A day trader is a trader who adheres to a trading style called day trading. This involves buying and subsequently selling financial instruments (e.g. stocks, options, futures, derivatives, currencies) within the same trading day, such that all positions will usually be closed before the market close of the trading day. Depending on one's trading strategy, it may range from several to hundreds of orders a day.
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Institutional day traders work for financial institutions and have certain advantages over retail traders due to their access to more resources, tools, equipment, large amounts of capital and leverage, large availability of fresh fund inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges, expensive and high-end trading and analytical software, support teams to help and more. These advantages give them certain edges over retail day traders.
Retail day traders work for themselves, or in partnership with a few other traders. Retail traders generally trade with their own capital, though they may also trade with other people's money. Laws may restrict the amount of other people's money a retail trader can manage. In the United States, day traders may not advertise as advisors or financial managers. Although not required, nearly all retail day traders use direct access brokers as they offer the fastest order entry to the exchanges, as well as superior software trading platforms.
In the past, most day traders were institutional traders due to the advantages they had over retail traders. However, since the technology boom in the second half of the 1990s, advances in personal computing and communications technology, realized in the accessibility of powerful personal computers and the Internet, have brought fast online trading and powerful market analytical tools to the mainstream. Low, affordable commissions from discount brokers as well as regulation improvements in favor of retail traders have also helped level the trading playing field, making success as a retail trader a possibility for many and a reality for some.
Auto traders auto-trade, which stands for automated trading and the use of computer programs and other tools to enter trading orders. Because this all happens with the help of the computer algorithm it is also called algorithmic trading.
Pros and cons
Day traders' objective is to make profits by taking advantage of small price movements in highly liquid stocks or indexes as well. According to Adam Leitzes and Josh Solan (Bulls, Bears and Brains: Investing With the Best and Brightest of the Financial Internet), the more volatile the market, the more favorable the conditions for the day trader, regardless of the longer-term direction of the trend in the market. Unlike some fund managers and investors, who hold positions over longer periods of time and are averse to selling equities short, the day trader is not committed to a position and can adapt himself to whatever condition the market is in at any given moment.
A day trader who wants to achieve success needs appropriate knowledge, equipment, tools and markets together with the ability to trade the right electronic trading platform. A day trader with the right information might be able to succeed, otherwise, success will go to the other person in the transaction or to the broker, if he happens to be the best informed person in the transaction.
Also, a successful day trader needs to know which stocks to trade, when to enter the trade, and when to get out of the trade. Part of this knowledge is to find those stocks with liquidity and volatility, in order to generate profits.
Markets for retail day traders
Previously seen as a niche market, or something for institutional speculators, the foreign exchange market (forex) by 2010 had increased exponentially to an average daily volume of about US$4 trillion worldwide, with spot retail forex trades accounting for an estimated 10% of that volume.
Possible reasons for the surge in retail forex trading is the now high margin requirements in individual U.S. equities (stocks) for day traders imposed after 2001 and apparent overt manipulation of commodities markets making commodity futures markets a less desirable market in which to participate. However exchange-traded funds (ETFs) have gained rapidly in popularity, being seen as a less expensive way to trade all futures markets as well as some more exotic markets not otherwise available to retail day traders.
The amount of margin required by most retail forex brokers in contrast is negligible. With full size lots (100,000 units of currency), mini-lots (10,000) and even micro-lots (1,000) all with up to as much as 1000:1 leverage being available (although not in the US where the maximum is now 50:1 after a ruling by the CFTC), means a retail day trader could in theory trade a single micro-lot of USD for the cost of $20. Realistically most brokers require a minimum deposit of $500. The sheer volume of the forex market makes it a difficult one to manipulate in any meaningful way, even with the money available to large proprietary and institutional trading interests.
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- Davis, E. Philip; Steil, Benn (2001). "Part IV: Institutional Trading". Institutional Investors. United States of America: MIT Press. p. 378. ISBN 0-262-04192-8. Retrieved 26 March 2012.
- "Automated Trading and What an Auto Trader does". Retrieved June 1, 2010.
- Leitzes, Adam; Solan, Josh (6 December 2000). "How Day Traders Survive". Forbes.com. Retrieved 26 March 2012.
- "Day Trading Strategies For Beginners". Retrieved June 1, 2010.
- Daily forex trading hits $4 trillion a day
- Day Trading Margin Requirements: Know the Rules