You have seen them in the movies, screaming at their phones asking to buy a few thousand or to sell a few millions worth of stocks. Meet the Day trade, a different type of profit seeker in the stocks market.
Day traders are also called speculators because they make their money from short-term fluctuations in the market. You can trade in stocks, options, futures, derivatives or currencies. In day trading, there are two types of traders, Institutional and retail. If you trade for yourself, you are a retail trader. Institutional traders are bigger financial institutions with vast resources, money and brainpower. Consider them as the elephants of the market while a retail trader is more like a weak fox, which follows the elephant. They have the upper hand.
Retail traders work via a retail brokerage and trade with their own money. There are also some traders called Auto traders who use custom tools and rules (Algorithm based) to automate the buying and selling process.
Day trading is making use of opportunities presented by the market sentiments.
There are two major types of opportunities in day trading, Buy low and sell high or sell high and buy low. In either case, your buy or sell position needs to be squared off by the end of the trading cycle. ie. If you buy something in the morning, and you sell it later in the day, you are squaring off thus completing the cycle.
If you expect the price to go up during the trading hours, buy the stocks and hold until it reaches your target price. Sell it once it reaches your target price and go home with the happy money.
Example: Joe the trader is expecting the price of HTR Company to go up in the day and the stock is at £ 12.75. Joe buys a thousand shares at this price. Within hours the price climbs up to 18.50 and starts falling down. Joe sells his entire lot at 17.30 and makes a cool £ 4000+. This is called Buying long
If he had sold the stocks at the peak, the price he would have made £5750. By the end of the day, the stock price falls to £11.25. Had he kept those shares until the end of the day, he would have incurred a loss.
In case you suspect the price will slide down through the day, you can sell the stocks at a price and then buy them back when the price goes lower. This is known as shorting or short selling.
Example: Joe the trader is expecting the price of GTF Company to go down by the end of the day. now, the price is at £25.50 apiece. He sells a thousand shares at that price. By end of the day, the price is at £23.20 so Joe buys back a thousand shares thus squaring off his position. He made a cool £2300 by these two trades. This an example of a short sell.
What could go wrong?
These trades were just an example. In reality, a multitude of things can happen. When Joe sold a thousand shares at 25.50, he could have lost money if the price had gone up throughout the day.
Joe could also lose money on buying long if his shares’ price falls after he buys them. Joe could also have lost money by waiting for a better price.
Things to remember: Day trading is dependent greatly on the stock market sentiments and is susceptible to rumours. Price variations can happen anytime and you should be able to respond to those changes.
Two cardinal rules:
- Only risk capital you are prepared to lose.
- Create a set of rules and stick to it.
Never risk capital that you need for something else. It will only cause mental anguish, which may lead to emotional decisions that could lose you money.
Second. Set up a set of rules for trading. Ex: Profit margin, loss margin (or stop loss). Lot value (i.e. how much money to put into a single trade). Always start with conservative values i.e. once you make 5% profit, exit and so on. This will help you gain discipline so you can avoid rash emotional decisions.