You’ve likely heard the term “day trading” before, but do you know exactly what it means? What is a day trader, and what does a day trader do?
In the simplest terms, forex day trading refers to short-term trading, and in general, trades are opened and closed on the same day or within 24 hours. Often, day traders make frequent trades over very short time frames, sometimes as little as 30 minutes. And it’s extremely popular. These days, nearly three-quarters of new forex traders start in “day trading.”
So now that you have the basic idea, you might be wondering: Why do some traders choose day trading? What are the benefits? And what other types of trading exist?
What are the Advantages of Day Trading?
In forex, day trading – or intraday trading – provides novice traders with a few advantages. For one, a day trader benefits from having no open positions at the end of the day. Either all trades are closed, or stop loss orders – which are markers that traders set that automatically liquidate a trade at a certain level – are moved up to protect your current profits.
So day traders can rest easy at the end of the day; there is no opportunity for overnight losses caused by market fluctuations. Additionally, as day trading takes place over very short periods of time throughout the day, traders have the ability to maximize the number of trades they enter, enabling them to grab as much profit as possible.
Now, there are some disadvantages. For starters, day trading requires near-constant attention to the markets, especially during trading hours. It can be very time-consuming. Additionally, as more trades are made each day, losses can quickly add up; day traders must learn to minimize their risk in all trading positions.
Day Trading or Swing Trading?
So day trading takes place on very short timeframes, and requires traders to make many frequent trades each day to turn a profit. But not every trader utilizes this method. Some don’t like that the risk is too high, and the need for constant attention to taxing.
Swing trading is one method that offers a counterpoint to day trading. Swing traders make fewer trades over longer periods of time, from as little as 4 hours, to 24 hours or even multiple days. Long-term swing trading is also a possibility. One advantage to this style of trading is that the slower cycle requires traders to make fewer trades, which limits money spent on spreads and commissions and comes with the potential of capturing the greater overnight and multi-day price fluctuations.
But due to the longer cycle, traders must also set higher average profit targets, and in effect, more risk per trade. Plus, overnight exposure is another disadvantage to swing trading, as traders cannot liquidate a position if a large fluctuation takes place overnight.