Day Traders and Day Trading

What is a day trader? What is day trading?

A day trader is a trader, often a person with exchange trading privileges, who takes positions and then offsets them during the same trading session prior to the close of trading. (Source: CFTC)

Day traders rapidly buy and sell stocks, commodities, or currencies throughout the day in the hope that they will continue climbing or falling in value for the seconds to minutes they own them, allowing them to lock in quick profits. Day trading is extremely risky and can result in substantial financial losses in a very short period of time. (Source: SEC)

Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions will usually (not necessarily always) be closed before the market close of the trading day. Traders performing day trading are called day traders.

Some of the more commonly day-traded financial instruments are stocks, stock options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures.

Due to the nature of leverage and rapid returns, day trading can be extremely profitable and high-risk profile traders can generate huge percentage returns. Some day traders can manage to earn millions per year solely by day trading.

Nevertheless day trading can become very risky, especially if one has poor discipline, risk or money management. The common use of buying on margin (using borrowed funds) amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, a broker usually allow more margins for daytraders. Where overnight margin required to hold a stock position is normally 50% of the stock's value, many brokers allow pattern day trader accounts to use levels as low as 25% for intraday purchases. That means even a day trader with the minimum $25,000 in his account can buy $100,000 worth of stock during the day, as long as half of those positions are exited before the market close. Thus a day trader has to admit mistakes quickly and cut losses fast when the market goes against a position. Even when a position is in profit the day-trader needs to be careful since the profit plus any dividend has to offset the transaction costs and the interest on the margin. (Source: Wikipedia)