What Day Traders Trade
The most popular securities for day traders are stocks. Stocks are shares in a company, and owning a stock in a company makes you a shareholder.
Most day traders follow the standard “buy low, sell high” strategy of trading stocks, of course though with a more rapid pace than long-term investing. Day traders will only hold the stock for the day, and will rarely hold a stock overnight. To follow a stock’s movement during the day and decide if it is a good trade, a day trader will follow technical analysis, charts, and even news sources for that particular company.
Options are the name of a legal agreement made between the buyer and seller of a security at a specified price for a specified period of time.
There are two basic types of options:
1. Call option: An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
2. Put Option: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
When the price of a stock is expected to rise, the trader buys a call option of a certain number of that stock. Similarly, when the price of the stock is expected to go down, the put option is bought for a certain number of stocks at a specific rate. The positions are closed when the expected level of price is reached on a future date making it a profitable trade.
Day trading options offer two key advantages: leverage and loss-limiting capabilities (stops, protective puts).
Day trading options also holds some disadvantages: reduced liquidity (see day trading glossary) and limited price movement – this affects a day trader who is looking to make a quick profit due to significant price jumps in a shortened time period.
A futures contract is a financial contract obligating the buyer.
(This is the main difference between a future and an option) to purchase an asset (or the seller to sell an asset), commonly a financial instrument, such as a commodity (energy, metals, livestock, farmed goods), at a predetermined future date and price. Futures trading involves betting on the direction in price of an instrument, in order to make a return. You can make money on the rise or fall of the instrument concerned, as long as you predict correctly.
Day trading futures is an advanced skill that should only be attempted by experienced day traders with the right amount of knowledge.
Some advantages of trading futures contracts are: volatility of the futures market and the low margin required to execute trades. Also, with futures there is a high degree of leverage than can be employed by a trader.
Some traders see the requirement of a margin account as a disadvantage in futures trading. While leverage is an advantage of trading futures, it can, due to its risky nature, be a disadvantage – this is where knowledge and experience comes into play.
Trading on the foreign exchange market (FOREX) gives a trader the opportunity to trade currencies against one another. Like day trading stocks, a trader can buy and sell currencies throughout the course of a day. Day trading currencies can be extremely risky due to the amount of factors that can affect national currencies.