What is Day Trading?
Day Trading is the process of trading financial instruments in the same trading day. Essentially this means that an individual will purchase certain financial instruments and sell them, looking to gain a quick profit, within the same trading day.
Traditionally day trading was exclusively done by stockbrokers and brokerage houses but with the advent of discount brokerage houses, such as TD Ameritrade, ScottTrade, and others, individuals can do day trading in stocks, stock options, currencies and futures contracts from their own homes.
Advantages & Disadvantages
There are many advantages and disadvantages that go along with day trading. Day trading allows an individual to invest in a financial instrument and sell those same instruments in a matter of hours to make a quick profit. Most day traders will invest in day trading by taking advantage of buying on margin. This basically means that the individual is borrowing money for purchase of the financial instrument. This can be very lucrative but also very costly. For example, if an individual were to buy 1,000 shares of stock at $10 a piece on margin then he would essentially be borrowing $10,000 that would be paid back at the end of the day. The individual will attempt to sell the stock for greater than $10 per share before the end of the days trading. If he sells the stock for $10.10 then, after repaying the money borrowed the total gained will be $100. In the inverse, the individual could end up having to sell the stock at a lower price than he, or she, bought it for and thus owe money to the lender.
Buying on margin can be very advantageous if it is done correctly but if you are involved in a losing stock it is important that an individual contemplate selling the stock before the price drops lower or else he, or she, will be called on the debt and have to pay the difference at the end of the trading day.
Day Trading Strategies
Short Selling is a day trading strategy where the individual investor will borrow stock from his, or her, broker intending to sell the stock initially and, intending for the stock price to drop, repurchase the stock at the end of the day resulting in a profit. For example, if an individual borrows 1000 shares of stock at $10 a piece, sells them, and at the end of the day repurchases 1000 at $9 a piece then the individual will have netted a profit of $1,000.
Trend following is a strategy where the investor follows the market trends with a specific stock, assuming that a stock that has been steadily increasing in value will continue to do so. A contrarian strategy is where an investor assumes that because a specific financial instrument ha been increasing in value it will eventually decrease; and vice versa.
Other day trading investment strategies involve scalping, rebate trading, news planning, price action, and even the use of automatic algorithms that perform day trading automatically.