A day trader\u00a0is a type of trader who executes a relatively large volume of short and long trades to capitalize on\u00a0intraday\u00a0market price action. The goal is to profit from very short-term\u00a0price movements. Day traders can also use\u00a0leverage\u00a0to amplify returns, which can also amplify losses.<\/p>\n\n\n\n
While many strategies are employed by day traders, the price action sought after is a result of temporary\u00a0supply and demand\u00a0inefficiencies caused due to purchases and sales of the asset. Typically positions are held from periods of milliseconds to hours and are generally closed out before the end of the day, so that no risk is held after hours or overnight.<\/p>\n\n\n\n
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There is no special qualification required to\u00a0become a day trader. Instead, day traders are classified based on the frequency of their trading. The\u00a0Financial Industry Regulatory Authority\u00a0(FINRA) and\u00a0New York Stock Exchange\u00a0(NYSE) classify day traders based on whether they trade four or more times during a five-day span, provided the number of day trades is more than 6% of the customer’s total trading activity during that period or the brokerage\/investment firm where they have opened an account considers them a day trader.<\/p>\n\n\n\n
A day trader\u00a0often closes all trades before the end of the trading\u00a0day, so as not to hold\u00a0open positions\u00a0overnight. A day traders’ effectiveness may be limited by the\u00a0bid-ask spread, trading commissions, as well as expenses for real-time news feeds and analytics software. Successful day trading requires extensive knowledge and experience. Day traders employ a variety of methods to make trading decisions. Some traders employ computer trading models that use technical analysis to calculate favorable probabilities, while some trade on their instinct.<\/p>\n\n\n\n
Day traders are subject to capital and\u00a0margin maintenance\u00a0requirements.<\/p>\n\n\n\n
A day trader is primarily concerned with the\u00a0price action\u00a0characteristics of a stock. This is unlike investors, who use\u00a0fundamental\u00a0data to analyze the long-term growth potential of a company to decide whether to buy, sell or hold its stock.<\/p>\n\n\n\n
Price volatility and average day\u00a0range\u00a0are critical to a day trader. A security must have sufficient price movement for a day trader to achieve a profit.\u00a0Volume\u00a0and liquidity are also crucial because entering and exiting trades quickly is vital to capturing small profits per trade. Securities with a small daily range or light daily volume would not be of interest to a day trader.<\/p>\n\n\n\n
A\u00a0pattern day trader<\/a>\u00a0(PDT) is a regulatory designation for those traders or investors that execute four or more\u00a0day trades\u00a0over the span of five business days using a\u00a0margin account.<\/p>\n\n\n\n The number of day trades must constitute more than 6% of the margin account’s total trade activity during that five-day window. If this occurs, the trader’s account will be flagged as a PDT by their\u00a0broker. The PDT designation places certain restrictions on further trading; this designation is put in place to discourage investors from trading excessively.<\/p>\n\n\n\n Day traders are attuned to events that cause short-term market moves. Trading the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings, or\u00a0interest rates<\/a>\u00a0are subject to market expectations and\u00a0market psychology. Markets react when those expectations are not met or are exceeded, usually with sudden, significant moves, which can benefit day traders.<\/p>\n\n\n\nDay Trader Techniques<\/h2>\n\n\n\n