Day-Trader and Day-Trading – What is it and How Do I Become One

A Day-Trader is somebody who buys and sells financial instruments, normally on the same day, or within a day or two. Usually the financial instruments are derivatives, such as futures, options, and CFD’s as they have a higher level of leverage. This high leverage gives the Day-Trader the opportunity to make enough returns in the very short period.

For some people Day-Trading is a hobby and for others they have given up their day job and spend every weekday watching the markets and trading.

The two main age groups of Day-Traders are 25-30 years old with surplus cash and have been brought up in the computer / internet age, where Day-Trading has really taken off. This is because of the ability for the average person to follow the markets in real time on the internet and place trades over the internet with lower brokerage rates. The other group is that of retirees who are looking after their own investments, and usually have more time on their hands to learn the skill and trade.

In the past share investing has usually been more of a longer time frame investment. With investors holding onto share for many years. These days the average length of time that shares or derivatives are held for has dropped considerably.

When holding onto shares for the long term Fundamental Analysis, which involves evaluating a companies financial position, such as profit and P/E ratio, was far more important. For a Day-Trader Fundamental Analysis is less important as it will rarely change a companies share prices during the day unless there is some sort of announcement.

What Day-Traders more commonly use is that of Technical Analysis. Technical Analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical Analysts believe that historical performance of shares and markets are indicators of future performance. Technical analysts do not attempt to measure a security’s intrinsic value, they instead use charts, and other indicators to identify patterns that can suggest future price movements.

Common patterns have been recognized over the years, such as support and resistant levels, candlesticks and break out patterns. Other indicators are such things as momentum, convergence/divergence, Williams %R, Moving averages, overbought and oversold, and Volatility to name just a few.

Most day-Traders have a strategy and a trading plan that uses these indicators to determine when they buy and sell. Using these derivatives the Day-Trader can go long or short, meaning that they can bet whether they think the market will go up or down.

The trading plan should also have predetermined profit targets and stop losses. This is very important in relation to money management.

However, the nature of these strategies can vary significantly in terms of risk, assessment techniques, size and even types of investments traded.

Many online brokers provide real-time trading platforms. This allows the Day-Trader to monitor movements as they happen, personalize your desktop for your trading style and place orders.

In addition to this, many traders use software programs or toolboxes that reflect their trading style. Such programs include MetaStock, BourseData and MarketScan. Some programs are set “black box” programs which just tells you when to buy and sell without explaining the reasoning behind the decision.

Other programs involve a live trading room where Day-Traders see and hear a professionals charts and trading plan and allows them not only to copy what the professional does in real time, but also allows the trader to ask question so they can learn the skill at the same time.

A new program to the market is the Auto-Trader. This allows the Day-Traders account to follow a professional traders account without you having to do anything. This not only solves the problem of the time necessary to trade but also overcomes the emotional problems that can be involved in trading.

Whatever strategy you choose you need to be disciplined in your trading to maximize your returns.

Author: Rob Read
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