Day trading is the practice of buying and selling financial instruments within the same trading day such that all positions are closed before the market closes for trading. Operators involved in the process of day trading are called day traders or active investors.
There are a number of financial instruments that are traded on the day trading market. These financial instruments include stocks, stock options, currencies and a variety of futures contracts such as equity index futures, interest rate futures and commodity futures.
Originally day trading used to be an activity performed by financial firms and professional investors and speculators. And even today, the participants of day trading are majorly bank or investment firm employees. These employees work as specialists in equity investment and fund management.
But with technology constantly improving, online trading has become quite common and has introduced new investors to the market. Day trading has become increasingly popular among at-home investors as well.
Day trading can either be extremely profitable or it can be extremely unprofitable. This is owing to the nature of the financial leverage and the rapid returns that are possible through day trading. High-risk profile traders can either generate huge percentage returns or losses.
It is because of the high profits and losses that are made possible through day trading that day traders are sometimes knows as bandits or gamblers among other investors. As unpredictable and volatile as day trading may be, a number of individuals manage to make a consistent living from day trading.
In order to be successful in day trading there are a number of strategies that can be followed. Besides these, there are some day traders that use reverse strategies to trade specifically against irrational behaviour from day traders using these approaches.
Some of the approaches require the trader to short sell stocks instead of buying them. Short selling is a process by which a trader sells a stock that he does not actually own but borrows from his broker. He then sells that borrowed stock in the hopes that the price will fall and he can purchase the shares at a lower price.
Trend following is a strategy that is used in all trading time-frames. The strategy assumes that financial instruments which have been rising steadily will continue to rise and similarly with falling financial instruments. Thus a trend follower will buy instruments that have been rising and will short sell those that are falling with the expectation that the trend will continue.
Contrarian or reverse investing is a market timing strategy that assumes that financial instruments which have been rising steadily will reverse and start to fall. Thus a contrarian trader will buy an instrument that has been falling or will short-sell a rising one with the expectation that the trend will change.
Apart from these, there are a number of other strategies like range trading, scalping, rebate trading, news playing as well as artificial intelligence that are used by day traders.
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