What is Day Trading?
Day traders are a special breed. Specializing in many short duration trades, they operate using technical analysis to seek many small wins in the minor fluctuations in stock prices. Technical analysis is the use of charts based on stock price and the volume of shares sold for the day.
Due to the fact, the day traders make many trades in a day, many of them seek to use leverage in the trades. For example, they may borrow $50,000 from their brokerage firm and have only $10,000 of their own capital. This is a 5 to 1 leverage. This means they can multiply their gains or make more trades in a day. Seeking a small gain from the intraday fluctuations in a stock price is also called scalping.
Advantages
If you are exceptional and have developed your own specific edge in the market place, you can potentially earn more returns than the average returns of the market.
Disadvantages
This is an incredibly risky trading strategy. The vast majority of day traders (up to 80%) lose most of all of their investment capital within the first year they start trading.
This is a very stressful way to make money and also very time consuming as you are watching the stock charts in real-time the whole day, every day.
High transaction costs – making so many trades means you have to pay for each transaction, this means you need to make more money per trade to cover the costs of the trade.
Average trade duration
Minutes to hours
The effort to maintain the strategy
High – lots of hours and every day
Risk Rating
Very high – use of leverage and trying to predict the essentially random tick by tick fluctuations in stock price movement is highly risky.
