Who are the day traders
Private individuals can practice day trading or intraday trading as a hobby or full-time. Day traders are speculative, act according to a clear strategy and have a high risk competence. The trading strategy serves to limit losses and must be implemented.
What is day trading?
With intraday trading, traders buy and sell financial instruments within a very short time in order to benefit from price differences. While an investor ties up his capital in the long term over many years, the day trader trades during one day. He can trade in minutes or trade in a day and sell his stocks. Same-day deal means that the trader opens and closes his security positions within a single day. Traders speculate on minor price deviations of financial products in order to make an exceptionally high profit. The enormously high return results not only from the price fluctuations during a trading day, but also from a comparatively low equity investment by the trader.
How does day trading work?
In the case of a simple financial product such as a share, volatility usually does not occur in a single day so great that trading is worthwhile. That is why day traders trade in financial instruments derived from underlying assets: derivatives. Underlyings can be stocks, interest rates, commodities, indices, currency pairs or money market instruments. A bet is made that the base value will move in a certain direction, i.e. that it will rise or fall. The most common derivatives are:
- Leverage certificates,
- CFDs (Contracts for Difference),
- binary options,
- Forex trading (currency trading).
For example, day traders can trade a derivative on the DAX within a very short space of time, which increases the price increase of the stocks contained in the index. This is related to the leverage effect of derivatives. The day trader only uses a fraction of the money that the underlying asset would actually cost. The leverage indicates the ratio by how much more the derivative rises or falls in relation to the base value. It multiplies the profit if the trader was correct in his assessment. If the DAX rises by 4 percent, the derivative price climbs by 16 percent with a leverage of 4. Derivatives can be traded on the stock exchange or over the counter.
Advantages and disadvantages of intraday trading
The advantage of day trading is that the highest returns can be achieved with relatively small amounts in a short period of time. There are low trading costs for day trading, so that an abundance of transactions is possible in one day. With the variety of derivatives, a day trader can also bet on falling prices of trading objects. Since the securities are not held overnight or for longer periods, there are no permanent price risks.
Since the return opportunity and risk of financial products are mirror images of each other, the credit leverage of derivatives also has a disproportionate effect on losses. In addition, with some derivatives there is the risk that the trader will have to pour in more money if the security was inadequate for the business because his speculation did not come off. Otherwise the broker can forcibly close positions. In derivatives trading, it is almost impossible to clearly understand the pricing of financial instruments. OTC trading is not regulated and can be intransparent. As bonds, derivatives are subject to issuer risk.
What do traders need to look out for?
Day trading are classified in the highest risk class, this is no coincidence. As a speculator on minimal exchange rate differences, one should be aware that exorbitant returns involve great risks. If you trade with credit leverage, if the trader has speculated, it works in the opposite direction. A total loss of the capital quickly occurred or the remaining assets were endangered by the obligation to make additional payments. The trading requirements include an inexpensive and fair broker who reliably processes the orders and a powerful computer with the appropriate tools. When it comes to technical conditions, the most important thing is the speed at which the trading platform executes transactions.
A successful day trader has in-depth knowledge of the economy, follows the latest news and can interpret economic relationships. Technical analysis is one of the instruments that a day trader should master in order to identify signals to act. The training, webinars and teaching materials offered by brokers should be used by traders to build their theoretical foundation. Demo accounts are useful for practical experience. However, no trader can achieve high profits in the long term without a rational trading strategy. Day traders need to follow an exact concept, plan or strategy. This includes stipulations on trading times, trading products, chart signals, capital employed and what happens if the broker, internet or hardware fails. This includes accepting losing days and consistently evaluating trades in order to learn from mistakes.
Day trading can be learned. For example, if you first observe your behavior over a certain period of time and practice it with fictitious money, you will acquire the necessary skills more quickly. Brokers have demo accounts and programs that traders can use to deal with the topic. However, beginners shouldn't trust themselves too much. It is generally advisable to only use the capital that you have left and can easily lose. In the beginning, traders should only risk small sums.
- Intraday trading: trading in derivatives within a very short period of time
- Speculation on small price differences in underlying assets, such as stocks, using chart analysis
- Trading requires special knowledge in derivatives trading, an understanding of economic relationships, psychological stability, and technically comfortable equipment
- extraordinarily high profits with small capital investment possible
- Risks potentiate losses through leverage; additional payments may be required for some derivatives
- Beginners should only risk small amounts and use training courses and demo accounts for preparation
- Advantage: Achieve high returns around the clock in a short period of time and bet on rising and falling prices
- Disadvantage: the risk of total loss must always be factored in, the pricing of the derivatives is not transparent and the issuer risk
- Trading strategy is essential, serves to limit losses and define entry and exit signals, must be strictly adhered to
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