How Do Day Trading Firms Make Investments?

Day trading firms house specialists who focusing on trading financial instruments such as stocks, options and currencies. These firms trade within the same trading day and do so for profit. Trading can be very lucrative and with the advent of electronic-trading, many people can now trade from home. It is not uncommon for a day trader to work independently either, but there is a certain excitement about being on the trading floor.
Day trading firms can be a highly profitable enterprise. There is a lot of money to be made and lost, making it a very risky business. However, with great risk comes great reward and depending on the trading style of any given trader, some trading styles are riskier than others. Here are some popular trading techniques you may have heard of:
Trend Following: This is a strategy used in all trading time-frames by most day trading firms. It assumes that financial instruments (stocks, options etc.) which have been steadily on the rise, will continue to do so and vice versa. A trend following trader will buy something which has been rising, or short-sell a falling one, in the hopes that it will continue with its current behavior.
Contrarian Investing: Contrarian investing is a market timing strategy used in all trading time-frames and most day trading firms. These investors do the exact opposite of trend followers. They assume that since a stock (for example) has been on the rise steadily, it is due to fall and vice versa. So they short sell stocks that are doing well and snap up ones that are falling.
Range Trading: This style of trading is based on stocks (for example) that follow a particular pattern of highs and lows. These traders buy at the low price and sell at the high. In certain instances, these stocks that normally go up and down in regular intervals, break that pattern. When the pattern is broken (whether the price goes above or below average) it usually continues on in that direction for some time.
Scalping: This is sometimes still referred to as spread trading but it is a trading style where small price gaps created by the bid-ask spread are exploited. This generally requires a trader to establish and then liquidate a position quickly – sometimes within seconds. This means taking quick profits while minimizing risk. This style preys on inherent weaknesses in the market and requires a certain degree of analysis to do effectively. This has become more popular with day trading firms in the last decade.
News Playing: News playing is primarily the realm of the day trader. The strategy is as simple as buying a stock which has just announced good news, or short selling a stock that has announced bad news. This sort of trading has the potential for big profits, depending on the news and whether the trader interprets it correctly. Rumors about businesses can effect stock prices and trends. Whispers about mergers or bankruptcies can incite a rash of buying or selling – regardless of whether the rumors are true. This makes this style of trading quite risky and volatile.
Price Action: This is all about technical analysis. It’s a more simplistic form of trading that ignores other more typical indicators. Price movement, chart patterns, volume, and other raw market data decide whether or not these traders buy or sell. This style of trading can be utilized in any market or day trading firm but it is not easier than any other method. Lots of experience and skill is needed to trade in this way.
Artificial Intelligence: These are trades made off of algorithms and other quantitative techniques. This style of trading has made the market more competitive and has shrunk the profit margins. In any given day trading firm, you can find a host of traders who all follow a different style or methodology for their trading. Some of them may be glued to the news or the financial section of the newspaper looking for an inside edge or factor that may influence the way a financial instrument is moving. The thing about all the trading styles is that there is a large degree of interpretation required. Interpreting correctly is the key.
This article was written by Tristan Rutledge, who has worked for a reputed day trading firm for a long while, and knows what's what.