The Basics Of Day Trading

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Day trading, as the name suggests, means trading-buying and selling-the stocks on the same trading day. The trading positions, usually though not always, are closed before the market closes for the trading day.

Day trading is different from after- hours trading where the trading activity continues even after the regular marketing hours when the stock exchange closes.

Sellers and buyers who participate in day trading are called day traders. Although day trading evokes the image of a hectic trading activity in course of the trading day, it may not be so in actual practice. You may make several trades, say a dozen, in course of a trading day, or, you may limit yourself to just one trade.

You may, in some cases, just buy a stock on one day and sell it on the next day, if you think that selling it on the same day would not prove profitable. There is no legal restriction such as that you must finish off your trading activity the same day. You may, at the most, have to pay some differential on brokerage if you carry your trade to the next day.

In standard practice, traders usually tend to close their trading positions by the end of the same trading day. In any case your trading frequency depends entirely on your trading strategy for that particular day, or, your general trading style and outlook.

There are traders who focus on very short or short term trading. They finish off their trades in a matter of few minutes or even seconds. Such traders buy and sell several times a day and usually their trades consist of high volumes. They are the favorites of the brokers who reward them with big discounts on commissions.

Some traders, however, do not hanker after reduced brokerages. They focus on momentum or trends of the stock movement. They are very patient during their wait for a strong move, which may occur during the trading day. Obviously such day traders make only a few trades.

There are traders who prefer to sell off their stocks before the close of the market day to avoid the risks arising out of the price gaps between the closing price on the day they bought a stock and its opening price on the next day. They consider this practice as a golden rule and follow it almost religiously.

Other traders believe in allowing the profits to run so they stay with the position even after the market closes.

As said earlier, the number of trades you make on a trading day depends upon your trading style or trading strategies.

Profits and risks in day trading

Day traders make quick bucks and also quick losses in a matter of minutes or at the end of the trading day. Day trading may evoke the visions of gamblers gaming in casinos. There is, however, a marked difference between day trading and gambling.

While, you can not make any calculated moves or devise any intelligent strategies in gambling, except when you are out to cheat others, day trading involves very serious understanding of the process of trading.

You study the general market trends and the movement of the stocks. You make fundamental and technical analysis and keep yourself abreast of the latest news flashes about the stocks of the companies that you trade in and much more.

Day trading is not playing a blind man's buff or just throwing away a dice. You have to be very alert and cautious before every move. It would, therefore, be unfair to call day traders gamblers or bandits as some frustrated losers in day trading are apt to do.

Experienced and intuitive traders generate huge percentage of returns from day trading. Some stock traders manage to mint millions per year Solely on the trading day. A large number of persons have successfully made day trading a sole avenue of making their livelihood.

This, however, is not to deny the risks of huge losses in day trading. Those who trade without a calculated and intelligent strategy and discipline are more likely to incur huge losses in day trading. This happens more with those who use borrowed funds, a practice known as buying on margins. They have to pay back the borrowed amounts with huge interests and other penalties if fail to make profits. This is what makes day trading really risky.

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Source by Amit Malhotra