Day Trading

Definition

The investing term day trading refers to individuals that buy and sell securities throughout the day, closing out their positions before the markets close.  Trades include a number of standard securities, including stocks, options, as well as futures (currencies, commodities, interest rates).

Explanation

The term day trading refers to individuals engaging in a number of techniques, all of which involve closing out their positions before the markets close.  Also referred to as active traders, these individuals are oftentimes considered speculators.  The speed of computers, along with the ability to conduct trades electronically, allows individuals to day trade from the comforts of their homes.

Day trading is a generic term used to describe a number of techniques, including:

  • Scalping: holding a position in a security for a brief period of time; an arbitrage approach that allows traders to profit from bid-ask spreads.
  • Price Momentum: looking for technical patterns that may indicate a security's price is about to quickly move up or down.
  • Range-Bound Trading:  watching for stocks that move past a resistance price, which can indicate it's about to break out and trade at higher prices in the immediate future.
  • News Playing: monitoring the news for information that might cause a sudden increase or decrease in the market's perceived value of a company's stock.

Day trading frequently involves purchasing securities on margin, which is also referred to as leverage.  The use of margin serves to amplify both profits as well as losses.  Pattern day traders are individuals that buy and sell the same security four or more times in five business days or less.  Pattern traders that also use margin accounts are required to maintain at least $25,000 in an account when actively trading.  Rules also permit these traders to purchase securities equal to four times their maintenance margin.

Related Terms

margin account, floor broker, stock exchange specialist, scalping, position trading, swing trading, over-the-counter market, position trading, swing trading, over-the-counter market, Advanced Computerized Execution System, advance decline line