Day trading and why you shouldn't do it

Day trading is when you try to take advantage of the intraday fluctuations in prices of financial instruments like stocks and bonds. The idea is that even though the overall daily price may decrease, the price will increase at some points throughout the day. If a trader can time his buys right before the increases and sell right before it starts decreasing, he can make a profit.

Consider the following intraday time series for a stock:

Overall, the stock price dropped from $10 to $8, a 20% loss. However, an omniscient investor could in theory buy the stock at 10 AM, sell at 11 AM, buy again at 1 PM, sell at 2 PM, buy at 3 PM, and finally sell at 4 PM. The net result is a $3/share, a 30% gain.

This kind of arbitrage can almost always occur, regardless of market conditions or time scale. This is because while the overall trends are consistent and can be predictable, the small fluctuations caused by people buying and selling shares is inevitable. There will almost always be both buyers and sellers throughout the day and if at any given point the number of supply exceeds the demand, the price will go up temporarily.