Definition
A day trader is a trader who adheres to a trading style called day trading. This involves buying and subsequently selling financial instruments within the same trading day, such that all positions will usually be closed before the market close of the trading day. Depending on one’s trading strategy, trades may range from several to hundreds of orders a day.
Day Trader
What is a ‘Day Trader’
A day trader engages in long and short trades in an attempt to profit by capitalizing on the intraday movements of a market’s price action resulting from temporary inefficiencies in the supply and demand of the moment. A day trader often closes out all trades before the market close and does not hold any open positions overnight. Some day traders use leverage to magnify the returns generated from small stock price movements.
Explaining ‘Day Trader’
Day traders are handicapped by the bid-ask spread, trading commissions and expenses for real-time news feeds and financial analysis packages. Successful day trading is a skill that requires extensive knowledge and experience to master. For those day traders that master the skill, opportunity for making profits is abound.
What Day Traders Trade
Unlike investors who use fundamental data to analyze the long-term growth potential of a corporation in order to make a decision to take a long position in its security, a day trader is more concerned with price action characteristics of the security itself. Price volatility and average day range are critical to a day trader. A security needs to have sufficient price movement over the course of a typical day in order to attempt to capture some of that movement for profit. Volume and liquidity are also crucial to a day trader in that entering and exiting trades quickly is vital to capturing small profits per trade. Securities with small daily range and light daily volume are not well suited for day trading.
How Day Traders Trade
Day traders key on any events that create a short term movement in the market. Trading the news is a popular technique that day traders use. When scheduled announcements regarding economic statistics, corporate earnings or interest rates, and do on, are announced, there are always expectations by market participants. When those expectations are not met, or exceeded, markets usually make sudden and large moves, which day traders attempt to seize upon.
Further Reading
- Day traders and the disposition effect – www.tandfonline.com [PDF]
- The anatomy of day traders – papers.ssrn.com [PDF]
- Fear and greed in financial markets: A clinical study of day-traders – pubs.aeaweb.org [PDF]
- The cross-section of speculator skill: Evidence from day trading – www.sciencedirect.com [PDF]
- The profitability of day traders – www.tandfonline.com [PDF]
- Day Trader Behavior and Performance: Evidence from Taiwan Futures Market – www.tandfonline.com [PDF]
- Optimism and economic choice – www.sciencedirect.com [PDF]
- The end of behavioral finance – www.tandfonline.com [PDF]
- Lottery players/stock traders – www.tandfonline.com [PDF]
