What is day trading?
Day trading is an active trading strategy that involves opening trades once the market opens and closing them, at a loss or profit, before the market closes. In day trading, traders don’t leave positions opened overnight, thus eliminating the burden of additional costs or unforeseen events that might affect price movements once the market opens the next day.
Day trading can be carried out in any marketplace, as long as you are connected to the market. The forex and stock markets are the most traded day markets, given the high levels of liquidity in both that allow traders to open and close trades with ease. The availability of leverage in these markets also makes it possible for traders to invest a small amount of capital and take full advantage of small price movements.
While day trading was the domain of professional traders in the past, the opening of the financial markets with electronic trading has since attracted novice traders into the practice as well. The rise of the Internet has also made it possible for the average individual to get into the game.
While day trading can be a lucrative way to create a new stream of income when done properly, it can also present challenges for those who don’t know what they are doing. Day traders rely on a number of strategies to open and close trades in the market.
Day trading strategy types
Given that day trading entails opening and closing positions before the market closes, scalping has emerged as one of the most popular day trading strategies. With scalping, traders try to make small profits by taking advantage of small price changes throughout the day.
Day traders who implement scalping execute as few as many as a few hundred trades in a day while trying to benefit from small price movements. Trades in this case are opened when the markets are moving up or down. The idea with scalping is that small profits when compounded amount to large gains at the end of the day.
Range trading is a day trading strategy that mostly focuses on support and resistance levels in the market. In this case, day traders plot resistance and support levels that will act as points of entry depending on how price moves.
The strategy is especially beneficial in range-bound markets where price oscillates between highs and lows. In this case, a day trader would open a buy order whenever price bounces off a support level and exit the position as soon as it hits the resistance level in the case of an uptrend. Likewise, the trader would open a sell position as soon as the price rises to the resistance level and experiences strong resistance, triggering a sell-off.
News-based strategy is a day trading strategy that seeks to take advantage of increased levels of volatility in times of big news events. Depending on how the markets interpret a given news event, prices can move in one direction or another with high levels of velocity. A day trader would, in this case, open a position and try to ride along with the trend in response to the news event.