A Day Trader’s Objectives
The objectives of day trading are different from traditional, long-term investing. Most investors buy stocks with regard to their future; most notably for their retirement.
Usually, individuals who invest in the stock market, either on their own or through a broker, have full-time employment or another source of income to fund their investments. The major difference between the two types of investing is that traditional investors allow their investments to grow and accumulate wealth, whereas day traders need to withdraw their earnings on a daily, weekly, or monthly basis in order to get by. For most day traders, trading is their job; it is their main source of income.
A successful day of day trading can yield profits ranging from the hundreds to the thousands. However, there are also the days when day traders lose money; sometimes a large sum. Day trading is extremely risky, and the days when traders lose money can happen with more frequency than days when a profit is made. This is one of the main disadvantages of day trading as a profession.
Note – After finishing this section go to the forex trading information on JobMonkey. Day trading and forex have a lot in common as both allow people to potentially make money on their own schedules working from home or anywhere there’s an Internet connection.
Basics of Day Trading
How Day Trading Works
Again, day trading is different form traditional, long-term investing. Day traders look to hold a security for a short time (at times only a few minutes or even seconds) in order to make a quick, and hopefully significant, profit.
The following is an example of a typical trade for a day trader:
If a day trader buys 1,000 shares of a security at $20 per share at 9:00 a.m.
At 9:14, our trader sells the security which has risen to $20.50 per share. Due to this increase of $.50 (50 cents) in the price of the security, the trader has made a return of $500 (less commission, and taxes, of course). It is possible that this same security could later fall in price. That is why it is important for a day trader to remain focused on the present situation, and the present trade he is involved in.
Now, this $500 gain may not seem like a lot of money to make on a trade, but keep in mind that a day trader makes anywhere from 20-30 trades per day. One of the main principles of day trading is to multiply one’s profits by increasing the volume of trades.
Important Day Trading Terminology
Securities: Financial assets that an investor can trade (buy and sell), e.g. stocks and bonds.
Stock: A type of security that gives the holder ownership rights in a corporation. If you own a company’s stock (called owning shares), then you are a shareholder.
Trade: To buy or sell financial assets in the financial markets.
Trader: A person who buys or sells financial assets for himself or for others. Traders generally hold assets for a much shorter time than investors.
Broker: A middleman who facilitates trades between buyers and sellers.
Leverage: The use of borrowed money to increase potential returns.
Volatility: a measure of the expected daily price range – the range in which a day trader operates. More volatility means greater profit or loss.
Liquidity: The level that a security can be traded without affecting its price. Liquidity is characterized by a high level of trading activity.
Closing Out: The act of completing all transactions at the end of the trading day. Day traders close out all of their trades at the end of the day to reduce overnight exposure.
Technical Indicator: an important piece of financial data for a particular security.
Pivot Point: A technical indicator obtained by calculating the numerical average of a particular stock’s high, low and closing prices.
Last Trade: The price and time of the last recorded trade for a security.
Day’s Range: The range between the high and the low price of a security for a day.
52 wk Range: The range between the high and low price of a security over a year.
Change: The amount the price of a security has risen or fallen since the previous day’s close.
Bid: The best current offer/price to buy security.
Ask: The best current offer/price to sell a security.
Prev Cls: The previous close price of a security.
Open: The opening price of a security for the current session.
Volume: The number of shares of a security traded in a session.