NEWS AND ANALYSIS

Incisive market commentary and expert opinion

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
 
+ Show blog menu

Categories

Menu

Expand 2017 <span class='blogcount'>(175)</span>2017 (175)
Collapse 2016 <span class='blogcount'>(483)</span>2016 (483)
Expand December <span class='blogcount'>(23)</span>December (23)
Collapse November <span class='blogcount'>(41)</span>November (41)
OPEC agrees to production cut - Video Update
30 Nov 2016
OPEC meeting in focus - AM Briefing
30 Nov 2016
A look-ahead to tomorrow’s OPEC meeting - PM Bulletin
29 Nov 2016
Mixed start for equities; crude lower - AM Briefing
29 Nov 2016
An introduction to technical analysis - Trading Guide
28 Nov 2016
Softer tone across risk assets - AM Briefing
28 Nov 2016
Crude, dollar and equities slip in holiday-shortened session
25 Nov 2016
ECB warns of uncertain outlook - Video Update
24 Nov 2016
Slow start as US closed for Thanksgiving - AM Briefing
24 Nov 2016
Gold slumps below key support
23 Nov 2016
Probability of Dec Fed hike hits 100% - AM Briefing
23 Nov 2016
Sterling slips ahead of Autumn Statement - PM Bulletin
22 Nov 2016
US stock indices hit fresh record highs - AM Bulletin
22 Nov 2016
How to read candlestick charts - Trading Guides
21 Nov 2016
US dollar pulls back from highs - AM Bulletin
21 Nov 2016
Dollar continues to surge - AM Bulletin
18 Nov 2016
Crude rebounds despite inventory rise - PM Bulletin
17 Nov 2016
Equity rally slows - AM Bulletin
17 Nov 2016
US dollar continues to rally - Video Update
16 Nov 2016
Dollar holds recent gains - AM Bulletin
16 Nov 2016
Dollar Index tests resistance - PM Bulletin
15 Nov 2016
Dollar soars as bonds slide - AM Bulletin
15 Nov 2016
What is Swing Trading?
14 Nov 2016
Markets adjust to Trump presidency - Weekly Bulletin
14 Nov 2016
Trump win sees investors rethink their portfolios - AM Bulletin
11 Nov 2016
Equities up, but bonds are down - PM Bulletin
10 Nov 2016
Market responds to Trump win - AM Bulletin
10 Nov 2016
US Election fall-out - Video Update
09 Nov 2016
Markets react to Trump win - AM Bulletin
09 Nov 2016
US Election – possible outcomes and market reaction - Video Update
08 Nov 2016
US election result is all that matters now - AM Bulletin
08 Nov 2016
What is day trading? - Trading Guides
07 Nov 2016
Election uncertainty spooks investors - Weekly Bulletin
07 Nov 2016
Market info update: US Election Market Changes
04 Nov 2016
US Non-Farm Payrolls in focus - AM Bulletin
04 Nov 2016
Non-Farm Payroll look-ahead - PM Bulletin
03 Nov 2016
Equities mixed ahead of BoE Inflation Report - AM Bulletin
03 Nov 2016
Central bank meetings and election polls - Video Update
02 Nov 2016
FOMC rate decision ahead - AM Bulletin
02 Nov 2016
Bounce-back in precious metals - PM Bulletin
01 Nov 2016
RBA and BOJ leave rates unchanged - AM Bulletin
01 Nov 2016
Expand October <span class='blogcount'>(37)</span>October (37)
Expand September <span class='blogcount'>(41)</span>September (41)
Expand August <span class='blogcount'>(52)</span>August (52)
Expand July <span class='blogcount'>(38)</span>July (38)
Expand June <span class='blogcount'>(42)</span>June (42)
Expand May <span class='blogcount'>(42)</span>May (42)
Expand April <span class='blogcount'>(45)</span>April (45)
Expand March <span class='blogcount'>(41)</span>March (41)
Expand February <span class='blogcount'>(42)</span>February (42)
Expand January <span class='blogcount'>(39)</span>January (39)
 
 
 Monday 07 November 2016

What is day trading? - Trading Guides

 

 

What is day trading?

It’s possible to break down trading strategies into four main types: Day, Trend, Swing and Position. Most traders tend to identify and stick to a single approach rather than mixing them up. However, it’s also fair to say that there is a degree of overlap between the four, at least when it comes to using technical indicators or focusing on fundamentals. It can be useful to look at what is involved in each approach to see how it suits you, your lifestyle and your attitude to risk. After all, you may not have enough free time to day trade. By the same token, you may be uncomfortable taking on the amount of risk which may be required to run longer-term position or trend-based trading strategies. In this guide we’ll consider Day and Trend trading and look at some of the key differences between them. We’ll cover Swing and Position trading in a separate post.

Day Trading

Day trading means opening and closing trades within a day, or a single trading session. This avoids the extra costs together with the added uncertainty that comes with holding a position overnight. In fact, some day traders may only run a position for a few hours or even minutes.

Day traders are constantly on the look-out for short-term opportunities. They tend to trade frequently and act when they consider a market to be oversold or overbought. Then they jump in to buy or sell in the hope of turning a quick profit. A day trader will typically have a tight risk/reward ratio. That is, they may be happy to risk £50 to make £50, although a 1:2 risk/reward ratio is more common and indeed more sensible. Due to the high frequency of trades and the tight risk/reward ratio, disciplined risk management is extremely important. Day traders often use charts with short timeframes (5 minute, 15 minute and hourly) to identify intermediate areas of support and resistance and trade accordingly. Day traders tend to work on the assumption that markets overshoot and undershoot specific price levels (which they identify on charts) and then quickly correct. Day traders have to be prepared to use tight stops in order to avoid losing money if a market breaks out of its short-term trading range. They have to be extremely disciplined in choosing their entry and stop levels. They must be prepared to take a series of small losses and always have a profit target for every trade. Day trading won’t suit anyone who hasn’t got time to keep a close eye on the markets throughout the trading session.

Trend Trading

There are a group of traders who specifically look for opportunities when a market shows signs of trending in a particular direction. They try to identify those times when momentum is building in a market on one side rather than another. Typically this comes when a financial instrument breaks out of a range after a period of consolidation and as sentiment turns increasingly positive (for a “buy” trade) or negative (for a “sell”). It doesn’t matter whether the direction is up or down as a trend trader only wants to establish that a market looks set to move broadly in a particular direction over a period of time. This can be short, medium or longer-term. Once the position is placed, the trader will then run it until there is evidence to show that the trend has run its course. Strictly speaking, trend traders put aside market fundamentals and instead concentrate on price action alone. They often use specific drawing tools and/or technical indicators to help them decide when a trend is establishing, and if so, which direction is it going in?  For instance, the Directional Movement Indicator is useful for signalling if a market is ranging or trending. Then a drawing tool such as Andrews’ Pitchfork can be used to establish the likely direction and strength of a trend together with lines of support and resistance. These can help to establish when a trend has run its course. As with any strategy, risk and money management is important with trend trading. In contrast to day traders, trend traders are prepared to put up more risk capital per trade, but aim for a bigger percentage return. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Trading Guides

Category: Trading Guides


Add a comment Add comment            

 

 
© 2017 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.