Day trader

A day trader is a trader who buys and sells 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. This trading style is called day trading. Depending on one's trading strategy, it may range from several to hundreds of orders a day.


Types of day traders

There are two major types of day traders: institutional and retail.

An institutional day trader is a trader who works for a financial institution. This type of trader has certain advantages over retail traders as he/she generally has 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. All these advantages give them certain edges over retail day traders.

A retail day trader is a trader who works for himself, or in partnership with a few other traders. A retail trader generally trades with his own capital, though he may also trade with other people's money. Law has restricted the amount of other people's money a retail trader can manage. In the United States, day traders may not advertise as advisors or financial managers. Although not required, nearly all retail day traders use direct access brokers as they offer the fastest order entry and to the exchanges, as well as superior software trading platforms.

In the past, most day traders were institutional traders due to the huge advantages they had over retail traders. However, since the technology boom in the second half of the 1990s, advances in personal computing and communications technology, realized in the accessibility of powerful personal computers and the Internet, have brought fast online trading and powerful market analytical tools to the mainstream. Low, affordable commissions from discount brokers as well as regulation improvements in favor of retail traders have also helped level the trading playing field, making success as a retail trader a possibility for many and a reality for some.

An auto trader is the person who performs auto-trading, which stands for automated trading and the use of computer programs and other tools to enter trading orders. Because this all happens with the help of the computer algorithm it is also called algorithmic trading or high-frequency trading.[1]

Pros and cons

Day traders' objective is to make profits by taking advantage of small price movements in highly liquid stocks or indexes as well.

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.

Besides all these technical requirements some personal traits are also necessary. They include the right psychological and emotional traits. Two emotions that the day trader faces and should manage are fear and greed. A balance between these two emotions is necessary to achieve successful trades.[2]

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.[3]

Day trading, as part of the market timing, however, is an activity that academics do not support. They question the market timing and believe in the efficient market theory. However, market timing is not illegal, and it is not considered unethical.

Although the activity can be profitable, it requires effort to be put in and is a difficult skill to master. Many people expect to make large profits with little effort, and the fact is that around 80% of day traders lose money.[3]

Markets for retail day traders

Previously seen as a niche market, or something for institutional investors, the forex market, by 2010 had increased exponentially to an average daily volume of about $4 Trillion, with spot retail trades now accounting for an estimated 10% of that volume. Possible reasons for the surge in retail forex is the now high margin requirements in individual U.S. equities (stocks) for day traders imposed after 2001 and apparent overt manipulation of commodities markets making the 'rigged' commodity futures markets a less desirable or 'fair' market in which to participate. However 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), means a retail day trader could in theory trade a single micro-lot of USD for the cost of $1. Realistically most brokers require a minimum deposit of $500. The sheer volume of the FX 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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