What is Day Trading?
Day Trading is a modern phenomenon that has received an inordinate amount of publicity. The popular picture of a day trader is an average person who buys and sells equities from their home or work computer, bypassing the traditional stock broker and stock exchange establishment. This image appeals to society’s natural backing of the underdog who beats the cigar smoking “backroom boys” at their own game. This image, however, only superficially reflects the realities of day trading. Although many day traders have achieved success over the long term, many others have not, and it is usually the inexperienced traders who have suffered the most.
In short, Day Trading is the practice of buying and selling equities on electronic stock exchanges with the majority of positions being closed out by the end of the trading day. In effect, a day trader will buy a certain amount of stock in the morning and sell it in the afternoon, hopefully realizing a profit. To do this successfully over the long term, day traders resort to any of a host of strategies that work best when applied to very short term trading.
“Trend following” is one of these techniques, and it is deceptively simple: if a stock is seen to be rising over a period of weeks or months, then chances are that if bought in the morning, it will close higher by the end of the day. Of course, such is not always the case and even stocks that show a rising trend can fluctuate in value over a single trading day.
Another strategy is called “playing news”, and this refers to the purchasing of a company’s stock as soon as some positive or negative news is received in the media. For example, if a major automaker announces disappointing sales numbers for a particular quarter, its stock will often drop suddenly before resuming its longer term trend. Day traders will try and take advantage of this type of “bandwagon” effect by striking when the iron is hot, so to speak.
Day trading is truly a product of the modern age, and several innovations in stock and securities trading have conspired to make it possible. One is the growth of home computing and steady increases in both Internet bandwidth and PC processing power.
Another is the change in the way equities trading itself is done, utilizing the vastly increased speed of trading made possible by the computer revolution. As far back as 1971, the founding of NASDAQ set the pattern for a host of similar electronic communication networks, or “ECNs” for short. The combination of these and other contributing factors such as the steep drop in commissions, reduction of settlement periods and the growth of a volatile high-tech market sector have given rise to conditions where skilled day traders can play the market from the comfort of their chairs.
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