Day trader
Encyclopedia
A day trader is a trader
who buys and sells financial instruments
(e.g. stocks
, options, futures
, derivatives
, currencies) within the same trading day such that all positions will usually be closed before the market close of the trading day. This trading style is called day trading
. Depending on one's trading strategy, it may range from several to hundreds of orders a day.
An institutional day trader is a trader
who works for a financial institution. This type of trader has certain advantages over retail traders as he/she generally has access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges, expensive and high-end trading and analytical software, support teams to help, and more. All these advantages give them certain edges over retail day traders.
A retail day trader is a trader
who works for himself, or in partnership with a few other traders. A retail trader generally trades with his own capital, though he may also trade with other people's money. Law has restricted the amount of other people's money a retail trader can manage. In the United States, day traders may not advertise as advisors or financial managers. Although not required, nearly all retail day traders use direct access brokers as they offer the fastest order entry and to the exchanges, as well as superior software trading platforms.
In the past, most day traders were institutional traders due to the huge advantages they had over retail traders. However, since the technology boom in the second half of the 1990s, advances in personal computing and communications technology, realized in the accessibility of powerful personal computer
s and the Internet
, have brought fast online trading and powerful market analytical tools to the mainstream. Low, affordable commissions from discount brokers as well as regulation improvements in favor of retail traders have also helped level the trading playing field, making success as a retail trader a possibility for many and a reality for some.
An auto trader is the person who performs auto-trading, which stands for automated trading and the use of computer programs and other tools to enter trading orders. Because this all happens with the help of the computer algorithm it is also called algorithmic trading
or high-frequency trading
.
A day trader who wants to achieve success needs appropriate knowledge
, equipment, tools and markets together with the ability to trade the right electronic trading platform
. A day trader with the right information might be able to succeed, otherwise, success will go to the other person in the transaction
or to the broker
, if he happens to be the best informed person in the transaction.
Besides all these technical requirements some personal traits are also necessary. They include the right psychological and emotional traits. Two emotions that the day trader faces and should manage are fear
and greed. A balance between these two emotions is necessary to achieve successful trades.
Also, a successful day trader needs to know which stocks to trade, when to enter the trade, and when to get out of the trade. Part of this knowledge is to find those stocks with liquidity and volatility
, in order to generate profits.
Day trading, as part of the market timing
, however, is an activity that academics do not support. They question the market timing
and believe in the efficient market theory. However, market timing is not illegal, and it is not considered unethical.
Although the activity can be profitable, it requires effort to be put in and is a difficult skill to master. Many people expect to make large profits with little effort, and the fact is that around 80% of day traders lose money.
Possible reasons for the surge in retail forex is the now high margin requirements in individual U.S. equities (stocks) for day traders imposed after 2001 and apparent overt manipulation of commodities markets making the 'rigged' commodity futures markets a less desirable or 'fair' market in which to participate. However ETF
s have gained rapidly in popularity, being seen as a less expensive way to trade all futures markets as well as some more exotic markets not otherwise available to retail day traders.
The amount of margin required by most retail forex brokers in contrast is negligible. With full size lots (100,000 units of currency), mini-lots (10,000) and even micro-lots (1,000) all with up to as much as 1000:1 leverage
being available (although not in the US where the maximum is now 50:1 after a ruling by the CFTC), means a retail day trader could in theory trade a single micro-lot of USD for the cost of $1. Realistically most brokers require a minimum deposit of $500.
The sheer volume of the FX market makes it a difficult one to manipulate in any meaningful way, even with the money available to large proprietary and institutional trading interests.
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
who buys and sells financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....
(e.g. stocks
Stocks
Stocks are devices used in the medieval and colonial American times as a form of physical punishment involving public humiliation. The stocks partially immobilized its victims and they were often exposed in a public place such as the site of a market to the scorn of those who passed by...
, options, futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
, derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
, currencies) within the same trading day such that all positions will usually be closed before the market close of the trading day. This trading style is called day trading
Day trading
Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day...
. Depending on one's trading strategy, it may range from several to hundreds of orders a day.
Types of day traders
There are two major types of day traders: institutional and retail.An institutional day trader is a trader
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
who works for a financial institution. This type of trader has certain advantages over retail traders as he/she generally has access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges, expensive and high-end trading and analytical software, support teams to help, and more. All these advantages give them certain edges over retail day traders.
A retail day trader is a trader
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
who works for himself, or in partnership with a few other traders. A retail trader generally trades with his own capital, though he may also trade with other people's money. Law has restricted the amount of other people's money a retail trader can manage. In the United States, day traders may not advertise as advisors or financial managers. Although not required, nearly all retail day traders use direct access brokers as they offer the fastest order entry and to the exchanges, as well as superior software trading platforms.
In the past, most day traders were institutional traders due to the huge advantages they had over retail traders. However, since the technology boom in the second half of the 1990s, advances in personal computing and communications technology, realized in the accessibility of powerful personal computer
Personal computer
A personal computer is any general-purpose computer whose size, capabilities, and original sales price make it useful for individuals, and which is intended to be operated directly by an end-user with no intervening computer operator...
s and the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
, have brought fast online trading and powerful market analytical tools to the mainstream. Low, affordable commissions from discount brokers as well as regulation improvements in favor of retail traders have also helped level the trading playing field, making success as a retail trader a possibility for many and a reality for some.
An auto trader is the person who performs auto-trading, which stands for automated trading and the use of computer programs and other tools to enter trading orders. Because this all happens with the help of the computer algorithm it is also called algorithmic trading
Algorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
or high-frequency trading
High-frequency trading
High-frequency trading is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:...
.
Pros and cons
Day traders' objective is to make profits by taking advantage of small price movements in highly liquid stocks or indexes as well.A day trader who wants to achieve success needs appropriate knowledge
Knowledge
Knowledge is a familiarity with someone or something unknown, which can include information, facts, descriptions, or skills acquired through experience or education. It can refer to the theoretical or practical understanding of a subject...
, equipment, tools and markets together with the ability to trade the right electronic trading platform
Electronic trading platform
In finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...
. A day trader with the right information might be able to succeed, otherwise, success will go to the other person in the transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
or to the broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
, if he happens to be the best informed person in the transaction.
Besides all these technical requirements some personal traits are also necessary. They include the right psychological and emotional traits. Two emotions that the day trader faces and should manage are fear
Fear
Fear is a distressing negative sensation induced by a perceived threat. It is a basic survival mechanism occurring in response to a specific stimulus, such as pain or the threat of danger...
and greed. A balance between these two emotions is necessary to achieve successful trades.
Also, a successful day trader needs to know which stocks to trade, when to enter the trade, and when to get out of the trade. Part of this knowledge is to find those stocks with liquidity and volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
, in order to generate profits.
Day trading, as part of the market timing
Market timing
Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis...
, however, is an activity that academics do not support. They question the market timing
Market timing
Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis...
and believe in the efficient market theory. However, market timing is not illegal, and it is not considered unethical.
Although the activity can be profitable, it requires effort to be put in and is a difficult skill to master. Many people expect to make large profits with little effort, and the fact is that around 80% of day traders lose money.
Markets for retail day traders
Previously seen as a niche market, or something for institutional investors, the forex market, by 2010 had increased exponentially to an average daily volume of about $4 Trillion, with spot retail trades now accounting for an estimated 10% of that volume.Possible reasons for the surge in retail forex is the now high margin requirements in individual U.S. equities (stocks) for day traders imposed after 2001 and apparent overt manipulation of commodities markets making the 'rigged' commodity futures markets a less desirable or 'fair' market in which to participate. However ETF
ETF
ETF may refer to:* Exchange-traded fund, an investment vehicle* European Training Foundation, a vocational training organization* European Transport Workers' Federation* Emergency Task Force, a tactical unit of the Toronto Police* Enriched text format...
s have gained rapidly in popularity, being seen as a less expensive way to trade all futures markets as well as some more exotic markets not otherwise available to retail day traders.
The amount of margin required by most retail forex brokers in contrast is negligible. With full size lots (100,000 units of currency), mini-lots (10,000) and even micro-lots (1,000) all with up to as much as 1000:1 leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
being available (although not in the US where the maximum is now 50:1 after a ruling by the CFTC), means a retail day trader could in theory trade a single micro-lot of USD for the cost of $1. Realistically most brokers require a minimum deposit of $500.
The sheer volume of the FX market makes it a difficult one to manipulate in any meaningful way, even with the money available to large proprietary and institutional trading interests.
See also
- Day tradingDay tradingDay trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day...
- Direct access tradingDirect access tradingDirect access trading is a technology which allows stock traders to trade directly with market makers or specialists, rather than trading through stock brokers....
- Paper tradingPaper tradingPaper trading is a simulated trading process in which would-be investors can 'practice' investing without committing real money....
- Pattern day traderPattern day traderPattern day trader is a term defined by the U.S. Securities and Exchange Commission to describe a stock market trader who executes 4 day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same...
- ScalpingScalping (trading)Scalping, when used in reference to trading in securities, commodities and foreign exchange, may refer to# a fraudulent form of market manipulation# a legitimate method of arbitrage of small price gaps created by the bid-ask spread....
- Price action tradingPrice action tradingThe concept of price action trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed, and at its most simplistic, it attempts to describe the human thought...