Day trading is defined as the purchase and sale of a security within a single trading day. It can occur in any marketplace but is most common in the foreign exchange (forex) and stock markets. Day traders are typically well-educated and well-funded. They use high amounts of leverage, which results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. This borrowed capital consists of money that is borrowed and used to make an investment. It differs from equity capital, which is owned by the company and shareholders. Borrowed capital is also referred to as “loan capital.” Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as “highly leveraged,” it means that item has more debt than equity.) and short-term trading strategies to capitalize on small price movements in highly liquid stocks or currencies.
Day traders are attuned to events that cause short-term market moves. Trading the news is a popular technique. Scheduled announcements such as economic statistics, corporate earnings or interest rates are subject to market expectations and market psychology. Markets react when those expectations are not met or are exceeded, usually with sudden, significant moves, which can benefit day traders.
Day traders use numerous intraday strategies. These strategies include:
- Scalping, which attempts to make numerous small profits on small prices changes throughout the day
- Range trading, which primarily uses support and resistance levels to determine their buy and sell decisions
- News-based trading, which typically seizes trading opportunities from the heightened volatility around news events
- High-frequency trading (HFT) strategies that use sophisticated algorithms to exploit small or short-term market inefficiencies