Most new investors run into websites where traders have made hundreds of thousands and even millions of dollars in a short period of time. The truth behind this is a whole other story we will go into at another time, but you can bet that most of those people are day traders. What is day trading? Read below to find out.
What is Day Trading?
Day trading is buying and selling stocks within the same day. The day trader looks to capitalize on small price movements on high volume stocks by investing a large amount of capital, either with his own money or with a combination of leverage. The larger the investment in a trade, the smaller the price movement needs to be for a day trader to make substantial gains.
Holding Positions Overnight
Day traders under no circumstances hold positions overnight. When the markets close, the rule of thumb for a day trader is that he has zero money in the market(skin in the game). This is to protect the day traders account by overnight fluctuations and possible price drops.
Who Day Trades?
You can essentially day trade any sort of security you want, but for the most part, day traders are heavily weighted towards forex and stocks. Day traders are typically higher risk takers, as leverage(margin) is often included to increase profits on positions. The Forex market is a prime example of this, where day traders can often take 500x leverage on a single position.
Is Day Trading Worth The Risk?
Most professionals would say no. In fact some of them would consider day trading gambling. 90 percent of day traders fail and it takes a rock solid trading plan to turn a profit. But regardless of professionals opinions, there are many who succeed.
What Account Do I Need To Day Trade?
This is a crucial question you must know before opening an account at a broker. A day trader needs many tools in his arsenal to succeed, and there is a specific account that new investors usually gravitate towards and that is the TFSA, or Tax Free Savings Account. Keep in mind that you cannot short sell, or trade on margin with a TFSA. What you have in your account is all you get, and the ability to not short sell hurts a day trader during a bearish market. Day traders need to make money regardless of market conditions, so the ability to not short sell is a crucial factor why you cannot day trade out of a TFSA.
I hope we have answered your question on what exactly day trading is. Now that you have a general idea, feel free to start with our Day Trading Tutorial. This is an excellent 14 part series that will set you on the right path to becoming a successful day trader. Good luck!