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Wednesday, February 2, 2011

What is day trading?

Day trading began in 1971 with the advent of the National Association of Securities Dealers Automated Quotations System (NASDAQ). It is the short term holding and selling of financial instruments such as stocks with the intent of financial gain. Day trading seeks to take advantage of short term fluctuations in the price of financial instruments. Some of these instruments include commodities futures, currency, stocks, stock options and exchange traded funds.

Day trading basics


Many financial instruments are bought and sold on exchanges. It is through these exchanges day trading takes place. Examples of exchanges are the Chicago Mercantile Exchange, The New York Stock exchange, the Foreign Exchange and the American Stock exchange. After analyzing a stock or other financial vehicle in addition to various patterns and movements surrounding the financial product, a day trader may decide to purchase some of those stocks. After a relatively short period of time, the day trader will sell the stocks for a profit if his or her analysis and predictions were accurate. According to the following instructional video, a day trader is someone who buys and sells financial securities such as stock, futures and options.


Types of day trading


There are several ways to day trade including arbitrage trading, options trading, stocks and exchange traded fund trading and forex trading.

Arbitrage is the buying of stocks or another financial vehicle on one exchange and then reselling it on another exchange.

Options trading is the agreement of a day trader to buy and/or sell large amounts of stock bought on credit at a fixed priced. This agreement must be fulfilled, settled or carried over within a certain time period of time.

Stock and exchange traded fund (ETF) trading is the buying and selling of these instruments on exchanges such as Nasdaq or the American Stock exchange.

Foreign Exchange Trading (FOREX) is the trading of currencies using one or more of several existing foreign exchanges. Currencies are bought at a fixed price and may be purchased on margin i.e. on credit for a larger volume.

The tools of day trading


Successful day traders often use special tools that allow them to perform what is known as 'technical analysis' of securities. Technical analysis involves the use of specialized numerical, real time, and graphical data to present information to the day trader so that (s)he may more adequately increase the chances of a successful trade. Some examples of day trading tools are the following:

• Day trading charts
• News alerts
• Stock trading systems
• Real time streaming data displays
• Stock analysis reports

Risks and rewards


Day trading is not an exact science and most day traders often incur losses at one point or another. To illustrate this point, one study by the North American Securities Administrators Association reported that 77% of Day traders lost money trading. While the rewards can be steep with margin trading, the risk can be equally steep. Since day trading takes place on short term patterns and quick decisions, it is more likely the day trader has incomplete information on the company (s)he is trading.

This possibility increases the chances of making faulty or less than ideal decisions thereby increasing the risk. Depending on which exchange is used, the risks of day trading can also fluctuate. Exchanges like the FOREX can be highly risky if a large volatility of a currency price occurs. The same is true with options trading as both can be purchased using loaned money making the losses terrible. Day trading wouldn't be practiced if there weren't some winners though. That is to say there are successful day traders out there and it is likely these day traders are very astute in the ways of the market, have significant know how and experience.

To conclude, day trading is a short term investment strategy lasting from minutes to hours and occasionally overnight. The practice of day trading is international and crosses multiple exchanges and financial instruments. Day trading is performed by individuals and large firms alike and often makes use of specialized financial information and analytical tools. The practice of day trading is not a guaranteed success and should therefore be exercised wisely and with caution.

Sources:

1. http://business.enotes.com/small-business-encyclopedia/day-trading
2. http://daytrading.about.com/
3. http://www.answers.com/topic/arbitrage?cat=biz-fin
4. http://www.stockcharts.com
5. http://www.answers.com/topic/day-trading?cat=biz-fin
6. http://www.thebulltrader.com/