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What is Day Trading?
Day
Trading involves
taking a position in the markets with a view of squaring that position before
the end of that day.
A day trader typically trades several times a day looking for fractions of a
point to a few points per trade, but who close out all their positions by day's
end.
The goal of a day trader is to capitalize on price movement within one trading
day.
Unlike investors, a day trader may hold positions for only a few seconds or
minutes, and never overnight.
What day trading really means.
The term "day trading"
is a widely misused and misunderstood term. Real day trading means not holding
on to your stock positions beyond the current trading day; in other words, not
holding any position overnight. This is really the safest way to do day trading
because you are not exposed to the potential losses that can occur when the
stock market is closed due to news that can affect the prices of your stocks.
Unfortunately, many people who claim to be "day trading," hold stocks overnight
because of fear or greed, thus setting themselves up for the catastrophic
elimination of their capital. When day trading currencies, the term "day
trading" changes slightly. Since currencies can be traded 24-hours-a-day, there
is no such thing as "overnight" trading. Thus, you can have open positions for
longer than a day with active stop losses that can be activated at any time.
Day trading can be further subdivided into a number of styles, including:
Scalpers: This style of day trading involves the rapid and repeated buying and
selling of a large volume of stocks within seconds or minutes. The objective is
to earn a small per share profit on each transaction while minimizing the risk.
Momentum Traders: This
style of day trading involves identifying and trading stocks that are in a
moving pattern during the day, in an attempt to buy such stocks at bottoms and
sell at tops.
Advantages of Day Trading
Zero
Overnight Risk: Since
positions are closed prior to the end of the trading day, news and events that
affect the next trading day's opening prices do not effect your portfolio.
Increased Leverage: Day
Traders have a greater leverage on their trading capital because of low margin
requirements as their trades that are closed in the same market day. This
increased leverage can increase your profits if used wisely.
Profit in any market
direction: Day
trading often will utilize short-selling to take advantage of declining stock
prices. The ability to lock in profits even as markets fall throughout the
trading day is extremely useful during bear market conditions.
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