Day Trader Definition Types Top Features With Examples

Day Trader Definition

The day trader is an individual who trades in the financial markets daily to earn profits by exploiting the inefficiencies present in the market.

Types of Day Trader

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Day Trader (wallstreetmojo.com)

Key Takeaways

A day trader is an individual who trades daily, unbothered by the market inefficiencies going on currently. There are three types of traders; financial traders, individual traders, scalpers, and momentum traders.Day trading features the size of capital, trading strategies, technical analysis, and the trading platform it is being conducted. They are important in decision-making for such traders. Such a trading method is beneficial as it provides a good attention span and a dynamic stance; any sudden bolts in the market stay at bay for day traders. There are a few disadvantages of this role, such as higher commission costs, marginal profit-making is temporary, and such a trader has limited funds and resources.

#1 – Individual Trader

They are the ones who utilize their own money, funds, and resources to trade in the financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more. They may trade on instincts or trading strategies devised by them. However, an individual trader with a proven track record of implementing successful strategies and delivering good returns may also handle individual high net worth accounts.

#2 – Financial Institution Trader

The financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more are dynamically engaged in the financial markets. They have separate departments under their ambit that undertake strategies to squeeze some money out of the financial markets on an intraday basis. They, therefore, hire individuals who specialize in day trading.

All the necessary resources and funds are allocated to the day trader. Financial institutions hire them to utilize the resources to provide returns to the financial institutions.

#3 – Scalpers and Momentum Traders

Scalpers are defined as individuals who derive small profits by manipulating the volumes of financial instruments. Finally, momentum traders are those who devise trading strategies based on the current market sentiments, trends, and momentum inherent in the financial markets.

Features of Day Trading

#1 – Size of Capital

A day trader who is at beginner levels may have limited capital to undertake. Therefore, trading capital can be defined as the resources and funds held in hand to be employed specifically for trading purposes. Consequently, they have to adapt to careful planning and strategy to best use their resources.

#2 – Trading Strategies

Each one has the trading strategies that it may use to manipulate inefficiencies in the financial marketsInefficiencies In The Financial MarketsAn inefficient market represents the one which fails to exhibit the actual value of the assets. Such a market doesn’t provide transparent information and is unavoidable in the real world, but it benefits arbitrage traders.read more and derive profits from them. Some of the strategies are based on the traders’ technical analysis, trends, and guts instincts.

#3 – Technical Analysis

Technical analysis is defined as analyzing the price movements of the financial assets present in the financial markets. They analyze the upward and downward trends in the markets to predict the best price to enter or exit the financial markets. There are many tools such as moving averagesMoving AveragesMoving average means we calculate the average of the averages of the data set we have, in excel we have an inbuilt feature for the calculation of moving average which is available in the data analysis tab in the analysis section, it takes an input range and output range with intervals as an output, calculations based on mere formulas in excel to calculate moving average is hard but we have an inbuilt function in excel to do so.read more and charting methods that help the day traders devise a comprehensive trading strategy.

#4 – Trading Platform and Highspeed Internet

They utilize high-speed internet and engaging high-end trading platforms to drive fast intraday positions. Due to exponential improvement in technology and the advent of the information age, there has been an emergence of discount brokersDiscount BrokersDiscount Broker is an online stock broker that assists investors in trading securities on the stock exchange by charging a relatively low rate compared to conventional brokerage firms. However, it does not offer any additional services like trading tips or wealth management. read more who charge zero brokerages simultaneously and provide high-end optimized trading platforms that help the day traders to drive trades. They take up the services of discount brokers and try to gain small profits from the intraday positions.

Example

Suppose a day trader has taken a long intraday position in ABC stock at 10 am. The price of entry is $15.

At 11 am, the price of ABC reaches the level of $25 per share. The trader squares off his position at $25 to earn a gain of $10 per share. The trader would then pay $3 towards the transaction costs and commissions for facilitating intraday trades.

After deducting the costs, the trader’s net gain is $7 per share.

Advantages

Since they maintain intraday positions, their returns are not harmed by any news overnight.A specialized day trader can always analyze his current position in the financial markets and trigger stop-loss functions at critical junctures to reduce and mitigate any potential losses arising out of the positions undertaken.There is the presence of individual brokerage houses that tend to provide extensive margins and leverages, which can then be used to leverage them to derive good profits and returns.Due to the vast uncertainties in the financial markets, day trading has become a very dynamic job. Due to this inherent nature, they learn something new daily.The day trader having a good attention span with a perfect grip on technical analysis skills can earn high returns on intraday positions.

Disadvantages

The trader who performs two to four trades daily also bears higher commission and transaction costs.There are certain types of assets on which day trading cannot be completed and hence becomes out of scope for the day trader itself.If positions are derived using margins, then there is a high probability that the trader may incur huge losses on such positions.There would be a situation wherein the trader may not get enough time to manipulate the positions undertaken and hence may not be able to derive returns on such positions.An individual trader who is new to day trading would have access to limited funds and resources.An inexperienced trader may lack the understanding of technical analysis techniques.

Limitations

The performance of the day trader is always limited by the transaction costs, commissions, dynamic changes in the bid-ask spread, and any expenses borne by taking up automated trading software.

There may be a situation wherein the trades performed by the trader may not provide any substantial gains since there may be limited volumes or less liquidity along with reduced price volatility in the financial markets as a whole.