You may have come across the term “Day Trading” in the past and never quite stood what was meant and how it differed from trading Forex or buying stocks and shares.
Well, the truth is that it doesn’t.
Day Trading refers to the buying and selling of any available asset, currency, investment, option, derivative or stock providing that the open position is closed before the end of the financial day. The intention is to avoid holding positions open overnight and especially for longer durations.
Why Day Trade?
Most Day Traders adhere to a particular strategy involving high liquidity and high volatility markets. These can include market changes brought about by financial data news releases such as earnings reports and interest rate decisions or by disasters involving a specific industry which can have an effect upon any related assets.
High liquidity and volatility are necessary because the aim is to see a considerable increase or decrease in the value of the chosen asset within a set period of time. This change in value is then locked in once the desired price movement has been met. Holding a position open overnight may allow it to be manipulated by other factors, potentially erasing the gains made in the previous day. This becomes especially apparent when a large number of exchanges are able to trade the same assets in different time zones.
The Advantages of Day Trading
The more accurately and consistently you can predict short term market movements, the more profitable Day Trading can be. It becomes much easier to track your overall trading performance, giving you the ability to quickly analyse where you went wrong and can also reduce your trading overheads by ensuring that no interest is incurred by holding overnight positions.
The Disadvantages of Day Trading
Day Trading results in much smaller margins for error. Accurate timing is very important to ensure the best possible entry on a chosen asset. Volatile markets have the ability to move very quickly and with unpredictability, which coupled with human emotion can make Day Trading highly stressful.