What is Day Trading?

Eduardo Montero

Day trading is a speculative investment system, which has many similarities with other investment models based on the investor carrying out buying and selling operations of a certain financial instrument (such as currencies, shares, commodities, indices,…) hoping to obtain benefits with the rise or fall of its price according to his prediction of what its future behaviour will be. The difference with other investment systems is that in the case of Day Trading, the investor opens and closes the operations within the same day of trading. It is therefore a way of investing in the short or very short term as the trader does not usually leave positions open overnight. There are many Day Traders who even keep their positions open for a few minutes or seconds (this technique is called scalping).

In Day Trading, the investor generally trades in real time in the financial markets looking for buy and sell opportunities that fit his investment strategy. Once he has located a particular instrument that is suitable for him, he opens a position and once he makes a profit, he closes it, even if it is only a small profit. You repeat this type of trading with various investment instruments as many times as possible but the common pattern is that they do not usually remain open beyond the same day.

Some of the reasons why many investors prefer Day Trading as an investment strategy are as follows:

– Day traders prefer to close their positions before the market closes to avoid possible losses due to differences between the price at the end of the session and the opening price of the following day.

– They opt for day trading as a short term strategy where they open numerous positions and achieve a day-to-day profit target rather than a longer term investment where long accumulated profits can disappear or be significantly reduced in future fluctuations that go against them.

– Day trading avoids the cost of the overnight premium that most online brokers charge for keeping positions open overnight.

How to do Day Trading?

The most common way to do Day Trading is to trade CF Ds(What are CFDs?). CFDs are a very agile method of trading as they do not have the physical property of the financial instrument in which it is invested and allow you to open buy or sell positions immediately. Thanks to the leverage you can invest a small amount of money as collateral and get the effect of trading a much larger amount. In this way you can achieve a quick positive return and go into profit in a few minutes but at the same time, it also incorporates a greater risk that is sometimes increased when investing in high volatility instruments to try and make a quick profit.

Day trading was, until not so long ago, a strategy reserved for financial institutions and professional speculators. Today, thanks to technological advances and the proliferation of online brokers, any retail investor can learn and do Day Trading on their own with an internet connection and from their own computer, tablet or mobile phone.

In our section Best Online Brokers we make a comparison of the brokers we believe are most recommended for investing in the stock market either through Day Trading or for investors who prefer short or medium term strategies.

If you want to learn how to do Day Trading for example the XM broker gives you the possibility to try their trading platform with a free demo account and start trading from only 5 $.

This post is also available in Spanish: day trading

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