and Disadvantages of Day Trading
The most significant benefit of day trading is that positions are not affected by the possibility of negative overnight news that has the potential to impact the price of securities materially. Such news includes vital economic and earnings reports, as well as broker upgrades and downgrades that occur either before the market opens or after the market closes.

Trading on an intraday basis offers several other key advantages. One advantage is the ability to use tight stop-loss orders—the act of raising a stop price to minimize losses from a long position. Another includes the increased access to margin—and hence, greater leverage. Day trading also provides traders with more learning opportunities.

However, with every silver lining, there are also storm clouds. While day trading can be highly profitable, it still comes with plenty of risks.

Disadvantages of day trading include insufficient time for a position to see increases in profit, in some cases any profit at all, and increased commission costs due to trading more frequently, which eats away at the profit margins a trader can expect. Day traders that engage in short selling or use margin to leverage long positions can see losses amplify quickly, leading to margin calls.

Pros
Positions are usually closed at the end of each day, and are so unaffected by risk from overnight news or off-hours broker moves.

Tight stop-loss orders can protect positions from extreme movements.

Regular traders have access to increased leverage and lower commissions.

Numerous trades increase hands-on learning experience.

Cons
Frequent trades do mean multiple commission costs.

Some assets are off-limits, like mutual funds.

There may not be sufficient time for a position to realize a profit before it has to be closed out.

Losses can mount quickly, especially if margin is used to finance purchases. Margin calls are a real risk.

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What Is a Day Trader? 2 weeks 2 days ago #214

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There was once a time when the only people who were able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. However, with the rise of the internet and online trading houses, it's become easier for the average individual investor to get in on the game.


Day trading can turn out to be a very lucrative career (as long as you do it properly). But it can also be a little challenging for novices—especially for those who aren't fully prepared with a well-planned strategy. Even the most seasoned day traders can hit rough patches and experience losses. So, what exactly is day trading and how does it work?


There was once a time when the only people who were able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. However, with the rise of the internet and online trading houses, it's become easier for the average individual investor to get in on the game.


Day trading can turn out to be a very lucrative career (as long as you do it properly). But it can also be a little challenging for novices—especially for those who aren't fully prepared with a well-planned strategy. Even the most seasoned day traders can hit rough patches and experience losses. So, what exactly is day trading and how does it work?

There was once a time when the only people who were able to trade actively in the stock market were those working for large financial institutions, brokerages, and trading houses. However, with the rise of the internet and online trading houses, it's become easier for the average individual investor to get in on the game.


Day trading can turn out to be a very lucrative career (as long as you do it properly). But it can also be a little challenging for novices—especially for those who aren't fully prepared with a well-planned strategy. Even the most seasoned day traders can hit rough patches and experience losses. So, what exactly is day trading and how does it work?


Characteristics of a Day Trader
Professional day traders—those who trade for a living rather than as a hobby—are typically well-established in the field. They usually have in-depth knowledge of the marketplace, too. Here are some of the prerequisites required to be a successful day trader.

Knowledge and Experience in the Marketplace
Individuals who attempt to day trade without an understanding of market fundamentals often lose money. Technical analysis and chart reading are both good skills for a day trader to have. But without a more in-depth understanding of the market you're in and the assets that exist in that market, charts may be deceiving. Do your due diligence and understand the particular ins and outs of the products you trade.

Sufficient Capital
Day traders use only risk capital which they can afford to lose. Not only does this protect them from financial ruin, but it also helps eliminate emotion from their trading. A large amount of capital is often necessary to capitalize effectively on intraday price movements. Having access to a margin account is also key since volatile swings can incur margin calls on short notice.

Strategy
A trader needs an edge over the rest of the market. There are several different strategies day traders use including swing trading, arbitrage, and trading news. These strategies are refined until they produce consistent profits and effectively limit losses.

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What Is a Day Trader? 2 weeks 1 day ago #215

Stock market participants are often broadly divided into two categories: investors and traders.

While technically both are engaged in investing activity, it's the duration that tends to be the biggest dividing line. Investors often have longer time horizons, sometimes holding on to positions in stocks for years at a time. Toward the other end of the spectrum lie day traders.

If becoming a day trader interests you, here are a handful of points to keep in mind:

What is a day trader?
Why you might want to become a day trader.
What are the risks of day trading?
Requirements for day trading.
How to be a successful day trader.

What Is a Day Trader?
In the strictest sense, a day trader is someone who opens and closes positions during the trading day instead of holding them for longer periods of time. Within a day, trade time spans can vary widely – including durations of a minute, an hour or several hours.

Rather than focusing on a company's fundamentals, day traders pay more attention to technical charts of what the stock price is doing right now and how the price has behaved historically given certain conditions.

For example, a day trader might buy a position in a bankrupt company simply because there is an uptrend on a particular day, says Gust Kepler, CEO of trading software company BlackBoxStocks (ticker: BLBX).

Why You Might Want to Become a Day Trader
People tend to get enticed by day trading because they see a friend making money, says Nigam Arora, CEO at The Arora Report.

Those who are successful day traders can make more working a couple hours a day from their home on their laptop in the morning than they might at a 40-hour-per-week job, Kepler says.

"It can be very profitable for people who learn how to do it," he says.

What Are The Risks of Day Trading?
Although there are day trading success stories, the reality is that most people fail at it.

Kepler estimates that only around 15% of people who try day trading succeed, and he thinks that figure is probably high because, as a trading software provider, he's in a position to see a lot of success stories.

Arora puts the figure much lower, saying that perhaps 1% to 2% really become successful.

If you're day trading long positions in stocks, the risk is that "you lose all your money," Arora says. "If you're trying to short the market, you can lose even more; your downside risk is unlimited."

Day traders face the risk that they won't make enough money to cover the extra transaction costs that come with making a higher volume of trades.

"Academic studies performed on day traders across the globe consistently find that the vast majority of day traders are unsuccessful," says Robert Johnson, finance professor at Creighton University. "The central message was that trading is hazardous to your wealth."

There can also be a psychological risk to day trading if it is coupled with a gambling mentality that can lead to addiction. Both gambling and high-risk stock trading generate a rush of dopamine in some people. When the incentive becomes the dopamine-induced rush itself, investors become gamblers in the stock market.

"Day trading is no more likely to make you rich than a roulette wheel or a blackjack table," says Aaron Sherman, president with Odyssey Group Wealth Advisors. "And much like gambling, the more you do it, the more certain you are to lose."

Requirements for Day Trading
f you want to start day trading stocks, you'll need a brokerage account. Brokers are individuals or firms who charge for executing trades on behalf of their investors.

Day traders are probably going to choose the do-it-yourself (DIY) route and may prefer an online brokerage account or discount broker that enables investors to buy and sell investment securities through the broker's website or app.

The brokerage may also offer a trading platform that displays real-time news, allows traders to look at technical charts and provides scanning that shows which stocks are making the biggest moves.

Some platforms allow investors to place online trades directly with a brokerage for a fraction of the traditional cost or nothing, depending on the asset being traded.

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What Is a Day Trader? 2 weeks 1 day ago #216

How to Be a Successful Day Trader
Perhaps the most important skill set to have when day trading is the appropriate temperament.

Successful day traders are level-headed, able to follow rules even when money is at stake and good at pattern recognition, Arora says. Day trading also takes a lot of discipline, Kepler adds, and even those who are well educated can find themselves overtrading instead of quitting while they're ahead.

If you feel like you have what it takes, then you'll want to educate yourself. There are plenty of free online trading resources, not to mention books at the library, so do your homework if you're thinking about paying money for trading courses.

Once you feel like you have the basics down, Arora recommends starting with short-term trading in which you hold positions for a week or maybe a couple months. Combine those more forgiving time frames with small amounts of money.

If you find that you're succeeding, then try shortening the time frames slowly until you're opening and closing trades the same day.

Once you're established as a true day trader, you'll spend time looking for promising technical patterns and stocks that are moving a lot, either up or down. You can scan headlines to see what's moving the market or individual stocks.

Because you may be looking at news and technical charts for multiple stocks, indices and other trades, you'll probably want to have a home office set up with multiple computer screens, not to mention reliable high-speed internet.

At the end of the day, though, remember that day trading is very risky, doesn't work out for most people in the long run and may be best considered a hobby for those who are already wealthy.

"Too often investors watch the 24/7 financial news networks and have a bias toward action – that is, trading," Johnson says. "Investment success is more easily achieved by making fewer decisions and practicing buy-and-hold investing."

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