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Day trading is a very common term used in the financial markets. Day trading refers to the purchase and sale of financial instruments on the same trading day so that all the positions care closed at the end of the day. It also means that whatever you have bought you have to sell at the end of the day. The people who do day trading are called active traders or simply day traders. The financial instruments in which these traders deal are stock options, stocks, commodities futures, interest rate futures and equity index futures.

Day trading used to be a favorite of many financial firms, speculators and investors. Many of the day traders are in fact employees in financial institutions such as banks while some of them are specialists in funds and investment management. However with the advancement in technology there are many home traders who have taken up day trading.

There are several styles in day trading. The day trader starts his day by finding out the potential trading setups that he cam do. He makes note of the stock or any other financial instrument that is going to accelerate in terms of price in any direction and which instrument has the potential of getting him profit at the end of the day. There is no limit to the number of trades the trader can make during the day. This applies to the profits or the losses for the day trader also which could again be unlimited. Hence we can say that day trading can turn out to be extremely risky if you are not smart enough or you are not experienced in this type of trading.

There are some traders who do very short term trading that can last for just a few minutes in a day. There is no limit to the number of times that day traders can buy or sell in a day. If there are large volumes then the share broker may give the trader trading fee discounts. There are certain factors in which the day traders focus. For example, some of them may focus on the technical patterns while others may focus on price momentum. They can also use of combination of more than one strategy to maximize the profit.

Some day traders may exit the positions and stop trading even before the market closes. This is to avoid any type of risks and negative price gaps. These gaps refer to the difference in between the price of the previous day’s close and next days opening. However there are other traders who believe the profit should continue so it is better to stay in position even if the market closes. The day traders may also borrow money to start trading. This type of trading is called margin trading. In this case the trader does not have to pay any fees as the interest in the margins are charged on the overnight balances. The margin interest rate is termed as the broker’s call.

Day trading can give you rapid returns but it can turn out be risky. For example, it could be very profitable on one day and extremely unprofitable on the other. Hence those traders who are high risk profile traders can either do ether huge percentage profits or huge percentage losses. There are some day traders who manage to make millions annually through day trading. The day traders are also called as gamblers and bandits as they can take such type of risks.

Day trading can be a very risky game in some ways. It could be risky when you trade on a loser’s game instead of a game that could still be winnable. It could also be risky when you are trading with less knowledge and poor discipline. The trader might be ignoring the market’s rules and tactics while trading. The trader might not have the adequate risk capital for day training and he might also be incompetent in money management. In some cases, substantial loses can occur in a very short period of time. The brokers generally allow bigger margins for the day traders. For example, the overnight margins are about 50% to hold the stock value many brokers will use as low as 25% for intraday purchases. Hence an intraday trade who has about $25000 in his account can avail of almost $100,000 of stock during the day so long as he exits from half of the positions at the end of the day. Because of the high risk margin the day trader may have to exit at a losing position very quickly so that he can prevent an even greater loss which could to more than his original investment or total assets.

In the US, the stocks were traded on the New York Stock Exchange. A broker would be contacted by the day trader who would then pass on the order to a specialist stationed at the NYSE. The specialists would then deal only in a few stocks. The specialist would help to match the deal by finding a seller of another broker and then send the information to both the brokers. The commission on the brokerage was fixed at 1%. The commission scheme was then changed in 1975 by the United States Securities and Exchange Commission. They termed the fixed commissions scheme as illegal as a result of which the brokers had to give a much reduced commission percentage.

Even the period for generating the financial statements used to be much longer. This is when technology had not caught up with the demands. But things have changed now and a lot of things have been automated. Today we can see that in order to reduce the market risk the settlement period is not more than 3 working days. This period used to be 10 working days in the past.

Today you can find good systems that have made day trading very easy and fast. These are called the electronic communication networks and they evolved during the second half of the 20th century. These are interconnected computer networks where brokers can list their securities to sell at a certain price and also offer to buy certain securities by quoting a buying price. Every ECN has a designated code number through which the broker and the trader can recognize it. People also started using stock screens which allowed them to trade even when the markets had closed down during the day. However such type of stock screen (called Instinet) was unfair to small time investors because large investors used to get better prices from them.

NASDAQ was founded in the year 1971 to facilitate day trading. NASDAQ is a type of a virtual stock exchange where the buying and selling orders are electronically transmitted. People found it extremely convenient to move from handwritten certificates to computerized trading. For this there were extensive changes made to the legislation and there was a complete redevelopment of technology. The online system was put into place rather than the telefax or the postal service. There were also cryptographic algorithms introduced into the system to prevent any type of unauthorized transactions or attempts of hacking.

In today’s time the market maker looks forward to buy the stocks at a certain price and then sells them at a higher price to make profit. Such type of a transaction is called the spread. However it is not important for the market whether the price of a particular stock rises or falls as it has adequate capital through which it can buy for lesser amount than it sells. Today there are over 500 firms in the US who operate under the ECS system.

In 1997 a rule was implemented where the market maker was required to publish his best bid on the NASDAQ. There was also one more rule brought in place called the Small Order Execution System where the market maker had to immediately sell or buy the small orders of up to 1000 shares. However there was a defect in the system and this gave rise to arbitrage by a small group of traders who were called bandits. This group made a lot of money by selling and buying small orders to market makers.

Today the day trader makes use of some techniques through which he can make profits. The most common technique is trend following where the trader assumes that the financial instruments that are rising steadily will continue to rise and those which are falling will continue to fall. Then there is another strategy called contrarian investing strategy where the day trader assumes that the financial instruments that have been rising will fall and vice versa when the price falls. Then there is range trading where the trend in the prices of stocks is watched over a period of time over a resistance price. The trader sells the stock at near the lowest price and sells at near the highest price.