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What is day trading?
Day trading is a common trading strategy in which traders complete the buying and selling of financial instruments during the trading hours of the day, aiming to profit from small price movements.
Intraday trading requires guessing the price movement of a security before the end of the day, which means that all positions are settled before the market closes. The trading method of day traders is very different from that of long-term traders, who usually use a buy-and-hold investment strategy. Day traders tend to trade stocks, currency pairs, indices, commodities and cryptocurrencies.
Throughout the ages, day trading has been a unique activity of large financial firms, banks and professional speculators, mostly day traders working in investment banks or as experts in stock investment and fund management companies. However, since the advent of retail and leveraged trading, more and more people have come into contact with day trading, and many individual traders have also become day traders.
Day Trading Strategies and Techniques
Day traders seeking to maximize intraday profits usually use one or more next-day trading strategies and techniques, and here are several intraday trading strategies.
Interval Trading
Range trading, sometimes called Grid trading, is a day trading strategy. First, traders need to understand the recent price history of a given security. Understand the general price highs and lows of the security by looking at the price chart, while paying close attention to the differences between these price points.
For example, when the price of a security rises from a support price or falls from a resistance price, traders choose to buy or sell based on their judgment of the direction of the market, this is called "trading within a certain range". Whenever the price of a security reaches a high point, it falls back to a low point, and vice versa. Day traders using this strategy will buy securities at low prices and sell them at high prices; If they choose to go short, they will operate in reverse.
Most range traders use stop-loss and limit orders to ensure that trades are in line with their forecasts for the market. If the price of the security is below the trader's entry point, the stop loss point is the point at which the position is automatically closed. On the other hand, the limit point is the price point at which the trader automatically closes the position when he or she believes that he or she is most profitable.
Range trading requires enough volatility to keep the price changing continuously throughout the day, but the price does not move beyond the range.
Contrarian trading
The principle of contrarian trading is that there are no securities that only go up but not down; Similarly, there are no securities that only go down but not up. Traders using this strategy prefer to choose assets that have risen before selling, or to buy asset classes that have fallen.
Doing so is actually buying cheap and selling high, or rather buying assets that appear to be underpriced and selling assets that appear to be overpriced. Traders using this strategy need to quickly detect changes in the trend and open positions at the best entry point. This trading strategy for market trends can sometimes be the exact opposite of what traders expect. However, for traders who are well aware of the laws of the market, trend trading strategies are a profitable weapon.
News Transactions
News trading is one of the most traditional and dominant short-term trading strategies used by day traders. News traders pay less attention to charts and technical analysis, and they focus on a variety of information and announcements, because they believe that such information has a vital impact on price changes. This information may be a company's quarterly report, new product launches, general announcements about economic indicators such as unemployment, interest rates, inflation, or simply certain rumors about a certain industry.
In order to do a good job of news trading, day traders will first understand the market in which they intend to trade. They don't necessarily do in-depth research on market makers, but they have the knowledge or expertise to analyze how market prices will change after the news is released. At the same time, they are sensitive to a variety of news sources and know the best time to enter the market.
The disadvantage of news trading is that there are usually few events that cause large fluctuations in asset prices. In general, before the official release of the news, the relevant impact has been reflected in the price. The implementation of trading automation is also more difficult because traders have to check the news before they can place an order. This trading strategy is more suitable for traders who can place orders as soon as they receive news.
Pairing transactions
Day traders using this trading technique find two related assets in the market and go long one market while shorting the other. Most traders will use paired trading strategies in the stock market of the same industry, selecting up and down stocks as trading objects, but they can also be applied in the futures market, such: long interest rate futures while shorting metal futures. The principle of this strategy is to get the maximum return from the trend that affects both assets.
Which assets do day traders usually choose?
In order to make more profits in a day, day traders usually look for financial instruments that meet the following criteria. Assets should be highly liquid, highly volatile, and contain a wealth of information. Leveraged trading provides better opportunities for less volatile markets because it provides a larger market share. This means that your profit will be maximized, but it also increases your loss. The following are some of the financial instruments that are more suitable for trading.
Foreign Exchange Contracts for Difference
The forex market is open 24/7 and currency pairs are ideal for day traders who enjoy high volatility, strong liquidity and low capital requirements. However, the forex pairs must be selected correctly to meet the intraday trading conditions. Usually day traders will choose a currency pair that they are familiar with and that fits the chosen day trading strategy.
Index CFDs
CFDs, which reflect indices, are one of the most liquid and traded instruments in the financial markets. Popular indices such as the Nasdaq 100, the Dow Jones Industrial Average and the FTSE 100 are all frequently chosen by day traders.
Commodity Contracts for Difference
For commodities that offer high liquidity, such as crude oil and gold, CFDs offer many opportunities for day traders. They also have the added advantage of providing diversification for traditional assets such as index CFDs.
Cryptocurrency CFDs
Cryptocurrencies are very unstable. Trading derivatives like CFDs on cryptocurrencies can achieve high liquidity, which means that day traders can enter the market at any time. However, cryptocurrency market movements are more volatile than traditional asset classes, and traders must use effective risk management techniques, including but not limited to stop orders and stop orders.