Thursday, February 26, 2009

Introduction To Day Trading

History of online day trading

Day trading was pretty much the domain of stock brokers and remained that way until the late 1990s, when the increasing popularity of the internet, motivated the international stock markets to move online. The birth of day trading was made possible when the computerized, over-the-counter NASD became available in 1971.

The consequence of this move was that day trading brokers became optional because anybody with Web access could execute their own trades, provided that they had an account with a registered online brokerage. The uptake was enormous, because by 1999, at least 25% of all trades made were done as online trading by individual investors. Day trading online grew in popularity as these investors started gaining online trading maturity. This growth found further impetus with the Dot Com Bubble as many traders could buy and sell the same share on the same day with three digit returns.

What is day trading?

The U.S. Senate Permanent Subcommittee on Investigations defines day trading as "Placing multiple buy and sell orders for securities and holding positions for a very short period of time, usually minutes or a few hours, but rarely longer than a day. Day traders seek profits in small increments from momentary fluctuations in stock prices after paying commissions."

With day trading it is common to focus on short-term trading, where a trade could last for anything between a couple of seconds to a couple of hours. In day trading online, the number of trades made may vary from between just a few to a couple of hundred per day. It is also common to finish the day with a closed overnight position. This means that everything you bought gets sold, before market close.

There are many different techniques or strategies that you can use in day trading. Some of the more common online trading systems include:

?Trend following
?Range trading
?Rebate Trading
?News Playing

One of the techniques that started surfacing in day trading is algorithmic trading. Algo, as it is commonly called, is favoured by hedge -, pension and mutual funds. It is estimated that 33% of all US and 40% of all UK trades during 2006 were made by algo traders. Algo trading is automated, meaning that the trader leaves it up to the computer to decide when to buy and sell.

Day trading can either be done by institutions or by individuals. Individual day traders normally make use of direct trading firms that offer them direct, real-time electronic access to stock markets. For a day trader real-time access is important because it enables them to have a ?live? view of movements on the Securities Exchange of those stocks, stock options, currencies, futures contracts, interest rate futures and commodity futures that they are trading online.

What are the pros of day trading?

?Self employment ? Day trading online offers you the potential to earn really good money and it goes without saying that you will enjoy flexibility in where and when you work.

?Stimulation ? Trading online is both exhilarating and interesting. It requires analytical thinking and continually challenges your abilities. Every day is a new start ? stagnation is not possible at all!

What are the cons of day trading?

Financing ? In day trading you need money to make money ? and lots of it. Day trading penny stocks could be high risk, so you will probably need to play in the bigger leagues, or at least find a happy (and profitable) balance between the two. There are also regulatory requirements around the amount of money you need in your account. In the US for example, it is $25,000.

Latent loss potential ? You are pretty much at the mercy of economy figures, analyst comments, interest rates, and so forth. A single press release or a single comment could turn a profitable stock into a dead loss. This makes your income unpredictable.

Day trading online can be highly profitable and produce rapid returns, in spite of being high risk. The risk is mainly due to margin use, and other day trading practices. Naturally, most risks can be managed if you remain prepared, alert and focussed. In example, when you start trading online, you will probably find that you have to exit a losing position very quickly, to prevent a loss. At the same time, you will need to move just as quickly to capitalise on any winning positions you may have.

Day trading online can be a fun and even profitable adventure, provided that you have good discipline, -risk and -money management.

What they can't do is give (people) the confidence to stick to those rules even when things are going bad." Almost anybody can make up a list of rules that are 80% as good as what we taught. "The key is consistency and discipline.

Richard Dennis, on Turtle Trading


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