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What Is Day Trading?

Day trading is the practice of buying and selling securities, currencies and other financial instruments within the same trading day. In day trading, an investor buys shares then sells them again within a few seconds, minutes or hours of purchase.

Investors who engage in day trading are known as day traders. They are also called gamblers and speculators by value investors (those who buy shares based on such shares' intrinsic value rather than their price movements).

Day Trading as a Market Timing Trading Strategy

Day trading is an extreme expression of the market timing trading philosophy.

Market timing: Market timing is a trading strategy used by most investors to make gains based on price differences. A market timing trader uses a variety of parameters to predict an instrument's future behavior then makes his moves based on this prediction.

Let's say, for instance, that an investor predicts that the per-share price of a certain stock is about to rise. In this scenario, this trader will buy shares of this stock now that the price is still low. If his prediction comes true and per-share prices do rise, he will sell his shares (preferably at the maximum possible price per share).

Market timing trading, therefore, is simply buying low and selling high. This is conventional trading wisdom. Sophisticated investors often deviate from this admittedly simplistic investing philosophy, considering other factors besides price movements (say, the viability of the instrument or long-term gain). However, market timing still largely influences most investors' trading decisions.

Day trading: Day trading is taking the market timing strategy to the extreme. Typically, market timing strategy investors wait days and weeks (or take an even longer position) before selling shares. Day traders, however, change positions within a single trading day - often in a span of seconds and minutes.

Day traders make their profit through small price movements. Even the smallest increase in share prices is a boon to a cunning day trader who amplifies small gains through volume trading and ECN rebate earnings (when applicable). High volume trading can also minimize the cost of frequent trading since most brokers provide trading fee discounts to volume traders.

A day trader, for instance, will buy at $11 per share then sell, within the same trading day, when per share prices reach $11.01. While a $0.01 gain per share may seem very small, the gain rises considerably when the sale involves 10,000 (or even more) shares.

More often than not, a day trader buys at a higher price than the minimum set by sellers to ensure that they'd get top priority. For instance, if the sale price per share is $11, the day trader may offer $11.001. Likewise, when it's time to sell, a day trader usually sells lower than the typical offer to ensure that he'd be the buyer's top pick for a trade. For example, if the offer price is $11.01, the day trader may sell his shares for only $11.009.

In this case, the day trader gains only $0.008 per share. However, volume trading, earned rebates and trading fee discounts ensure that he makes a tidy little profit before the trading day ends.

Day Trading Tips

  • Timing is everything in day trading. When you buy and sell makes a lot of difference. Buy a second later and you can lose the opportunity to buy at the lowest price possible. Sell a second later and you can lose the opportunity to make the greatest gain possible.
  • Volume is important. You need to execute high volume trades to make a profit in day trading. As already mentioned above, per-share gains are actually very insignificant. In volume trades, however, such insignificant gains add up.
  • Information and discipline are crucial. Day traders have different day trading approaches. Whatever your chosen approach, you need to have information (and timely information, at that). You also need to have discipline to stick to your day trading strategy and not be easily carried away by the potential for greater gains.
  • Day trading is risky. In day trading, you lose to gain a lot in a short period of time. Day trading is a two-edged sword, however, and day traders also risk losing everything in seconds. Day trading risks are magnified when you buy on margin (e.g. margin trading).
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