definition – day trading:
Day Trading is intra-day speculation for quick profits. This means that day traders generally close their positions before the end of trading day or more precisely before market close. The main motivation behind day trading is to minimize opening price risk. Day Trading also avoids any overnight interest payments due from margin lending, when day trading with leverage. Therefore, it reduces the cost of trading on Margin accounts.
Day traders generally use leverage such as margin loans. For instance, in the United States, Regulation T permits an initial maximum leverage of 2:1 for day trading. However, many brokers will permit 4:1 intraday leverage as long as the leverage is reduced to 2:1 or less before the end of trading day.
Day trading was once an activity that was exclusive to big banks and hedge funds. Many day traders are bank or investment firm employees working as specialists in equity investment and risk management. Day trading gained popularity after the deregulation of brokerage commissions in the United States in 1975. Real time price integration with electronic trading platforms in the 1990s helped increase liquidity in the day trading markets. And, with high speed internet availability since 2000s, day trading is now available to anyone, anywhere in the world, 24 hours a day.
high frequency trading(hft)
High-frequency trading(HFT), also loosely called algorithmic trading, is day trading done by machines instead of human beings. The idea behind HFT is that a trading strategy can be coded. This is done by identifying entry and exit points for a trade based on certain trading day conditions and tolerances. For instance, the algorithm may be coded to monitor standard deviation of an index at 5 minute intervals. If this standard deviation is within a certain range, the algo will open a position. Once the index goes below the mean of last 10 “5 minute intervals” price, it should exit the position.
In addition to opening and closing the position, the HFT may also keep track of n number of variables to limit trading losses on a given trading day. Typically, the traders with the fastest execution speeds and closest proximity to trading venues datacentre, will be more profitable than traders with slower execution speeds and farther away from the exchange.
High-frequency trading became popular when exchanges started to offer incentives for companies to add liquidity to the market. For instance, the New York Stock Exchange (NYSE) has a group of liquidity providers called Supplemental Liquidity Providers (SLPs). These SLP’s attempt to add competition and liquidity for existing quotes on the exchange.
It is now virtually impossible for individuals to compete with HFTs and day trade profitably. HFT’s will remove any arbitrage opportunities in milliseconds, before a human being can react to it. The only way to beat an HFT is by building a more clever HFT. A number of brokers are now offering direct API’s that allow individual day traders to build their own algo. STOKAI will provide such HFT’s in the future for day trading.
electronic communication networks(ecn)
Electronic communication network (ECN) is a computerized network that matches buy and sell orders for securities in real time. In addition, it allows anonymity. For instance, when a large order has to be executed without distorting the market price. It also allows the individual trader to bypass the broker. In addition, it allows trading directly with anyone, anywhere in the world. Even outside of market trading hours.
Some of the popular ECNs include Instinet, SelectNet, and NYSE Arca. Instinet was the first ECN, founded in 1969, and is used by small brokerages and for transactions between institutions. It is also widely used by market makers for NASDAQ trades. However, individuals and small firms can also use it.
ECN’s work with the concept of Limit orders. So, a market participant specifies, the maximum possible price, they are will to buy for. Or the minimum possible price they are willing to sell for. A large number of such buy and sell orders are then enqued into a list. And matched based on lot size and price.
Most HFTs firms have dozens (if not hundreds) of special order types at their disposal. Retail traders who want to be able to fight back and cut down their trading costs should learn and build useful order types that are available to them. If you do not have background in finance and computing, then you should look for a product in the market. And, test it with a paper money account before using real cash.
how to start day trading
zero sum game
Many people begin day trading without fully understanding the fundamentals of the contract. For each trade there is a winner and a loser. It is a good idea to hedge your short term day trading position. For instance, say your focus is long opportunities in stock indices. Then, keep a long term Gold ETF position open at the lowest commission rates possible as a hedge. While hedge protects against the downside of price changes, they also limit potential upsides as well.
Long-term success in day trading comes from mastering three disciplines. If you are a successful day trader, you are probably familiar with these rules. Firstly, you need a proven process that works for day trading. Secondly, sound money management can go a long way to helping you win the day trading game. Finally, any day your emotions control your trading, you are likely to lose.
As an individual in the day trading arena, you are up against the biggest and the best in the world. So, it is important to get access to tools that experienced traders use. Otherwise, you are playing with a handicap. Experienced traders have models to calculate the fair value of an asset. And to decide whether to play short term or long term market correction game. For instance, STOKAI is one such tool. You can read more in FAQs on how to achieve this.
Go through books and papers on day trading written by well known authors. Generally, thrill seekers tend to dive in straight into the markets. But, there is no skipping through when it comes to financial markets. Each successful trader has had their elbows in the mud. Read and learn the basics or lose money.
Do you have a lot of capital for day trading? Capital availability affects many choices. The first is whether you should open a retail brokerage account or a proprietary day trading account. Generally, $25,000 is the cutoff point. With $25,000, and four times leverage you can trade like a high capital trader with $100,000.
With a low-capital account, we need to find strategies that can utilize the maximum leverage available. Of course, getting a higher leverage is beneficial only if you have a consistently profitable day trading strategy. With a low capital, you will always be chasing high risk trades to make a reasonable profit. This is not a good position to be in when trading intraday.
An experienced trader has strong risk management practices and emotional stability. Hence, doesn’t need the guidance given by a proprietary firm. But, less experienced traders may benefit from the imposed restraints.
Finally, the soft skill needed in trading. Fear, anxiety, and greed are common traits in everyone. Keeping them under control is an ongoing effort. When they take over, your trading results will suffer. Instead of fear, some of you are planning to trade because of the love of thrill and danger. Or an incredible self-confidence that instant wealth is imminent. This is also a dangerous emotion to bring to independent day trading. And, this is why almost 70%-80% of retail traders lose money. Instant wealth is not the objective of trading. Therefore, the ideal trader is someone whose emotions have found the right balance between fear and greed.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
so what next when day trading?
STOKAI provides daily prediction using algorithms based on all factors that impact commonly traded assets. Then, it evolves the forecast over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.