The evolution of day trading – Reader’s Digest

A breakdown on day tradings history and how it has evolved.

When it comes to trading, advancements in technology and the rise of financial products and services have made trading in a host of assets much more accessible than ever before. However, before diving straight in, it can be worthwhile to understand the nuances of trading and the options out there before getting involved. With this in mind, we’re going to take a look at the evolution of day trading and its viability for traders everywhere.

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What is day trading?

In its simplest form, day trading is where an individual buys and sells assets like stocks, shares, bonds, futures, options, or commodities in quick succession; or as the name would suggest, on the same day. Profits are made from price movements in the underlying security and trades have to be executed prior to market closing (if they aren’t closed in time, they will be at risk of overnight exposure).

The evolution of day trading

While day trading has been around for decades, it really came into its own in 1997, when the ‘Dot Com Craze’ triggered major changes in the industry. At this time, interest was growing in technology and thanks to the internet, more and more homes across the world suddenly had access to the trading environment. As online brokers began to launch new services to attract small investors (such as Initial Public Offerings, or IPOs), less experienced day traders began to take up more and more positions. Now, those with little collateral had an advantage over larger investors – and this came about with the inception of the Small Order Execution System (SOES), which prioritised trades under £1,000.

The financial market saw unprecedented growth over the next few years, but this wasn’t to last as traders began to shift their endeavours away from tech stocks and toward other niches. Experienced traders with significant collateral began to fight against the trading imbalances that SOES created too, and the system was abolished in 2000. These events resulted in a new era for day trading; one with better regulations and a more stabilised environment.

In the last decade, the internet has allowed for much faster trading endeavours, with a focus on accessibility. Anyone with an interest in trading and a little collateral can find all the information they need to get started, and can sign up to trading platforms, exchanges and partner with brokers in real-time.

Leveraged trading

Many traders turn to leveraged trading to keep their outgoings low whilst maintaining their potential to enter more costly positions. Brokers will offer a loan amount to traders (rates will be decided upon before trades are undertaken) and depending on the success of the position, both parties will benefit financially.

All trading markets are subject to change at any given time and this can make trading both rewarding and risky in equal measure. Day trading is one of the sectors where volatility has more prominence, as instability can create an influx in trading opportunities. When leverage is used, the potential for losses is also increased, so it can be important to implement strategies to minimise risks. Here are some of the most widely-used:

  • Scalping
  • Range trading
  • News-based trading
  • High-frequency trading (or HTF)

 Read more about day trading here.

Pros and cons

Advantages of day trading:

  • Multiple trading strategies
  • Several trading opportunities
  • The ability to measure performance
  • No overnight risk

Disadvantages of Day Trading

  • Higher trading costs than some other trading vehicles
  • Limited profit potential
  • You can over-leverage trades
  • It is time intensive

Is day trading right for you?

There is a lot to consider when thinking about day trading and the niche has certainly seen some interesting growth and pitfalls in the past. It is a fast-paced market that can bring profits, but losses can occur quickly, too. It can be worthwhile to try out a host of strategies to see what works for you and make use of platforms that offer demo trading features to get the hang of things before putting your own finances on the line. Leveraging is widely used and can increase profit potential, but be aware that losses are equated across the whole spread, and not just on your portion of the position.

Make use of demo accounts to practise your trading strategies in order to mitigate potential future risk. Furthermore, stop loss can be useful mechanism to protect yourself from large losses.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

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