12/30/2021 - Economy and Finance

What is and what does a Day Trader do?

By Gustavo Neffa

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As investors, traders or market operators do not have a specific definition, but that the range is very wide and qualify both small independent investors working from an office at home, up to the largest institutional investor as a common investment fund, a bank, a stock exchange company, a pension fund or a insurance company, which moves hundreds of millions of dollars in stocks and futures contracts every working day.

To understand what a Day Trader is and what it does every day, first it is necessary to understand what trading is, how to operate the market: trading consists in buying and selling risk assets such as stocks, future currencies (Forex), treasury obligations and stock indexes, as well as raw materials.

The period of operations will depend on where the operator or operates on its own account and what its objectives are, but in principle the short term.

Often, the day trader uses leverage or leverage, i.e. purchasing a much higher amount of risk assets than it actually has as funds availability in your account, because the same operation redirects more in case of success. This is how the futures of the different assets are operated: one does not buy 100%, but a fraction of a futures contract, or rather, has to deposit silver of guarantees for much less than that contract, as the trader makes the gains or losses of the positions day by day (mark-to-market). There is no settlement of the difference on time because a trader is a speculative investor that does not take the asset, but speculates with the price difference.

It can not only take positions purchased in the various assets, but can also be sold in discovered and rebuy the position sold to close the operation.

In day trader's purse there are different concepts to go assimilating:

  • BUY (LONG PROVISION): this is when you want to buy shares from a company that is thought to rise, this is known as a “long” position in English long position or purchased position.
  • SELL: This order is executed when we already have the actions and want to sell them.
  • SELL SHORT: known as shortening an action or betting on the low, where we bet on the possibility of earning money in a bassist movement selling an asset that has not reached our broker or the market as a guarantee (with the promise to rebuy the value below).
  • BUY TO COVER: this type of order is used when an asset has been previously translated and wishes to exit the position to take the profits (or cut the losses if it is at a price higher than that of opening the position).
Trading requires concentration and focus on few instruments in order to permanently control the evolution of one or more shares, or market or commodity indices, in order to try to detect when it will start a suba or low and buy or sell chord to the formed expectation. In those minutes even, the price of an action begins to rise and it is there where you decide to take the gain and get out of the position that, in some cases, reports a girl gain.

Why are you girls the profits there are a lot of people who are engaged in this?

Because trading requires repeating the operation several times a day.

Because the amount at stake can be leveraged in speculative form through credit through the use of the so-called margin account (margin account).

Because the more it operates, transaction costs or operating commissions are usually more boys (broker serves you more than a trader often operates in a median account that does not operate a very large account).

This last requirement is fundamental to engage in trading: one must seek the best commissions or that this broker does not cover commissions as occurs in several cases. Many online brokers no longer charge commissions (generating silver on the other hand selling ETFs and funds from administrators with whom they have a paid contract).

Often trading is carried out by brokers themselves or fellowship houses operating on the market for third-party clients, but also operating for their own investment accounts and do not carry commissions on operations. They cannot fail to pay the stock exchange and tax expenses, but they do not have to bear the cost of an intermediation commission as they have to suffer the common and current investor for the greater it is, because they themselves do trading.

One important aspect to take into account is that the day trader almost always closes the positions on the same day. It is very little frequent to find day traders that take a purchased position from one day to the next, less still among professional operators.

And the more professional the traders are, these investors will employ more quantity and more sophisticated analysis programs, or “tool-boxes”, which in some cases have scheduled purchase and sale orders when the action reaches a maximum or a minimum.

At its end, the high-frequency systems (HFS), which are computer systems that act automatically through the application of different algorithms, are called “black-boxes”.

They also feed on the technical analysis that marks them that the action is close to a support or resistance, which reinforces their decisions based on various indicators and oscillators, as well as very short-term mobile means.

Day trading is stressful because it requires a lot of “great” for the management of investments in the short term and because they often use leverage to enhance returns, knowing they can also enhance losses.

It requires, on the other hand, a lot of discipline as it requires the application of output orders (exit order) to perform the gain, or orders to cut a loss (stop-loss order), in addition to the application of a method that each trader can perfect with time.

It is necessary to be soaked from the market and from the latest news so that you can exercise a trader efficiently. But in most cases, although day traders know the financial news of the most relevant time, they do not try to search for fundamental information or have greater knowledge of this square or market in which it operates, because its operative is based almost exclusively on the most basic of the stock information which is the analysis of the graphics, prices and volume operated.

A point of entry or a green light that shoots in your speculative trading system can also be given when “here are the planets”, that is, when the different variables, technical indicators or oscillators that are the inputs of the model launch a buying or selling signal. Your trading systems have algorithms that give you signals with formulas elaborated in advance, but always something information has to have at hand to know if the market is buyer or seller. That is why day traders often rely on this information to incorporate in stock prices or other assets: a corporate result, an announcement of a company, an extraordinary event or a macroeconomic event that was not discounted (for good or for bad) are the real mobilizers of the market price trend.

Liquidity is very important: the markets, asset classes, or the “subsory” in which day traders are usually more liquid to allow entry and close positions at the lowest possible cost: more traditional stocks and ETFs, as well as futures more liquid currencies, commodities, indices or bonds are part of a day trader’s menu with a spread or difference between the lowest selling and buying price possible.

In addition to these short-term traders, the markets that make them perfect or seek their perfection, because they react fast and because they try to discover arbitration opportunities that correct the same imperfections of the markets. An arbitration is an operatory with safe gain while assets are not in the prices they should be or should be quoted.

They are more professional operators than the average, so they are also enabled by their brokers to be operating in pre-market or after-market, which are 3 hours before and after the normal bag session.

Negotiating in trend or positioning, the so-called positioning trading: is more profitable for boy investors, since it is not based on intraday operations that is the operative of buying, selling and closing positions on the same day, but it would consist in taking advantage of an upward or full bassist trend that can last days, weeks or even months or years. Trading in trend, unlike day trading, requires much more time to materialize and is more conducive to the retail investor or to the one that operates an investment account from their home and that it is not correct or stock exchange.

The scalp trading (which performs scalping or scalping as the American Indians used to make their victims as a show of strength and victory over the enemy), is also that day trader who never takes the position from one day to the next, but differs from the same in the sense that also operates with very short positions, according to Minutes. The day trader, as we said earlier, operates with daily positions.

These are the different styles depending on the trading deadline, the most sophisticated and short-term to the longer term:

In summary, the task of day trader is a short-term positioning task and with often leveraging in the different liquid markets to be able to perform more reducible operations, always trying not to take open positions the next day.

They are usually guided by what the reading of the graphics or the signals that give you their algorithms built based on oscillators that indicate the input and output points.

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gustavo neffa

Gustavo Neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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