What is Day Trading?

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Linda Bradford Raschke says traders can make a living from one pattern. While there may be one or two big macro trends during a year, there are millions of trading opportunities for intraday traders when you search for small ripples among thousands of liquid stocks and other securities across 250 trading days per year.

That makes Raschke’s advice to distill the opportunity down to repeatable processes the goal of many day traders.

Day traders gained notoriety from capturing outsized gains in volatile technology stocks during the 1990’s. Since then market volatility has decreased and competition from algorithmic trading has increased exponentially. The day trading game today is less cowboys in their pajamas and more cold-hard probability.

Day trading, or intraday trading as many practitioners prefer to call it, involves coming into the day with little or no inventory, trading, and exiting the day with a profit and little to no positions.

Trading strategies can range from market making to technical trading to arbitrage and pairs trading. Algorithms drive many of these day trading strategies as their ability to process large amounts of data and execute quickly are paramount.

Day traders place more bets in the same amount of time than position traders do. Consider a position trader who places 1 trade each year. That trade might have a 50% chance of winning and the average win might be twice the average loss. That trader has a positive expectation, but still only has a 50% chance of finishing in the black on any given year.

A day trader who trades ten times a day with the same win rate and ratio of average wins to losses has almost a 100% chance of making money over the course of a year of trading.

Day traders must have edge, but assuming they do, day traders have the odds dramatically stacked in their favor.

That’s the secret of the day trading game.

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