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Inside the Day Trading Revolution

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How Does Day Trading Work?

The goal of a Day Trader is to realize a modest profit on a security in the shortest span of time possible. This frees up the Day Trader's capital base to be used again and again in the course of a single trading session. During a typical day, a trader may complete dozens of different transactions. Most of these bets will be placed on a handful of stocks selected for their price volatililty. High Tech stocks with broad average trading ranges are favorite targets. Frequently, a trader will execute numerous transactions per day on a single active stock in an attempt to squeeze profits out of small price fluctuations.

Day Traders spend most of their time analyzing trends and assimilating information from a variety of sources. Internet resources top the list. Up to the minute charts and graphs depicting volumes and price movements are keys to successful decision making. Traditional information resources such as newspapers, magazines, and Cable and TV business and investment commentaries are also important. Day Traders also rely heavily on chat sessions and other interaction with fellow Day Trading professionals for insights and advice. While Day Traders tend to be an independent bunch, they seem to appreciate the comraderie and perspectives of fellow Day Traders.

Because Day Traders rely on price volatility to eek out narrow gains (typically between 1/16 - 1/4 point per transaction), they live in a universe dominated by a handful of stocks that are known for their price volatility. Most active Day Traders will be intensely fixated on this small group of volatile stocks throughout the trading day - watching for short windows of opportunity to profit from modest price swings.

To the Day Trader, it doesn't matter whether the stock is moving up or down. The important thing is that there is price movement. An astute and experienced trader can make money either way. Throughout the course of a typical pulse-pounding day, a trader will move in and out of dozens of stock positions in an attempt to wring a small but steady stream of profits from these relatively miniscule price movements.

By committing to short term positions, Day Traders are often forced to liquidate stock holdings at a loss when the price of the stock moves contrary to their expectations. If the Day Trader is holding a leveraged position in a security, the gains or losses will be magnified dramatically.

Professional Day Traders typically affiliate themselves with one of the growing number of firms that cater to the needs of full-time Day Traders. In exchange for commissions and fees, these Day Trading outlets provide high speed computers and complete access to professional trading systems and brokerage services. Real time stock quotes and instantaneous trading capabilities, which are the life blood of the Day Trader, are available on a continuous basis throughout the trading day.

The daily commissions and transaction fees can add up very quickly given the high number of trades that are typically executed in each session by active Day Traders. These commissions can easily approach or exceed $1,000 per day! The thing to remember about commissions is that they are paid out on every transaction regardless of whether a trade results in a gain or a loss. Commissions serve to minimize gains and compound losses. The commission structure of the brokerage firm selected by the Day Trader will be a significant factor in his ability to generate profits through Day Trading.


What is Driving the Recent Popularity of Day Trading?


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