From the August 01, 2007 issue of Futures Magazine • Subscribe!

Day-trading defined

What exactly are you getting yourself into when you decide to become a day-trader? In short, a lot.

By definition, a day-trader enters and exits the same positions during the course of a single trading session. A day-trader does not hold positions overnight and may only hold them for a few seconds or minutes. Most day-traders are intensely focused throughout the day — on prices, indicators, charts and anything else that may signal a buy or sell zone in which they can strike with precision. Day-traders may make only a few trades a day, or dozens. Not all day-traders necessarily thrive on stress, but they must be able to co-exist with it.

It’s unclear exactly how many day-traders are out there. In 2000, the Electronic Traders Association (ETA) estimated the number of true day-traders to be between 5,000 and 10,000. Over the last few years, that number has undoubtedly swelled.

Revolutionary innovations in technology have made markets easily accessible to millions of would-be traders worldwide and price competition has made short-term strategies more viable. By all accounts, there are many millions of online investors and those numbers are steadily growing.

Retail day-trading is a recent phenomenon. For decades, it was the exclusive domain of the professional. Those wishing to trade traditionally consulted printed charts or fundamental reports and then called their broker who relayed the order to a colleague on the floor of one of the exchanges. That floor broker then contacted a trader in the pit who finally made the trade. Even the price of the trade might not have been immediately known by the customer. Clearly, day-trading under such circumstances would be random at best and impossible at worst.

Speed was not the only issue; the cost of each transaction was also steep. The commission on a single transaction could run $50.00 to $100.00 or more, making the cost of trading for relatively small short-term gains cost prohibitive.

Then came the Internet. Exchanges facilitated online trading capabilities, brokers designed software to allow customers to access their accounts, sophisticated analysis tools went online and Web-based newsfeeds every bit as fast as the wire services of the past became available. The world once reserved for the professional was now available to anyone with the right trading tools and the financial resources to buy and use them.

The genie was out of the bottle. But as anyone who has tried day-trading knows, trades — like the wishes granted by Aladdin’s genie — don’t always pan out as you’d expect.

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