Forex trading involves risk. Losses can exceed deposits

Day trading definition

Forex trading involves risk. Losses can exceed deposits

What is day trading?

Day trading is a trading strategy that involves opening and closing positions within the same day. Day traders tend to have no positions held overnight, opting instead to close their positions each evening, and reopen positions the following day. Day trading is a short-term strategy that intends to profit from small, intraday fluctuations in price, instead of longer-term market movements.

The meaning of day trading is in direct contrast to traditional investing techniques of buying low, holding, and then selling high. Day traders therefore have to think differently from investors, focusing on an asset's price action rather than its long-term potential. This is why day trading strategies are usually based on vast amounts of technical analysis, and required the trader to remain up to date with breaking news that might cause market fluctuations.

Characteristics of a day trader

Day traders can speculate on forex markets. The rise of trading technology and increased prominence of margin trading, which amplifies both profits and losses, has made day trading more popular in recent years.

Day trading requires time, focus and dedication as it involves making fast decisions and executing a large number of trades. Day traders don’t necessarily need to trade all day, but do need to stay vigilant and stay ahead of the markets.

Day traders have to think differently from investors, as buying low and selling high might not always be in their best interests.

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Pros and cons of day trading

Pros of day trading

Day traders can speculate on a variety of markets, including stocks, forex, commodities and futures. Shares are particularly popular, because closing positions at the end of each trading day removes the risk of markets gapping overnight.

In the past, day trading was only carried out by large investment firms. However, the rise of trading technology and increased prominence of margin trading - which amplifies both profits and losses - has made day trading more popular in recent years.

Cons of day trading

Day trading in not for the part-timer. It requires focus and dedication, as it involves making fast decisions and executing a large number of trades in a single day. Day traders don't necessarily need to trade all day, but do need to remain vigilant and stay ahead of the markets.

Day traders can be limited by the costs involved. For example, if you buy and sell shares you will pay commission, and any short-term capital gains - profit made on assets held for less than a year - will be subjected to the same tax rate as your income.

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