Characteristics
Although collectively called day trading, the practice contains many styles with specific qualities and risks. Scalping is an intra-day speculation technique that usually has the trader holding a position for a few minutes or even seconds. Shaving is a method which allows the scalping speculator to jump inside the bid or the ask by a small amount, and a full round trip (a buy and a sell execution) is often completed in under one second. Suppose the bid is $102.00 and the ask is $102.03. The scalper will place an order inside the bid at $102.01, thus becoming the best bid and therefore the first in line to be able to purchase the stock. And since the best offer is $102.03, the shaver will again place an order inside the current market to be first in line and sell one cent cheaper at $102.02. Completing a buy and a sell at these prices make for a profit of $0.01 per share traded. Since the profit per share in a shaving strategy is typically very small, traders are required to execute many shares in this fashion in order to make a reasonable profit. It is possible to make a little more on the trade by getting rebates for providing liquidity. Another strategy a day trader might use is to actively search for potential trading setups. When a day trader thinks prices are ready to accelerate in either direction, the stock is said to be in a "tension state". By correctly identifying the direction of the price movement, there is a potential for substantial profit. The number of trades one can make per day is almost unlimited, as are the profits and losses.
Some day traders focus on very short-term trading within the trading day, in which a trade may last just a few minutes. Day traders may buy and sell many times in a trading day and may receive trading fee discounts from their broker for this trading volume.
Some day traders focus only on price momentum, others on technical patterns. Some traders choose to focus on an unlimited number of strategies they feel can be profitable.
Most day traders exit positions before the market closes to avoid unmanageable risks—negative price gaps (differences between the previous day's close and the next day's open bull price) at the open—overnight price movements against the position held. Other traders believe they should let the profits run, so it is acceptable to stay with a position after the market closes.
Day traders sometimes borrow money to trade. This is called margin trading. Since margin interests are typically only charged on overnight balances, the trader pays no fees for the margin benefit, though still running the risk of a Margin call. The margin interest rate is usually based on the Broker's call.
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