Day Trader
Day traders are individuals who open and close stock and option positions during the same trading session. Most often these traders will conduct numerous transactions during that time, with some traders making hundreds of transactions. Their goal is to capture a slight movement in a stock's price, either upward or downward, and take profit. Some traders will buy stocks and options, while others are focused on the foreign currency or FOREX market or commodities. Regardless of the underlying financial instrument, they're looking to get in and get out quickly and for profit. It is the extreme side of the buy-and-sell school of trading.
The concept of day trading was formerly the realm of financial professionals or specialists in equity investment and fund management. Today a day trader can be anyone who has a computer, even a casual or non-professional trader. The increase of day trading has been brought about by the development of online brokerage houses and the shrinking size of commissions. Option trades that formerly cost $60-$100 to enter and exit can now be completed for half as much, which makes trading more affordable for everyone. And new online brokerages are popping up every month.
But anyone who wishes to be a day trader must meet certain guidelines established by the Securities and Exchange Commission. These were designed to prevent uneducated people from putting an exorbitant amount of money at risk. A person is considered by the government to be a day trader if they buy and sell the same security within in the same trading day four or more times within a five-day period. If they exceed that number of transactions, the brokerage firm is required to freeze their trading account, unless they have an account of at least $25,000.
Those who make multiple trades during the day are generally keeping an eye on the news and using it as a basis for their moves. They may look for a company that has just announced good news and buy the stock, or wait for a company to release a piece of bad news and enter into a short position. Because news events can create volatility in the market, a day trader can use that fluctuation to create an opportunity for quick profits. Even rumors can be used to squeeze or create profit-making chances. These traders usually need a direct-access broker, which permits them to send their orders straight to the floor. Regular retail brokers don't offer the sort of speed that is needed; they can't get orders filled enough on either side of the transaction to make it profitable.
There is a potential to make money, but it is estimated that most don't achieve the rate of success required to become profitable. Many times these traders fail because they lack the necessary capital or because they don't obtain the education needed to compete in the market. Although things move faster in the day trading environment, the same rules for entries and exits apply. Traders must still buy the proper stocks and options and follow the same procedures followed by traditional traders.
