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How Does Day Trading Work

Day Trading Definition

How does Day Trading work? As Robert Deel notes, the definition of a day trader is someone who enters the market at some point during the day and is totally in cash by the end of the day. At no time does a day trader carry a position overnight.

Day Trading usually involves significant time investments, as daily fluctuations tend to reflect market sentiments rather than the actual performance of the underlying stock. Day traders frequently rely on chart patterns to time their moves – one chart pattern that is often considered highly valuable is the bearish engulf, where an uptrend is entirely engulfed by a downtrend; this indicates a coming steep drop in price.

Types of day traders

Scalpers

This type of day trader trades for fractions of a point. However, this technique is highly psychologically demanding and has a high rate of failure. Before you decide to become a scalper, note the statistics: 92 percent of scalpers lose money.

Intraday trend traders

This type of day trader stays in a trade until the trend reverses. Depending on the market, this could take anywhere from a few minutes to a few hours.

Day trading typically requires a large amount of operating capital. You would generally need at least $50,000 in order to be able to offset the trading costs (brokerage costs, clearing fees, etc).

Microtrend traders

Unlike day traders, microtrend traders typically hold trades for three to five days. They attempt to trade a portion of a larger trend, and uses stops to stop the trader out of a trade if the expected pattern reverses dramatically. Successful microtrend trading requires that the entry be made at a point when the trend is strong, preferably when it begins explosively.

Microtrend trading is typically less stressful than day trading. Microtrend trading also requires less capital in order to be successful.

Position trend trader

How to day trade like a position trend trader? Position trend traders attempt to ride trends for at least ten days. This type of trading would mean that you need to be willing to allow for price volatility. Trailing stops would be necessary, and position trend traders would need to know how to place stops intelligently in order to be successful.

The amount of capital necessary for position trend trading varies; generally, the minimum amount necessary for success for be lower than that for microtrend trading and day trading.


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