Day traders buy and sell stocks within a 24-hour period, going all-in when there is a perceived gain, and dumping the stock when it looks to be on the downward trend. This is done time and time again throughout each open market day.
So, do day traders affect the stock market? Day traders, like other investors, influence the rise and fall of the stock market. Their trades are made much more quickly than normal investors, however, they still affect the market fluctuations.
Day trading can deal with thousands of shares of stock at a time, making that stock’s price rise or fall based on the day trader’s actions. It involves a large variety of techniques and strategies to take advantage of perceived market inefficiencies.
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Who Are Day Traders?
While day trading used to be reserved only for a certain group of investors that had access to large amounts of capital, day trading has now taken on a new face with the more amateur traders getting in on the game thanks to sites and trading applications like Robinhood.
Robinhood, and many other applications like it, allow anyone to open an account and purchase stocks, or fractions of a stock through their platform. Now while these are not the users with the large amounts of cash that can swing a stock up or down, they do have the ability to easily buy and sell just by opening their app.
In this case then it would be relevant to assume that if we put them in the category of day traders that they have a big effect on the stock market. It also depends on whether or not traders who use these platforms trade the same stock within one day, which is by definition what a day trader is.
For the most part, however, true day traders do not do this as a hobby, but as a career. They spend more money and buy larger amounts of shares than someone using Robinhood.
What Methods Do Day Traders Use to Affect the Market?
There are different ways that a day trader makes money. Four techniques that a day trader may use are:
Scalping
This is when a day trader sells a stock as soon as it makes a profit, meaning after all taxes and commission fees are met. They will try and be quick to sell it on the upswing before it has the chance to turn back down again. This is one of the more popular day trading methods, especially with newer traders.
Fading
Traders may short sell a stock that is at its peak. This involves selling a stock that isn’t owned by the trader but by their broker, then buying it back to complete the transaction. If the price of the stock is falling, the trader can make a profit off of the difference.
Daily Pivots
Many stocks trade within a specific range each day. Knowing this and being able to buy the stock at its lower range and sell once it reaches its peak is how many day traders make their money.
Momentum
This involves buying a stock that is rapidly rising then selling the stock once it starts its downward trend. Here, the traders are banking on the assumption that once the downtrend begins, the stock will continue to go down and will not bounce back up again.
Day traders must be very knowledgeable when it comes to trading and have a large amount of capital to work with. This allows them to make the big trades and hopefully make money off of the stock market movement.
How Do Day Traders Affect the Stock Market?
Because serious day traders are dealing with thousands and sometimes millions of dollars when trading, they have the ability to single-handedly make a stock price go up or down based on trading it. This is true for smaller stocks or the penny stocks and the movement might be negligible for a stock such as Amazon, but with thousands of day traders trading at the same time there is room for change.
Since day traders are not in it for the long haul and close all of their trades before the closing bell, they can affect a stock price more rapidly than a regular investor who buys the stock and then holds it for months or even years. Intraday trading changes the market landscape on a much smaller scale than things like politics but the movement is still there.
When Do Day Traders Affect the Market the Most?
Day traders will usually affect the stock market the most when there is already movement in a stock price. By buying the stock on the rise and selling it as it begins to decline, they speed up the process of the stock’s volatility. Day traders tend to jump on fast-moving, popular stocks at the same time, hence moving the stock price that much quicker.
When there is a huge dip in the stock market, and everyone begins dumping their stocks you can be sure that day traders are doing the same. But the difference is that they are also waiting to see if there is an uptick, which depending on the reason for the market fluctuation may not be within the same day.
During the COVID-19 pandemic when the market took a turn for the worse and started tanking there wouldn’t be much day trading since the stocks did not immediately come back up. Those traders may have turned towards regular investing though, banking on the fact that the market would eventually come back up after they snagged good stocks at extremely low prices.
What Markets Do Day Traders Affect?
Day traders can be in virtually any financial market. The stock market, which includes the S&P 500 and the Dow Jones Industrial Average, is one of the main market indices that day traders trade in. These indices are extremely popular and day traders have a lot of stocks to choose from here.
The futures market is another one that day traders can affect. Trading on the futures market is not as popular as the stock market due to how the trades are conducted. Day traders will still use the futures market to profit from fluctuations in the stock market price by the close of the market.
Forex markets have become much more popular recently and the market is now the largest market in the world. Trading on the Forex market is done by trying to turn a profit from the price fluctuations in currency exchange rates.
Cryptocurrency markets are now on the rise since the inception of currencies such as Bitcoin. Cryptocurrencies have high volatility rates, making them great for day traders since they can easily profit from the downs and ups of the price point. Since it is a newer market there are still a lot of knowledge gaps with most day traders when it comes to trading cryptocurrencies but that doesn’t stop them from profiting off of the internet altcoins.
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Conclusion
Day traders have the ability to make thousands or even millions depending on the capital they have to play with, and that alone can change the market landscape in a single day. The market volatility can easily be sped up by day traders who are quick to get in on a rising stock and even quicker to dump it once it starts to decline in price. With all that said, the effect that day traders have on the market fluctuations is not as big as other things like politics and economics.
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