What is Day Trading?

What is Day Trading? How does it work? What should one consider while doing Day Trading?
Day trading, as the term implies, is trading that is completed within a day. It means that stocks are bought and sold within the same trading day. Day traders usually hold the stocks for just a few hours or even few minutes and may aim for a profit as low as 30 or 40 cents. The percentage gains that day traders typically get in a single trading are often miniscule, but the strategy is to trade in large volumes of shares to make huge profits. The day traders capitalize on small fluctuations in stock prices. Most day traders who trade for a living work for a large institution. Individual traders often manage other people's money or trade with their own. 
 

There is a great deal of controversy over whether day trading is profitable. Many believe day trading is akin to gambling and the rewards do not justify the risk but there are many day traders who are able to make a successful living. Day trading is not for everyone and involves significant risks. It requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. 

How Does Day Trading Work?
The goal of a Day Trader is to realize a modest profit on a stock in the shortest span of time possible, thus allowing the base capital to be used again and again in the course of a single trading session. During a typical day, a trader may complete dozens of different transactions. Most of these will be placed on a handful of stocks selected for their price volatility. High Tech stocks with broad average trading ranges are favorite targets. Frequently, a trader will execute numerous transactions per day on a single active stock in an attempt to squeeze profits out of small price fluctuations. Most active Day Traders will be intensely fixated on a small group of volatile stocks throughout the trading day, waiting for small windows of opportunity. 

The important thing to a Day Trader is the price movement of a stock. It does not matter whether the movement is up or down. Through a typical day, a trader will move in and out of dozens of stock positions in an attempt to gain a small but steady stream of profits from miniscule price movements. Because the Day trader holds short term positions, stocks may have to be liquidated at a loss at short notice. 

Considerations for Day Trading:
A stock should have the following criteria: 
• Liquidity – There should be a sufficient number of buyers and sellers for a stock. This will allow the day trader to quickly and easily acquire or dispose of the stock thereby increasing chances for profit.

• Volume - A stock should trade at least 500,000 shares a day or more to make it useful for day trading. This will allow the day trader to buy or sell large quantities of shares without unduly affecting the price of the stock. 

• Volatility – This refers to the actual or expected price movement of a stock (either up or down) over a particular period of time. A stock should fluctuate by at least $2.00 in a typical trading day to make it a viable stack for day trading

• Price Transparency – A day trader should be able to obtain up-to-the-minute information regarding the order flow for a particular stock.