The opening and closing of positions in the market on the same day without holding them overnight.

What is day trading?

Day trading is generally referred to as the short-term and speculative trading of securities, such as stocks, currencies (Forex), commodities or CFDs.

By using leverage, even the slightest price fluctuations can be exploited to achieve high profits in a short time.

The individual positions are often just held for a few hours or minutes and will be closed by the end of the trading day.

The main reason why day trading is becoming increasingly popular is the mentioned leverage-effect.

This allows private investors to generate huge profits with a small deposit, which without the leverage could only be realized with a multiple of the initial capital.

In this way, traders can rapidly achieve attractive returns, while the amount of a potential loss will grow proportionally.

Risk Management with Day Trading

The risks related to daily purchases and sales of securities are basically the same as in long-term investments.

However, the fluctuations within a day are logically substantially less than for a longer period of observation, which is why the use of leverage is beneficial.

Day trading requires an in-depth knowledge of securities markets, trading strategies and derivative financial instruments.

Hercules Finance has committed to facilitate the responsible use of its customers when trading.

Therefore private investors and especially beginners should consider the following principles and guidelines when day trading, in order to reduce their risk:

  • Test run
    Firstly, efforts should be made to get to know the trading platform and to get along on the fast-paced financial markets by using a demo account and virtual money.
  • Theory
    Before an investor practically runs day trading, he should make use of brokers’ academy and webinars in order to get familiar with the complex theory of speculation and to study terms and charts.
  • Stop-Loss-Orders
    To reduce the potential for losses, traders can set a loss limit at which their position will automatically be closed.
  • Profit
    The long-term success in day trading is generally composed of various different profits. One should therefore not forget to take smaller profits as well, while looking for a big hit.

Money Management with Day Trading

Every satisfactory trading plan should include the ways and means to handle money management.

The concept of money management includes a prudent assessment of position size, volume and realistic profit objectives.

Trading too frequently (churning) drives up transaction costs.

Taking on too large of a position, forces the trader to set their stop-loss orders so close to the market that they frequently get taken out of a trade soon after they initiate it.

Not knowing when to take a profit (either too early, or too late) can cause the trader do the opposite of what is required of them to stay in business over the long run; that is, cutting their losses early and letting their profits mature across time.

Fundamental vs Technical Analysis

Trading the markets profitably requires having an effective trading plan.

A good trading plan needs to have a way for the trader to know when to enter and exit the market.

Long-term investors are able to employ a combination of fundamental and technical analysis techniques to discover actionable entry and exit points.

Day traders do not have that luxury.

Fundamental analysis techniques take into account global or regional economic factors that play out over long periods of time – weeks or months.

As such, the trading signals this style of analysis generates are few and far between.

Day traders need to know what the market is likely to do within the next few hours or sooner.

For this reason, day trading requires having a good working knowledge of technical analysis.

Technical analysis techniques rely upon the use of mathematically constructed moving averages and other short-term flow of funds indicators.

The skillful interpretation of these indicators and how they correlate with real-time price action can help the day trader isolate and identify those fleeting day trading opportunities that earns the day trader a good living.

Trend Trading

Day traders make their money by identifying market trends and riding them until they are deemed to be exhausted.

There are two types of market trends, up-trends and down-trends.

An uptrend is a temporary market condition that encourages buying.

In an uptrend, buyers are more aggressive than sellers and prices are bid higher until they reach a point where sellers are encouraged to come off the sidelines and into the market.

A downtrend is a temporary market condition that encourages selling.

In a downtrend, sellers are more aggressive than buyers and prices are offered lower until they reach a point where buyers are encouraged to step in and support the market by closing out short positions and establishing new long positions.

Day Trading Technology

Few day traders can operate effectively without computerized charting software.

Charts take live market data and construct a visual picture of what a particular market is doing at the moment.

Charts paint a picture of a market and encapsulate market action according to different time periods or “time frames.”

Today’s charting platforms can display charts for different time frames including one-minute charts, five-minute charts, 30-minute charts, hourly charts, along with daily, weekly and monthly charts.

Day traders tend to look at higher time frame charts to understand recent underlying market trends, and they tend to trade off the charts of shorter time frames.

Support and Resistance

Along with technical indicators, day traders rely upon support and resistance levels to show them where to get in and out of the markets.

Support is an area on the chart where buying energy is sufficient to digest all the selling energy and stop a downtrend.

Resistance is an area on the chart where selling energy is sufficient to digest all present buying energy and stop an uptrend.

Support and resistance can be identified on a chart and lines can be drawn on it to mark these bounds.

Day traders make money by entering the market on the buy side when the market is trading near support.

They sell it when prices rise to the level of resistance.

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