What To Watch For As A Day Trader

For many investors, intraday trading is perceived to be an inherently risky occupation, and one that attracts individuals oblivious to its many pitfalls. In the words of accomplished buy-and-hold investor, Warren Buffett, "If you aren't willing to own a stock for ten years, then don't even think of owning it for ten minutes."[1] Albeit contradictory to Buffett's perspective, an active day trader aspires to do just that: realise a profit using an investment horizon of minutes and hours instead of months and years.

The ultimate goal of intraday trading is to generate a long-term financial gain from frequent marketplace transactions. In order to accomplish this goal, one must always be on the lookout for factors that are capable of compromising the trading operation's profitability. Anything that can influence a trader's ability to identify opportunity, quantify risk and operate efficiently within the marketplace must be effectively managed.

Factors that directly impact trading performance are nearly limitless in number and depend upon the adopted methodology of each market participant. Listed below are key areas of trading that are constantly monitored and evaluated by professional day traders to properly assess opportunity, risk and performance:

  • Market specific data
  • Volatility
  • Performance of trading equipment

Market Specific Data

As an active day trader, one must be aware of information that is specific to the product and market being traded. Liquidity, technical levels and time of day are factors that directly affect the current market condition.


In the arena of day trading, market liquidity is a crucial factor that influences a trader's ability to open or close positions effectively. Liquidity is defined as being the ability to convert an investment into cash with little or no loss of value.[2] A market is said to be "liquid" if an ample number of buyers and sellers are trading the market with regularity. Large cap stocks, major currency pairings or certain futures products are examples of liquid financial instruments.

Trade the News: View our Economic Calendar

A product's current liquidity is a major consideration that is necessarily determined by anyone engaged in intraday trading. High market liquidity can provide a trader with the ability to enter and exit a given market efficiently, without substantial slippage. Conversely, low market liquidity increases the chance of capital loss due to order slippage and inefficient market entry and exit. It is important for a trader to understand that trading an illiquid market is a commitment; entering at an acceptable level can be challenging and having to make an untimely exit can be costly.

Throughout the trading session, liquidity is continuously monitored by day traders. Empirical data, such as traded volume, dollar traded volume and market turnover rates, are commonly referenced measures of liquidity.[3]

In addition to the statistical measures, price action attributed to order flow is a sign of a market's current liquidity. Often, day traders are able to gain a perspective on a product's liquidity through simply observing the price action presented by a specific market.

Technical Levels

In the field of intraday trading, technical analysis is a widely practiced method of constructing trading methodology. Technical analysis is defined as the study of price action, primarily through the use of charts, for the purpose of determining future price trends. Due to the prevalence of technical analysis within the current electronic marketplace, a day trader must be conscious of important technical levels and their areas of convergence.

Technical analysis spans a wide array of processes. Proprietary tools and indicators are privy only to selected market participants, whereas public domain technical tools are available to all traders. While the impact of proprietary trading strategies and indicators upon the market is impossible to identify and predict, the public domain technicals are easily catalogued. With a bit of study, key technical levels associated with public domain analysis tools can be determined.

Popular public domain technical analysis tools are:

Also, certain pricing levels play key roles in active trading practices and can influence market behaviour. Key publicly known technical pricing levels for day traders are:

  • Current and previous session's high/low
  • Current and previous week's high/low
  • Current and previous month's high/low
  • 52-week high/low

On its own, each of the public domain technical tools and levels has a variable relevance upon a given market. However, if several of these indicators and levels converge within a narrow price range, the effect on price action can be substantial. In order to manage trading operations with the idea of avoiding undue risk, a day trader is well advised to be aware of such convergence areas.

Time Of Day

Chronological time is an element of day trading that a market participant is ill-advised to ignore. The specific time of day can have a great impact on nearly every aspect of market behaviour, and must be taken into account when placing or managing a trade. Certain times lend themselves to producing optimal trading opportunities while others exhibit an increased risk or dull price action. The age-old axiom "timing is everything" may not be more applicable to any discipline than it is to day trading.

The electronic marketplace has brought about the near-24 hour trading day. However, depending upon the market and security being traded, certain times of the day are more relevant than others in regards to market activity. Aggressive pricing fluctuations and large traded volumes can be present during the following periods of time:

  • Market open
  • Market close
  • Following an economic data release
  • Unexpected news

It is important to realise that each market and financial product being traded has a different opening and closing schedule, and the time of an economic data release is predetermined. However, randomly occurring news items can send markets into chaos at a moment's notice.

In order to account for potential variations in price action attributed to time of day, a trader can reference the following materials to identify specific periods during the trading session in which a market may become turbulent:

  • Economic calendar
  • Domestic market schedule
  • Global market schedule
  • Real-time news feed

Being abreast of all market-related breaking news is a substantial undertaking, and one that is difficult to anticipate. However, knowing the market hours and times of scheduled economic data releases should be a part of the day trader's due diligence.


Perhaps the most important characteristic of an actively traded product or market is its volatility. Volatility can be defined and calculated in many different ways, depending on the desired sophistication and context. For the purposes of day trading, volatility is defined as the size and frequency of rapid price changes over a specific period of time.[5] Volatility can be illustrated in numerous ways, ranging from the use of statistics derived from intricate mathematics to basic visual indicators.

One of the most commonly referenced illustrations of intraday volatility is provided via the "price bar" represented graphically on a pricing chart. Price bars are drawn vertically upon a chart and represent the trading range of a specific security over a defined period.[6] Although not present in every form of charting application, price bars are included in OHLC (open, high, low, close), candlestick and certain varieties of tick charts.

A key component of referencing a price bar as a measurement of a product's intraday volatility is the observation of the price bar's "range." Range is calculated by taking the difference between the high value and low value of a price bar, and serves as a direct representation of pricing volatility.

Over the course of a trading session, price bar ranges change reflecting current market conditions. As the highs and lows of intraday price bars increase, the product is undergoing a range expansion, which is a sign of increased volatility. If the reverse is true, the product is experiencing a range contraction, or a reduction in volatility.

In addition to the use of chart-based methods, certain statistical measures are also used to quantify volatility. Derivative financial products and complex mathematical formulae are used to calculate a simplified statistic by which current volatility facing a product or market can be expressed. This calculation is known as a volatility index. A few of the most common volatility indexes are for the S&P 500 (VIX), S&P 100 (VXO) and the Nasdaq 100 (VXN).[7] Volatility indexes are popular among derivatives and equities traders, and they serve as a point of reference for many day trading operations.

Quickly and without warning, markets can become too active for safe trading. Periods of substantial volatility serve as double-edged swords, providing a greater opportunity coupled with increased risk. In order to preserve the sanctity of adopted money management principles, pricing volatility is an aspect of market behaviour that a day trader must be aware of at all times.

Equipment Performance

In the current electronic marketplace, a day trader conducts business remotely, via internet connectivity with the exchange or market. Computer hardware, software and internet connection afford the day trader market access. Lagging performance of trading equipment will undoubtedly hinder a trader's ability to interact with the market efficiently and in a timely manner.

In order to recognise lagging performance, all trading equipment must be monitored regularly. An active day trader may use the following methods to evaluate the performance of his or her trading equipment:

  • Computer hardware: Depending on the operating system, tests are available to analyse computer speed and efficiency. For example, some operating systems employ a "task manager" that gives information on hard drive capacity and usage.
  • Internet connectivity: "Ping" tests are used frequently by professional day traders to measure how fast their orders are reaching the brokerage or exchange server from local trading equipment. Ping tests are easily performed, and provide a useful illustration of connectivity speed.
  • Trading platform: Efficient order entry and operation of charting applications is crucial to overall trading performance. "Data lag" occurs when streaming market data is delayed at some point during the transfer process. One simple way that data lag can be readily identified is through the synchronisation of a charting timer to an alternate time source. If there is a discrepancy in the times, then there is a data lag issue.

Staying current in the evaluation and maintenance of the trading equipment is an ongoing task. In order to remain competitive within the digital marketplace, computer hardware is recommended to be replaced on a regular basis, at least every four years.[8] Running the trading software's current version is also a sound decision.


Intraday trading is a challenging endeavour that tests one's patience, discipline and sensibility. The marketplace is a dynamic system that can generate both possibilities and potential problems. Through the constant observation and evaluation of data pertinent to the trading operation, the day trader seeks to capitalise upon potential opportunities while simultaneously managing risks associated with rapidly changing market conditions. Trading on margin carries a high level of risk and losses can exceed deposited funds.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



Retrieved 06 Jun 2016 https://www.suredividend.com/warren-buffett-quotes/


Retrieved 08 Jun 2016 http://www.businessdictionary.com/definition/liquidity.html


Retrieved 09 Jun 2016 https://www.researchgate.net/post/How_do_you_measure_money_and_liquidity_in_a_financial_market


Retrieved 07 Jun 2016 http://www.businessdictionary.com/definition/volatility.html


Retrieved 07 Jun 2016 http://www.investorguide.com/definition/price-bar.html


Retrieved 09 Jun 2016 https://www.thestreet.com/investing/understanding-the-four-measures-of-volatility-10343098


Retrieved 08 Jun 2016 https://www.computerhope.com/issues/ch000985.htm

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