So you went to the website of your brokerage firm, plunked in $500 bucks and bought yourself some Vanguard ETFs. The problem is they’ve done well, so now you want to increase that number to $1000.
You go back online and research how to become a skilled ETF trader in the UK. Then you come across words like “day-trading”, “scalping”, “swing trading”, and “options”. So what exactly do these definitions mean?
First of all, let’s define what an ETF or Exchange Traded Fund is.
ETF
An ETF or exchange-traded fund is equivalent to having shares in an index or specific commodity.
For example, if we invested my money into shares for Apple Inc., we would be receiving dividends and quarterly reports of Apple Inc. based on how much money we invested in this company.
On the other hand, if we were to invest my money into an ETF such as Vanguard S&P 500 Trust Fund, we would be investing in shares of companies that are part of the Standard & Poor’s 500 Index.
For example, if you invested 1000 dollars into this fund, your money will automatically be spread across different companies, also included in the Standard & Proud 1000 Index (google ticker VOO).
Thanks to ETFs or exchange-traded funds, investors don’t have to do all that research on deciding what stocks they want to buy for their portfolios.
ETFs (exchange-traded funds) are bought and sold on the stock exchange just like other stocks.
They are bought and sold based on demand and supply. ETFs or exchange-traded funds can be bought or sold at any time during trading hours, unlike mutual funds, where you have pre-determined buying times.
Intra-day traders
It’s essential to understand what types of traders buy ETFs or exchange-traded funds. The primary type of trader who knows how to trade ETFs or exchange-traded funds is an intra-day trader.
Intra-day traders actively buy and sell shares throughout the day to make profits off small movements in price.
Intra-day traders aim to make around fifty pips (0r 0.5%) per day by opening up thousands of tiny positions and closing them out before the end of the trading session.
How do intra-day traders make money? They make money through a strategy known as “scalping”.
Scalping
“Scalping” is a short-term trading strategy that has been around since the 16oos, when it was first used by farmers who sold their produce to townsfolk on market days.
Scalpers aim to buy or sell at a low price then sell or buy back that commodity at a higher price within minutes to hours later. It’s a numbers game for scalpers.
They average one pip (0r 0%). It may seem like very little, but if you had more positions open for more extended periods, your total pips would average out to around fifty pips per day.
Although intra-day trading seems like a very lucrative business, it is essential to realise that daily fluctuations of up to 3% are the norm in the stock market, so there’s no guarantee you’ll make 50% profits each day by scalping.
Intra-day traders can lose their entire investment if they don’t manage their risk and capital properly.
They take huge risks by entering into hundreds of short positions, which could all go against them anytime.
If an index or stock rises suddenly, this would mean that all the short trades taken by scalpers will incur significant losses for them because they’re shorting (betting it will go down) when everyone else thinks it’s going up.
Losing a lot of money in one trade could lead to a chain reaction where the trader starts to lose more and more money because they have taken too many unnecessary risks.
Although intra-day trading can be very profitable for those who know how to manage their risk, there are much safer options out there for day traders or intraday traders.
There’s no leverage involved (using other people’s money) as scalpers do, and your possible loss is limited to merely the capital you invest into buying the ETFs.
Take a look at exchange-traded funds UK for more info.