Day trading has a profit potential that it both controversial and popular among Wall Street-ers and other market participants across the world. There are those who do day trading with sufficient knowledge and thus make a successful living despite the odds being stacked against them. In this article, we’ll take an overview of day trading and what’s in it for the traders.
Day Trader Characteristics
Knowledge and Experience
The persons who attempts to day trade without an understanding of market fundamentals often ends up losing money than gaining profits.
Sufficient Capital
One cannot expect to make money by day trading quickly and easily. Day traders, in reality, use risk capital, or the money that they can afford to lose. Not only does this protect them from financial ruin, but it also helps them eliminate emotions from their trading. A large amount of capital is usually necessary to capitalize effectively on intraday price movements.
Strategy
A trader needs an advantage over the rest of the market. There are several different strategies that day traders utilize, and these include swing trading, arbitrage, and trading news. These strategies are refined until they come out with consistent profits and effectively put a cap on losses.
Discipline
A profitable strategy is worthless without a trader’s discipline. Many day traders end up losing a lot of money just because they fail to make trades that meet their own criteria.
What Day Trading Demands
Access to Trading Desks
This is typically reserved for traders who are working for huge institutions or those who manage large amounts of money. The dealing desk offers these traders with almost immediate order executions which can be important, especially when sharp price movements take place.
Multiple News Sources
News provides the majority of opportunities day traders capitalize on, so it is imperative to be the first to know when something big occurs. The typical trading room contains access to the Dow Jones Newswire, CNBC, and other organizations.
Analytical Software
Trading software is an expensive need for most day traders. Those who depend on technical indicators or swing trades depend more on software than news. This software typically contains many features, which include the following:
Automatic Pattern Recognition
This means that the trading program determines technical indicators like flags and channels, or more complex indicators like Elliot Wave patterns.
Genetic and neural applications
These are programs that use neural networks and genetic algorithms to polish trading systems to make more accurate predictions of future price movements.
Broker integration
Some of these applications even interface directly with the broker, and this allows for a near-instant and even automatic execution of trades. This is very helpful for getting rid of emotion from trading and enhancing execution time.
Back testing
This enables traders to look at how a certain strategy would have performed in the past with the view to predict more accurately the manner it will perform in the future, although, of course, one must remember that past performance is not always indicative of future results.