UNDERSTANDING ELECTRONIC DAY TRADING Every Investor’s Guide to Wall Street’s Hot

Understanding Electronic Day Trading

Opinions about day trading vary widely. Some people swear it is the best way ever to make a profit in the stock market…others, including the SEC (Securities and Exchange Commission) advise strongly against day trading, insisting it is too risky. As with many things having to do with investing and the stock market you will hear all kinds of things about day trading. The trick is to sort the information out.

But what exactly is day trading and why do so many advise against it? Day traders literally trade everyday, all day, buying and selling sometimes very rapidly. They hope to see a stock going up, for instance, quickly buy a block of that stock and then sell it again as soon as it has risen enough to make a reasonable profit. If everything works right the trader makes a profit every day from the normal movement of stock prices up and down.

Day traders try to concentrate on certain stocks that are particularly suitable for day trading. The most important thing is that the stock must be one that is highly liquid, which means it is bought and sold often. This allows the day trader to buy and sell easily. Liquidity varies with market volume and the size and nature of the business. In general almost all stocks on the major exchanges are more than liquid enough for day trading purposes.

To be suitable for day trading a stock also needs to be sold in sufficient volume that the buying and selling activity of one trader won’t affect the market price of the stock. Day traders usually buy and sell big blocks of stock so a good day trading stock needs to have at least 500,000 shares traded a day. Day traders also look for stocks that have high volatility, which means that the price goes up and down rapidly. A stock with a rapidly changing price is perfect for day trading. The ideal is at movement of at least $2 a day.

A day trader also needs to be able to find sufficient real time information of the orders for a stock. This is sometimes called price transparency or market depth and lets the trader know how much stock they can probably move in a certain period of time. Traders need to have access to the NASDAQ level II quote screens in order to gather this information.

There is nothing illegal about day trading but it can be extremely risky. Almost all day traders are working with borrowed funds which they hope to increase through their buying and selling. If the NYSE and the NASDAQ classify someone as a “pattern day trader” then that trader must trade through a margin account with at least $25,000 as a deposit in it. The broker who handles the account will require that further deposits be made if the trader’s holdings drop too far in value.

Because day trading is so risky the Securities and Exchange Commission has devoted quite a bit of energy to spreading warnings about the practice. Their fear is that people will become involved without understanding how much money they can lose in a very short time.

Anyone who decides to try day trading can expect to suffer huge losses as they try to learn how to do it successfully. Very few will succeed and make money in day trading. No one should ever try day trading with money that they cannot afford to lose without any problems.

Day traders are not really investors. They buy and sell over the span of time as short as seconds or minutes. They never hold stock after the close of the trading day because the risk of overnight price changes is too great for them. Day trading is really speculating; some call it gambling.

Be sure to avoid websites which promote day trading by talking about the great profit potential and then offer you ‘expert information’ or ‘hot tips’ for money. The recommendations are usually actually paid for themselves and the advice is worthless.

Forex day trading can be incredibly profitable if done correctly. Successful Forex day traders enjoy not only the profit and wealth-building potential of Forex trading but the peace of mind of not holding open Forex trades overnight.

Forex Day trading is system of trading on the foreign currency exchange market, where the trader begins and ends all trades on the same trading day. The trades are typically completed quickly, with the trader profiting from the changes in a currency exchange rate from time he buys and sells.

Depending on the method or system that the trader uses to pick the trades, it can be very complicated. Currency exchange rates fluctuate over the course of the day. Multiple factors change the rate many times per day. Some of those factors are other traders, world news and what current rumors. Day trading in the foreign currency market is affected by rumors, current events and news stories more than other types of trading in stocks, currency and future markets. Traders can maximize their profits by paying close attention to the current news and how it is affecting the currency exchange rates.

The foreign exchange currency market, also referred to as Forex, is the most liquid market in the world. Each day, the trading volume on Forex exceeds $1,300,000,000,000 U.S. dollars are. Forex is the world’s largest market, partly due to the practice of day trading. Day trading differs from other types of trading in the duration between buying and selling the stocks, or in this case currency. A day trader sells everything by the close of the day’s market. No currency is held over to be traded the next day. Whatever the trader buys must be sold by the end of the day or vice versa.

In actuality, the market does not have an end of the day. It is open 24 hours, there from Sunday afternoon to Friday afternoon. So the beginning and end of the trading day is defined by the trader, and not the market itself.

One thing to keep in mind when day trading is that the more frequently you trade the higher your transaction costs will be. This is why it is important for Forex day traders to use trading systems which can produce enough profit to overcome all transaction costs.

It is believed that the difference between a day trader and an investor is the duration between buying and selling. That definition is simplistic. The major difference is in the goals and perspective of the traders. An investor buys a stock believing it will increase in value over time, and expecting to hold for a long time so that increase can happen. A day trader buys and sells in anticipation of minor, short-term fluctuations in the currency market. Forex trading is done in large lots of 100,000. A small fluctuation in the exchange rate might not seem significant, however, it can be very profitable, or costly, when multiplied by 100,000.

Day trading on the foreign currency exchange has potential risks and rewards just like any other type of trading. Successful traders get to know the market and understand the ramifications of their trades. Traders who begin trading without an understanding of the fundamental and technical workings of the Forex market are destined to fail, just as they would in any business. High potential profit comes with high risk. Traders must be educated and prepared before they engage such the volatile, fluctuating market of day trading.