Day Trading
What is day trading?
Day trading is the process of buying and selling stocks on the same trading day to record profits from their short-term price movements. These trades usually take place in stock markets, foreign exchange markets, and futures markets.
How does day trading work?
Day Trading refers to a disciplined way of buying and selling stocks and other financial instruments every day. This means that the shares bought today will be sold on the same day.
In the stock market, traders buy and sell company stock and exit their position before the market closes at the end of the day. In the Forex market, traders trade global currencies and profit or suffer a loss due to the relative change in the value of that currency.
Finally, in the futures market, traders profit from an increase or decrease in the price of futures contracts from the time of purchase until it is sold at the end of the trading day.
By definition, day traders only hold their shares for one day. At the end of each day, they come out or close their position in actions, options or futures, then restart the next day. It is the same backward.
Day traders who can spot buying or selling pressures and act at the right time can make good profits. Note that the risks and rewards of such a trade are immediate. When done correctly, it can help investors escape the periodic losses that come with the usual buy-and-hold strategy.
Seems like a very lucrative opportunity to make a lot of money in a short period. But you have to trade with the utmost care, discipline and strategy. Day traders can lose a lot of money and sometimes even go bankrupt due to limited market knowledge and awareness.
Day Trading Strategies
There are different types of strategies that individual investors apply for this type of trading in the stock market. Some of them are as follows:
Using this strategy, an investor collects profit through small changes in stock prices during a single trading day. Traders using this strategy buy and sell stocks as quickly and often as possible.
This strategy is based on the use of support (oversold) and resistance (overbought) zones. Investors buy in the support areas and sell in the resistance area. It is based on the logic that stocks that are priced below or above their trend average will eventually revert to their mid-market price.
Here traders benefit from their market knowledge gained through news or any announcements that may impact stock prices. Therefore, they buy and sell the securities accordingly during an intraday transaction.
It is a practice with which traders make decisions for buying or selling stocks on the basis of complex algorithms calculated by computer programs
Day Trading Rules
The rules that the Financial Sector Regulatory Authority (FINRA) established for day trader models are discussed below. Model day traders are those who complete at least four trades in five trading days:
Minimum capital requirement
Model day traders must maintain a margin amount of 25000cr on their trading account or equivalent securities to conduct the trading activities. This condition must be met at the close of each preceding day for the following day’s trading.
Day Trading Buying Power (DTBP)
Model-day traders can only trade four times the amount of margin left on the trading account after excluding the minimum capital requirement at the previous day’s close.
Day Trading Rules
DTBP = Margin Amount x 4,
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By buying beyond this limit, the trader receives a margin call from the broker or dealer to deposit the deficit margin money.
Buying and selling are limited to double the amount of excess margin until the merchant deposits the remaining funds. The merchant has five working days to fulfil this condition. After that, the broker limits trading only to the amount available in the trading account for 90 days or until the trader deposits the money.
Advantages
Day trading has been an exciting career option for the new generation as it has transformed the fortunes of many traders making them rich in no time. Let’s take a look at some of its significant advantages:
Easy to get started: No certification or license is required to trade. You can start it immediately if you have a laptop and an internet connection.
No risk overnight: traders close their position before the end of the day. Hence, they are not worried about day-to-day market fluctuations.
Flexible working hours: Traders are free to trade at any time between trading hours, i.e. between the opening and closing hours of the market.
Source of Income: Collect good profits every day, which serve as daily income for day traders.
Huge Potential: Has the extreme chance of generating a colossal margin when the market is at its best and luck turns in the trader’s favour.
Disadvantages
Although successful, this is a very demanding and risky area. To find out why let’s look at the following limitations:
Nerve-wracking: It takes a lot of discipline and can become very stressful as the markets are risky and unpredictable in the end.
Loss for Individual Traders: Individual investors involved in this trade often get low returns or lose money while competing with companies that use high-frequency trading techniques.
Minimum Balance Requirement: Another significant drawback is that day traders are often marked as pattern traders and must reserve a minimum amount in their trading accounts.
Carries a high risk: Investors without sufficient knowledge, resources and support can lose a lot of money if the markets fall.
Requires quick decision-making: as the market fluctuates rapidly, it can result in a loss if the trader does not immediately decide to buy or sell.
