Finding Alphas, 2nd Edition

27Intraday Trading

By Rohit Kumar Jha

Intraday trading, also known as day trading, is speculation in securities – specifically, buying and selling financial instruments within the same trading day. Some of the more commonly day-traded financial instruments are stocks, options, currencies, and a host of futures contracts, such as equity index futures, interest rate futures, currency futures, and commodity futures. Strictly defined, all day-trading positions are closed before the market closes. Many traders, however, include day trading as one component of an overall strategy. Traders who trade intraday with the motive of profit are considered speculators rather than hedgers or liquidity traders. The methods of quick trading contrast with the long-term methods underlying buy-and-hold and value investing strategies.

It may seem quite unremarkable that a trader can buy and sell an instrument on the same day, but day trading is a relatively new concept. Although the practice can be traced back to 1867 and the creation of the first ticker tape, there were significant barriers to entry at that time, and as a result this type of trading was not popular among the general population. Day trading began to gain in popularity with the creation of electronic communication networks like Instinet in 1969 and the National Association of Securities Dealers Automated Quotation System, or Nasdaq, in 1971, as well as the abolishment of fixed commission rates in 1975.

An intraday alpha tries to ...