Day trading is speculation in securities, especially buying and selling of financial instruments within the same trading day. In fact, daily trades are only traded just in a day, so all positions are closed before the market closes for trading day. Many traders may not be so strict or may have day trading as one component of the overall strategy. Traders who participate in day trades are called day traders. Traders who trade in this capacity with profit motives are speculators. The quick trading method contrasts with long-term trading underlying buying and holding strategies and value investments.
Some of the more commonly traded daily financial instruments are stocks, options, currencies, and futures contracts such as equity index futures, interest rate futures, currency futures and commodity futures.
Day Trading is an exclusive activity for financial companies and professional speculators. Many day traders are bank employees or investment companies who work as specialists in equity investments and fund management. However, with the advent of electronic commerce and margin trading, day trading is available for individuals.
Video Day trading
Characteristics
Some day traders use intra-day techniques known as scalping which usually have traders holding positions for a few minutes or even seconds.
Most day traders get out of position before the market closes to avoid uncontrollable risks - a negative price gap between the one-day closing price and the next day's open-air price. Another reason is to maximize day trading purchasing power. Other traders believe that they should let the profit run , so it is acceptable to remain in position after the market closes.
Daily traders sometimes borrow money to trade. This is called margin trading . Since margin interest is usually only charged on overnight balances, traders can pay no fee for margin profit, although still run the risk of margin calls. Margin interest rates are usually based on a broker's call.
Fortunately and risk
Due to the nature of financial leverage and possible rapid returns, day trading results can range from highly profitable to highly unfavorable, and high-risk profile traders can result in large percentage returns or large percentage losses. Because of the high profits (and losses) of the trading day it is possible, these traders are sometimes described as "bandits" or "gamblers" by other investors.
Daily trading is risky, especially if the following things happen during a trade:
- trafficking game/system losers rather than games that can at least be won,
- inadequate risk capital with excess pressure accompanying it for "persisting,"
- Incompetent money management (ie bad execution of trades).
The general use of buying by margin (using borrowed funds) strengthens profits and losses, so substantial losses or increases can occur in a very short period of time. In addition, brokers usually allow a larger margin for day traders. In the US for example, while the overnight margin required to hold stock position is usually 50% of the value of the stock, many brokers allow day trader account patterns to use levels as low as 25% for intraday purchases. This means a daily trader with a legal minimum of $ 25,000 in his account can buy a $ 100,000 (4x leverage) stake during the day, for half of that position being issued before the market closes. Due to the high risk of using margins, and other day trading practices, day traders often have to get out of losing positions very quickly, to prevent greater losses, unacceptable, or even huge losses, much greater than their losses. or the original investment, or even greater than its total assets.
Maps Day trading
History
Initially, the most important US stock was traded on the New York Stock Exchange. A merchant will contact a stockbroker, who will deliver an order to a specialist on the NYSE floor. These specialists will each make the market only a handful of stocks. Specialists will match buyers with other broker sellers; write physical tickets which, after being processed, will effectively transfer the stock; and pass information back to both brokers. Brokerage commissions are set at 1% of the trade amount, ie to buy $ 10,000 worth of buyer $ 100 purchase cost in commissions and 1% for sale. (Means that for profit trading it should make more than 2% to get real profit.)
One of the first steps to make a day trading of potentially lucrative shares is a change in the commission scheme. In 1975, the Securities and Exchange Commission of the United States (SEC) made the commission rate remain illegal, resulting in discount brokers offering a lot of commission deductions.
Financial pricing
The period of financial settlement is used longer: Prior to the early 1990s on the London Stock Exchange, for example, shares may be paid up to 10 business days after purchase, allowing traders to buy (or sell) shares at the beginning of the settlement period just to sell (or buy) they before the end of the period expect price increases. This activity is synonymous with modern commerce, but for longer settlement periods. But today, to reduce market risk, the settlement period is usually two business days. Reducing the settlement period reduces the possibility of default, but is not possible before the transfer of electronic ownership takes place.
Electronic communication network
The system in which stocks are traded has also evolved, the second half of the twentieth century has seen the emergence of electronic communication networks (ECN). This is basically a large proprietary computer network in which the broker can register a limited number of securities for sale at a specified price (asking price or "ask") or offer to buy a certain amount of securities ("bid")).
ECNs and bourses are usually known by merchants by three or four letter designers, who identify the ECN or swap on a Level II stock screen. The first is Instinet (or "inet"), established in 1969 as a way for big agencies to get through the increasingly complicated and expensive NYSE, also allow them to trade during the hour when the stock is closed. Early ECNs such as Instinet are very unfriendly with small investors, as they tend to provide higher prices to larger institutions than is available to the public. This results in a fragmented and sometimes illiquid market.
The next important step in facilitating day trading is the establishment in 1971 NASDAQ - a virtual stock exchange where orders are shipped electronically. Moving from paper stock certificates and stock registers to "dematerialized" shares, computerized trading and registration requires not only extensive changes to legislation but also the necessary technological developments: online and real time systems rather than batches; electronic communication rather than postal service, telex or physical delivery of computer cassettes, and the development of secure cryptographic algorithms.
This development heralded the emergence of "market makers": the NASDAQ equivalent of NYSE specialists. A market maker has stock inventory to buy and sell, and simultaneously offers to buy and sell the same shares. Surely, he will offer to sell the stock at a price higher than the price offered for purchase. This distinction is known as "spreading". Market makers do not care whether stocks go up or down, it's just trying to keep buying less than it sells. Continuous trends in one direction will result in a loss to the market maker, but the strategy is overall positive (otherwise they will be out of business). There are currently about 500 companies participating as market makers on the ECN, each typically making the market in four to forty different shares. Without any legal obligations, free market makers offer smaller spreads on the ECN than NASDAQ. A small investor may have to pay $ 0.25 spread (eg he may have to pay $ 10.50 to buy stock but can only get $ 10.25 to sell it), while the agency will only pay a $ 0.05 spread (buy at $ 10.40 and selling at $ 10.35).
Bubble technology (1997-2000)
After the 1987 stock market crash, the SEC adopted the "Order Handling Rule" which requires market makers to publicize their best offer and ask NASDAQ. Other reforms undertaken are the "Small Order Execution System", or "SOES", which requires market makers to buy or sell, immediately, small orders (up to 1000 shares) on bids or requests submitted by the maker's market. The design of this system spawns arbitration by a small group of traders known as "SOES bandits", which make substantial profit buying and selling small orders to market makers in anticipation of price movements before they are reflected in published offers/requests. price. The SOES system ultimately leads to trade facilitated by software rather than the market maker via the ECN.
In the late 1990s, the existing ECN began offering their services to small investors. New brokerage firms specializing in online merchants who want to trade on ECN appear. New ECN also appears, the most important Islands ("statues") and Islands ("isld"). Nusantara eventually became the stock market and in 2005 was bought by NYSE. (At the moment, the NYSE has proposed incorporating Islands with itself, though some resistance has emerged from NYSE members.) The Commission falls. To give an extreme example (trading 1,000 shares of Google), an online merchant in 2005 may have bought $ 300,000 shares with a commission of about $ 10, compared to a commission of $ 3,000 that traders will pay in 1974. In addition, in 2005 to buy stocks almost instantly and get them at a cheaper price.
ECN is in constant flux. Recently formed, while existing ones were purchased or merged. By the end of 2006, the most important ECNs for individual traders are:
- Instinet (who bought the Island in 2002),
- Archipelago (although it is technically now an exchange of ECNs),
- Brass Utility ("brut"), and
- The SuperDot electronic system is now used by NYSE.
The combination of these factors has made day trading in stocks and stock derivatives (like ETFs) possible. Low commission rates allow individual or small companies to make large amounts of trade for a day. The liquidity and small spreads provided by the ECN allow one to trade instantly and earn a favorable price. High-volume issues like Intel or Microsoft generally only have a difference of $ 0.01, so the price only needs to move a few cents to the merchant to cover commission fees and show profits.
The individual's ability to trade today coincided with the extreme bull market in technology issues from 1997 to early 2000, known as the Dot-com bubble. From 1997 to 2000, NASDAQ increased from 1200 to 5000. Many naive investors with little market experience made a big profit buying this stock in the morning and sold it in the afternoon, with a margin of 400%.
In March, 2000, this bubble burst, and a large number of less experienced day traders began to lose money as quickly, or faster, than they did during the buying frenzy. NASDAQ fell from 5000 back to 1200; many less experienced traders have gone bankrupt, though it certainly may have made a lot of money during that time by shorting or playing on volatility.
In line with stock trading, beginning in the late 1990s, a number of new Market Maker companies provide foreign exchange and derivative day trading through new electronic trading platforms. These allowed day traders have quick access to decentralized markets such as forex and global markets through derivatives such as contracts for difference. Most of these companies are based in the UK and then in less restrictive jurisdictions, this is partly because of regulations in the US that prohibit this type of over-the-counter trading. These firms typically provide trades with margins that allow day traders to take large positions with relatively little capital, but with an increased risk associated. Retail foreign exchange trading is becoming a popular way of day trading due to its liquidity and 24 hour market trait.
Technique
Here are some basic strategies that traders use today to generate profits. In addition, some day traders also use a contrarian (reverse) strategy (more often seen in algorithmic trading) to trade specifically against the irrational behavior of day traders using this approach. It is important for traders to remain flexible and adapt their techniques to adjust to changing market conditions.
Some of these approaches require shorting stocks rather than buy them: traders borrow shares from their brokers and sell borrowed stocks, hoping prices will fall and he will be able to buy stocks at lower prices. There are some technical issues with short sales - the broker may not have a share to lend in a particular matter, the broker may request the return of his shares at any time, and some restrictions are enforced in America by the US Securities and Exchange. Commission for short-term sales (see detailed rules for details). Some of these restrictions (especially the uptick rules) do not apply to stock trading that are actually shares of exchange-traded funds (ETFs).
Trends follow
Following the trend, the strategy used in all trading time frames, assumes that ever-increasing financial instruments will continue to rise, and vice versa by falling. Followers of the trend of buying an instrument that has increased, or short selling fall, in the hope that the trend will continue.
Contrarian Investment
Counter investment is a market timing strategy used in all trading times. This assumes that the ever-increasing financial instruments will reverse and begin to fall, and vice versa. Contingent traders buy instruments that have fallen, or short-sell increases, in the hope that the trend will change.
Trading range
Trading ranges, or limited range trades, are trading styles where stocks are watched that have risen from support prices or falling from resistance prices. That is, whenever the stock touches high, it falls back to the lowest point, and vice versa. Such stocks are said to be "trading in the range", which is the opposite of the trend. Therefore, a range trader buys the stock at or near a low price, and sells (and possibly sells short) on a high. The approach associated with the trading range is to look for movements beyond the established range, called breakout (breaking prices) or disruptions (price moves down), and assume that after the price range has been broken it will continue in that direction for some time.
Scalping
Scalping was originally referred to as spread trade. Scalping is a trading style in which small price gaps created by bid-ask spreads are exploited by speculators. It usually involves the formation and liquidation of positions quickly, usually within minutes or even seconds.
Scalping highly liquid instruments for off-floor merchants involves taking quick profits while minimizing risk (loss of exposure). It applies the concept of technical analysis such as purchasing zone, resistance and resistance to excess, as well as trendline, trade channel to enter the market at key points and take quick advantage of small movement. The basic idea of ​​scalping is to exploit market inefficiencies when volatility increases and the range of trades extends. Scalper also uses the "faded" technique. When stock values ​​suddenly rise, they sell short securities that seem to be overvalued.
Rebate trading
Rebate trading is an equity trading style that uses ECN rebates as the main source of profit and income. Most ECNs charge commissions to customers who want their orders immediately filled with the best available price, but ECN Commission pays to buyers or sellers who "add liquidity" by placing boundary orders that create "market-making" in security. Rebate traders are trying to earn money from these rebates and will usually maximize their profits by trading low-priced and high-volume stocks. This allows them to trade more shares and contribute more liquidity to a set amount of capital, while limiting the risk that they will not be able to get out of stock position.
News Games
The basic strategy of the news game is to buy shares that have just announced good news, or a short sale of bad news. Such events provide enormous volatility in a stock and therefore the greatest opportunity for quick profits (or losses). Determining whether the news is "good" or "bad" must be determined by the stock price action, because the market reaction may not match the tone of the news itself. This is because rumors or predictions of events (such as those issued by market and industry analysts) will already be outstanding before the official release, causing prices to move in anticipation. Price movements caused by official news will therefore be determined by how well the news is relative to market expectations, not how good it is in absolute terms.
Price action
Keeping things simple can also be an effective methodology in terms of trade. There is a group of traders known as price action traders who are technical merchants who rely on technical analysis but do not rely on conventional indicators to direct them toward trading or not. These traders rely on a combination of price movements, chart patterns, volumes, and other raw market data to gauge whether they should trade or not. This is seen as a "simple" and "minimalist" approach to trading but not in any way easier than other trading methodologies. It requires a strong background in understanding how the market works and the core principles in the market, but the good thing about this type of methodology is that it will work in almost all existing markets (stocks, foreign exchange, futures, gold, oil, etc..).
Artificial Intelligence
It is estimated that one-third of stock trading in 2005 in the United States is generated by automated algorithms, or high-frequency trading. Increased use of algorithms and quantitative techniques has led to more competition and smaller profits.
Cost
Commission
Commission for direct access brokers is calculated by volume. The more shares traded, the cheaper the commission. The average commission per trade is roughly $ 5 per round trip (in and out of position). While a retail broker may charge $ 7 or more per trade regardless of trade size, a typical direct-access broker can charge anywhere from $ 0.01 to $ 0.0002 per traded share (from $ 10 down to $ 0, 20 per 1,000 shares), or $ 0.25 per futures contract. A broker can cover those costs even with minimal profit.
Spread
The numerical difference between bid and ask is referred to as a bid-ask spread. Most of the world markets operate on a bid-ask-based system.
The ask price is the direct (market) execution price for the quick buyer (request taker) while the bid price is for quick sellers (bid taker). If trading is done on quoted prices, closing trades immediately without queuing will always cause losses because the offer price is always less than the asking price at any time.
The bid-ask spread is two sides of the same coin. Spreads can be seen as bonuses or trading costs by various parties and different strategies. On the one hand, merchants who do NOT want to queue their orders, instead of paying market prices, pay for spreads (fees). On the other hand, merchants who want to queue and wait for execution receive a spread (bonus). A few day trading strategies seek to capture spreads in addition, or even sole, advantages to successful trading.
Market data
Market data is required for day traders, rather than using pending market data (by anything from 10 to 60 minutes, per exchange rule) that is available for free. Real-time data feeds require payment of fees to the respective stock exchanges, usually combined with brokerage fees; these costs are usually very low compared to other trading costs. Fees may be revoked for promotional purposes or for customers who meet the minimum monthly trading volume. Even a fairly active day trader can expect to meet these requirements, making basic data feeds essentially "free".
In addition to raw market data, some merchants purchase more advanced data feeds that include historical data and features such as scanning large numbers of shares in the immediate market for unusual activity. Complicated analysis and charting software are other popular additions. This type of system can cost from tens to hundreds of dollars per month to access.
Rules and restrictions
Day trading is considered a risky trading style, and regulations require brokerage firms to ask if clients understand the risks of daily trading and whether they have previous trading experience before entering the market.
Day trader pattern
In addition, in the US, the Financial Industry Regulatory Authority and SEC restrict further entries by means of an "pattern day trader" amendment. Day trader patterns are terms defined by the SEC to describe any trader who buys and sells certain security on the same trading day (day trade), and does this four or more times in every five consecutive business days. A day trader pattern is subject to special rules, the main rule is that to engage in day trading patterns in margin accounts, traders must maintain a minimum equity balance of $ 25,000. It is important to note that this requirement is only for day traders using margin accounts.
See also
Notes and references
External links
- US. Securities and Exchange Commission on daily trading
Source of the article : Wikipedia
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