What is Day Trading?
Most people are familiar with investing: buying stocks and holding them over months or years, profiting from long-term growth day trading is similar, but on a different scale. Rather than waiting years for a position to mature, day traders capitalize on intraday price movement to generate returns within hours, sometimes minutes. The market is always in motion, and this price movement can be leveraged to generate substantial returns within a day. Because of this simple change, a whole new approach to the activity must be taken. Let us dive into how this works exactly.
Within this context, there are three core actions available to a trader.
First, you can buy, also known as going long. Say I am trading S&P 500 futures, and my analysis indicates that the price is going to move upwards, so I go long. When the price goes up, I am able to make money on the gain in price compared to when I bought it. If the price goes below the amount that I paid, then I lose money.
Next, you can sell or go short. This works by borrowing shares at a specific price to sell, then buying them back at a better price. In the current example, if I went short at 6900 on the S&P 500 and the price dropped to 6870, I would make a profit on the 30-point drop. However, if the price continues upwards above my entry, I would lose money.
Finally, and perhaps the most important action of day trading is not doing anything. Trading is about identifying opportunities and acting on them. The market is always moving, which creates the illusion of constant opportunity. While you always have an opportunity to trade and make money, you do not always have the necessary conditions to profit from the market. It is important to be able to wait for setups to present themselves, as you are gambling otherwise. Knowing when to trade and when to sit on your hands is one of the hardest yet best skills an effective trader can have. The ability to wait for high-quality setups to develop, rather than forcing trades out of impatience, separates disciplined traders from everyone else. Patience is not passive. It is one of the most active and valuable skills you can develop.
- From the desk of Declan Otañez