»● Day Trading Terms

Day Trading Training

Day trading training involves the process where the potential trader (or day-trader-in-training) is trained to increase his probability of being successful in day trading. Day trading training should make the day trader familiar with the day trading platform he will use as well as equip him with techniques and strategies of when to buy, when to sell, how to set stop losses, etc. The coaching and experience received in this training are essential in empowering the day trader to succeed. Day trading training should not just involve the reading of books (in fact, many day trading books in the market are worthless); it should also include plenty of paper trading on a live simulator and, if possible, one-on-one mentoring from a day trading trainer. Before forking over thousands of dollars for a training that alleges to make anyone a millionaire in five days or less, a prospective day trader should ask many questions before commencing.

Direct Access Trading

Direct access trading (DAT) means trading with a system that allows the order to buy or sell to be sent directly to the market. The term "direct access trading" is usually used when referring to a NASDAQ Level II trading system like RealTick. With a direct access stock trading system, a trader needs to select where to route his order. This could be to an exchange, a computerized system known as an ECN (electronic communications network), a market maker, etc. The stock trader could achieve direct order execution through a direct access broker. Direct access brokers can execute orders much faster than online brokers and that is why they are essential for traders with active day trading or short-term trading styles. Even though advancements in technology in the late ninetees have brought down the commissions of direct access brokers to a level that is comparable to that of online brokers, quality stock direct access systems can cost between $300 to $600 a month. Currency trading platforms are typically free to use and have execution speeds comparable to direct access stock trading systems.

ECN (Electronic Communications Networks)

ECN stands for electronic communications networks. ECN's are essentially computerized order matching systems. When an order to buy or sell a stock is sent to an ECN, the order is usually executed at a lightning-fast speed (less than a second is possible). Before regular investors and day traders could trade via ECN's, only institutions could do so through Instinet. This allowed institutions to buy and sell stocks outside of regular stock market hours (when most earnings announcements took place), while the small investors could only sit and wait for the market to open. This unfair scenario lasted until 1997, when an ECN by the name of Island finally opened its doors to the public. As a result of this and the creation of other ECN's, the stock trading landscape was changed forever. The growth in trading volume via ECN's has been so dramatic, that Instinet and traditional NASDAQ and NYSE order execution systems have lost a significant amount of business. Due to their speedy executions and transparency, ECN's have always been day traders' favorite choice when executing a trade. Even though the forex market is more liquid than the stock market, ECN systems for trading currencies have not reached the same level of popularity of stock ECN's.

Fundamental Analysis

As opposed to technical analysis, fundamental analysis does not involved the study of charts, price patterns, or technical indicators. Fundamental analysis tries to discover what "should" happen to the price of a stock, currency, future, etc. by studying financial conditions, economics, political environments, etc. Technical analysis, on the other hand, assumes that all these factors are already reflected in the chart of the financial instrument in question, so a study of the chart suffices. Fundamental analysis is a lot more difficult to perform than technical analysis and involves knowledge of economics, politics, accounting, etc. Although there are eternal arguments as to which method of analysis (technical or fundamental) should be used to make a buy or sell decision, both methods are useful. Fundamental analysis is better for longer-term investing by helping the investor better determine an investment's possible "intrinsic" or "real" value, while technical analysis can be better used for day trading and short-term trading. Despite this fact, many investors and traders use a combination of both methods in implementing their financial strategies.

Market Maker

Market makers are special institutions that trade for a living through the NASDAQ system. Market makers make their money trading and executing orders for their clients. Market makers must be willing to take orders for certain stocks as specified by NASDAQ. When working a large order for a client, rather than trying to execute the entire order in the market at once, a market maker tries to make use of his experience to control or temporarily move the stock in his desired direction until the order is completed. A market maker also tries to make money throughout the day by buying and selling stocks; in essence, acting like a day trader. Large, well known market makers are firms like Goldman Sachs and Morgan Stanley. Throughout the history of day trading, there has always been controversy regarding market maker practices and, for that reason, traders have tried to avoid trading against market makers as much as possible, opting for ECN's instead.