One investment opportunity that is much misunderstood is what is called day trading. It can be option day trading, or day trading for regular stock issues rather than options. Either way the name comes from the fact that the transactions take place usually within the time frame of one day. As a matter of fact, many of the transactions take place in a matter of minutes.
It was the introduction of ECN’s, Electrical Communications Networks, and their acceptance by the SEC, The United States Security and Exchange Commission, that opened the door to day trading as it is practiced today. In the past, it was the way the Stock Exchange operated that restricted day trading, as a certain amount of time was required to process transactions on the floor of the Stock Exchange.
Day trading is a wide and diverse investment opportunity, and its reception by the more traditionalist in the financial world has been somewhat mixed. Often viewed as more gamblers than investors, day traders have been reviled by some. On the other hand, some are giving day traders credit for helping to stabilize the market.
One thing is certain. Day trading carries a great deal of risk. So much so, that brokers are required to issue risk warnings to potential investors before allowing them to engage in day training. Individual investors are generally required to maintain a $25,000 minimum balance in their accounts.
Day Traders use several methods to make investment decisions. Trend following is one of them. Trend following is based on the assumption that stocks that are rising will continue to rise, and stocks that are falling will continue to fall. The day trader makes his buy early in the day, and sells at the end of the day, taking the day’s rise as profit.
Another method used by day traders is called Range Trading. The idea here is that stocks have certain points that when reached cause the stock price to drop. Traders have knowledge of this range level, and use it to guide purchase or sale decisions.
Some Traders use a method known as “Playing the News.” This method is simply keeping up with news that might impact the price of a stock. There is usually a delay in between the announcement of financial news, and the reaction of individual stocks to the news. The news can be good and cause stocks to rise, or bad, and cause them to fall, but the day trader acts quicker than the market.
Another method is called shorting. In this type of trading, stocks are borrowed from a broker, and sold. The trader is expecting the stocks to fall during the day, and at the end of the day, he buys them back at the lower price, repays the broker, and pockets the profit.
All of these various trading strategies depend on the ability to make trades in volume, and to make them quickly. This was not possible in the days before the internet became so wide spread, and the ECNs were established. Today, online option trading allows transactions to be made with the stroke of a keyboard, and this has fueled the rise of day trading.
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