What is a 'Day Trader'A day trader engages in long and short trades in an attempt to profit by capitalizing on the intraday movements of a market’s price action resulting from temporary inefficiencies in the supply and demand of the moment. A day trader often closes out all trades before the market close and does not hold any open positions overnight. Some day traders use leverage to magnify the returns generated from small stock price movements.
BREAKING DOWN 'Day Trader'Day traders are handicapped by the bid-ask spread, trading commissions and expenses for real-time news feeds and financial analysis packages. Successful day trading is a skill that requires extensive knowledge and experience to master. For those day traders that master the skill, opportunity for making profits is abound. There are many methods and techniques that day traders use to make trading decisions. They range from traders that employ very elaborate computerized trading systems that use technical analysis to calculate favorable probabilities, to others that trade based on sheer instinct or “gut feeling.” At all levels, there are those that are profitable, and many that are not. What Day Traders TradeUnlike investors who use fundamental data to analyze the long-term growth potential of a corporation in order to make a decision to take a long position in its security, a day trader is more concerned with price action characteristics of the security itself. Price volatility and average day range are critical to a day trader. A security needs to have sufficient price movement over the course of a typical day in order to attempt to capture some of that movement for profit. Volume and liquidity are also crucial to a day trader in that entering and exiting trades quickly is vital to capturing small profits per trade. Securities with small daily range and light daily volume are not well suited for day trading. How Day Traders TradeDay traders key on any events that create a short term movement in the market. Trading the news is a popular technique that day traders use. When scheduled announcements regarding economic statistics, corporate earnings or interest rates, and do on, are announced, there are always expectations by market participants. When those expectations are not met, or exceeded, markets usually make sudden and large moves, which day traders attempt to seize upon. Another popular method is fading the gap at the open. When the opening price shows a gap with respect to the prior day’s closing, 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, day traders will make a determination early in the day as to which general direction the market is moving. If the market is moving upward, day traders will buy securities that are exhibiting strength when their prices dip. If the market is moving downward, day traders will short securities that are exhibiting weakness when their prices bounce. There are as many methods as there are day traders. Read more: Day Trader http://www.investopedia.com/terms/d/daytrader.asp#ixzz4dXZ24nCT Follow us: Investopedia on Facebook Comments are closed.
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August 2017
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