There are two primary divisions of professional day traders: those who work alone, and/or those who work for a larger institution.
Most day traders who trade for a living work for large players like hedge funds and the proprietary trading desks of banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to counterparties, a trading desk, large amounts of capital and leverage, and expensive analytical software (among other advantages). These traders are typically looking for easy profits they can make from arbitrage opportunities and news events; these resources allow them to capitalize on these less risky day trades before individual traders can react.
Individual traders often manage other people’s money or simply trade with their own. Few of them have access to a trading desk, but they often have strong ties to a brokerage (due to the large amounts they spend on commissions) and access to other resources. However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades—combined with some leverage—to generate adequate profits on such small price movements in highly liquid stocks.
Day trading demands access to some of the most complex financial services and instruments in the marketplace. Day traders typically require:
Access to a trading desk
This is usually reserved for traders who work for larger institutions or those who manage large amounts of money. The trading or dealing desk provides these traders with instantaneous order executions, which are particularly important when sharp price movements occur. For example, when an acquisition is announced, day traders looking at merger arbitrage can place their orders before the rest of the market is able to take advantage of the price differential.
Multiple news sources
News provides the majority of opportunities from which day traders capitalize, so it is imperative to be the first to know when something significant happens. The typical trading room has access to the multiple leading newswires, constant coverage from news organizations, and software that constantly analyzes news sources for important stories.
Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely more on software than on news. This software may be characterized by the following:
- Automatic pattern recognition: This means that the trading program identifies technical indicators like flags and channels, or more complex indicators such as Elliott Wave patterns.
- Genetic and neural applications:These are programs that use neural networks and genetic algorithms to perfect trading systems to make more accurate predictions of future price movements.
- Broker integration: Some of these applications even interface directly with the brokerage, which allows for instantaneous and even automatic execution of trades. This is helpful for eliminating emotion from trading and improving execution times.
- Backtesting: This allows traders to look at how a certain strategy would have performed in the past to predict more accurately how it will perform in the future. Keep in mind that past performance is not always indicative of future results.
Combined, these tools provide traders with an edge over the rest of the marketplace. It is easy to see why, without them, so many inexperienced traders lose money. Additionally, other elements that influence a day trader’s earnings potential are the market in which they trade, how much capital they have, and how much time they are willing to devote.