Day traders are financial market participants who do not hold their trading positions overnight. They tend to open and close trades within the same day, regardless of market conditions. Because of this trading characteristic, day traders can be categorized as speculators. Day traders operate in various markets such as stocks, derivatives, futures, forex, or options. Their main goal is to chase daily profits with high trading frequency. Generally, there are two types of day traders: institutional traders and retail traders.
Institutional Day Traders
Institutional day traders are speculators who work for financial institutions. They have several advantages, including:
- Information Sources: They have access to first-hand or second-hand information that is faster and more accurate.
- Trading Tools: They use sophisticated and comprehensive trading tools.
- Computer and Software Facilities: They have highly adequate computer facilities, software, and online communication systems.
- Support Teams: In large financial institutions with established management, traders are supported by several teams with different tasks, such as monitoring fundamental news releases or analyzing technical data.
Thus, institutional day traders can generally monitor the market more comprehensively. They also have large fresh funds continually flowing into their trading accounts, so they do not worry about running out of funds if a margin call occurs. However, institutional traders typically work according to targets set by the company. If targets are met, they can receive bonuses based on performance, whereas falling short of targets can jeopardize their careers.
Retail Day Traders
Unlike institutional traders, retail day traders are individual speculators who work for themselves or their groups. They trade with personal funds or pooled funds from several traders. Some also manage other people's funds based on specific agreements. In the United States, there are restrictions on the amount of funds that can be managed by a retail day trader. They are also not allowed to advertise themselves as investment advisors or managers, but only permitted to manage their own funds. However, these rules may differ in other countries.
Retail day traders usually do not have access to the same resources as institutional day traders. They rely on trading software provided by brokers and may subscribe to commercial data providers for specific information. Additionally, the funds managed by retail day traders are typically limited and much smaller compared to institutional traders.
Since the mid-1990s, the number of retail day traders has increased along with the rapid development of communication and IT technology. Many forex brokers have emerged, offering adequate software and competitive trading conditions. Although their daily income is unpredictable and they often have to bear losses, in the long run, many day traders achieve returns of tens or hundreds of percent per year.
According to Adam Leitzes and Josh Solan in their book Bulls, Bears, and Brains: Investing With the Best and Brightest of the Financial Internet, the market conditions most favored by retail day traders are high volatility, without regard to the direction of long-term trends. They can quickly adapt to various market conditions.
Specifically for the forex market, since 2010, daily trading volume has reached 4 trillion US dollars, the largest of any market. It is estimated that about 10% of participants in the forex market are retail traders. Additionally, the leverage facilities offered by brokers, which can reach 1:1000, further enliven trading activities in the forex market. However, traders must always be cautious of poorly regulated brokers, as they can potentially scam or deceive traders.
By understanding the differences between institutional day traders and retail day traders, as well as the advantages and challenges of each, you can be better prepared to make decisions in the world of day trading.
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