What is Day Trading?
When you think of day trading, you may imagine someone sitting alert in front of multiple computer monitors, wearing a headset, and making high stakes, rapid-fire trades. And in part, you may be right. Day trading is the buying and selling of financial assets with the goal of making a profit on the same day.
Here we’ll cover the basics of day trading and clear up a few murky areas to help you learn more about this niche practice.
What is The Meaning of Day Trading?
There are many types of day trading, each with features suited to different trader styles. They range from short-term trading, such as scalping where assets are only held for a few seconds or minutes, to longer-term swing and position trading where an asset may be held throughout the trading day.
Even though it may seem like they buy and sell on the fly, swing traders often look for patterns that can occur over many days or weeks.
Most day trading systems have a great deal of flexibility and can keep open positions for anywhere from a few minutes to a few hours. The span of time they stay open for depends on how the trade is doing, and whether it is in the right state to make a profit.
The main types of day trading markets are futures, options, currencies, and stock markets. Within these types, there are groups of markets based on stock indexes (such as the Dow Jones, and the DAX), currency exchange rates (such as the Euro to U.S. Dollar exchange rate), and commodities (such as gold and oil).
Day traders can have access to all of the exchanges and their markets via direct access brokers, so-called because they offer direct access to the exchange. Going through a broker is the fastest way to engage in trading at the lowest cost.
Day Trading vs. Swing Trading
|Day Trading||Swing Trading|
|Trades are made in the same day||Trades are made over days or weeks|
|Assets need constant watch||Trader can watch assets less often|
|Relies mostly on how aware a trader is of the market||Relies mostly on technical analysis|
|Can be large trades||Mostly done with smaller trades|
Types of Day Trading
Most day traders will choose a single type of trade, but some traders will take different types and choose which one to trade based on the current state of the market. The types include:
- Trend trades: Trades in the trending direction of the current price movement (i.e., buying if the price is moving up)
- Counter-trend trades: Trades against the direction of the current price movement (i.e., selling if the price is moving up)
- Ranging trades: Trades that go back and forth in range between two prices, and used when the market is moving sideways
Why is Day Trading So Popular?
Every investor has ever thought of being a day trader. While some became spectacularly successful, others could not survive the fast-paced market.
Day trading is popular for a host of reasons, and some are listed below:
Perhaps no other legal investment instrument provides you with as much returns as day trading. You can enter the market at 9 AM and exit any time before 3:30 PM with unlimited money.
Day trading is not restricted to equity stocks. You can also become a day trader in commodities, currencies, Exchange-Traded Funds (ETFs), futures, options, etc. Some day traders work in the stock market until 3:30 PM and move to the commodity market after that.
Brokers like 5paisa provide leverage facilities to intraday traders. The leverage or margin amount depends on your eligibility. With margin, you can buy more shares than your account balance permits. So, if the margin is five times or 5X, you can buy stocks worth INR 50,000 with an investment of INR 10,000.
No Overnight Risk
Since day traders close their positions before the market closes, their capital is immune from overnight risks. Hence, no negative news can disrupt their peaceful sleep after the market closes.
As a day trader, you can also benefit from a bearish market by selling first. If you are certain that a stock’s price will decrease further, you can place a sell trade when the price is high and book the profit when the price decreases further.
How Can You Start Your Career as a Day Trader?
To start your career as a day trader, you need a PAN card, Aadhar card, bank statement, and a photograph and use them to open a Demat account and a trading account. While the Demat account is used to store shares and is mandatory under Indian laws, the trading account facilitates easy access to stocks, commodities, currencies, etc. When you deposit money for trading, the amount gets reflected in your trading account. Similarly, you can place a withdrawal request from your trading account to get the profit in your bank account.
You can open either of two types of trading accounts – cash and margin. If you have a cash account, you can buy shares worth the amount available in your trading account. Conversely, if you have a margin account, you can buy more shares than your account balance permits.
So, you know what the meaning of day trading is and how to open an account; discover the tips required to trade efficiently in the following section.
Tips to Trade Efficiently As a Day Trader
The following are the top time-tested strategies to trade like an expert:
Consistency is the Key
Day trading is a matter of patience and determination. Quite often, traders lose motivation when they lose a few trades without realizing that it takes time to excel in the art of day trading. It is wise to place a stop loss every time you place a buy or sell trade.
Devise a Strategy
Brokerage houses like 5paisa regularly publish research reports and recommendations to help you identify solid opportunities for day or positional trading. However, besides the recommendations, you must also devise a day trading strategy to make consistent profits. Some strategies are scalping, momentum trading, arbitrage, high-frequency trading, etc.
Invest a Healthy Amount
Capital plays a crucial role in determining the profit margin. If you enter the market with low capital, you may have to take higher risks to get the profit you desire. However, if your capital is high, you can take calculated risks. A high capital also helps you diversify your total investment.
Use Leverage Cautiously
Some investors consider leverage as a double-edged sword. While it can maximize your profit, it can also magnify the losses. Hence, treat leverage with caution to minimize your risks.
- People who attempt to day trade without proper knowledge and experience tend to fail in their attempt and end up losing large amounts of money.
- Proper strategy and discipline is key to a day trader’s success.