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Day Trading

day trading

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Success rates in day trading can range from 5% to 20%. In other words, up to 95% of day traders lose money and only a handful consistently profit over time.

Despite these figures, you may still be interested in what makes those day traders succeed.

How does day trading compare to other financial methods like investing and swing trading? How can you benefit from day trading? Are there strategies to help improve profitability and lower your risk?

This article explores how day trading works and how you can turn day trading into a living.

This article also includes various day trading strategies to help manage your trades.

The Day Trading Basics: What Is Day Trading?

Day trading is buying and selling assets within a day, usually in seconds, minutes, or hours. This strategy involves exploiting the up and down price movements happening within a trading day.

Some markets where day trading commonly occurs are the forex (foreign exchange) and stock markets.

How Does Day Trading Work?

Day trading requires a considerable amount of knowledge, skill, and experience to become successful. The following sections give an overview of what day trading is and how it differs from other trading methods.

Getting Started: Day Trading Explained

Day trading is an investment strategy focused on short-term price movements. You can implement this strategy in almost any asset class, such as stocks, commodities, indices, and cryptocurrencies.

With day trading, you only need to hold a position for a few hours or less. By the end of the trading day, most, if not all, of your positions should be closed.

Day Trading vs. Swing Trading

While day trading dictates that you shouldn’t keep a position open after market hours, swing trading gives you more flexibility regarding how long you can keep your position open.

Day trading focuses on intraday price movements and volatile market conditions. Intraday price movements happen during trading hours and within a single day.

In swing trading, you look for short- to medium-term trends. As a swing trader, you can enter and hold a position for several hours to a few weeks.

Day Trading vs. Investing

Buy-and-hold investors usually have a different emotional experience than most day traders, especially regarding holdings gaining value.

If you’re an investor with long-term holdings, you’re in a position to diversify your investment. The long-term nature of your investment can also help mitigate substantial losses when one or two assets don’t perform well because the other assets that do may help offset those losses.

However, if you’re a day trader, your portfolio will likely be less diversified because you tend to trade only a few assets at a time. Therefore, movements with any one security can significantly impact your financial health.

Day Trading vs. the Alternatives

Robo advisors are day trading alternatives that let you choose an investing profile and specify your risk level and investing time frame. The system’s algorithm does the investing automatically for you and can work for long-term investing plans that don’t require daily trading.

Social trading is another alternative that allows you to mimic other traders’ trades at your funding capacity. This option may work if you don’t have time to find trades.

Patterns and Technical Analysis

Technical analysis lets you identify trading opportunities and evaluate investments by analysing trading activity trends like volume and market price movement.

When you perform technical analysis, some of the most common day trading activity chart patterns you’ll encounter are continuations and reversals.

Continuations suggest a continuous movement in a particular direction, while reversals indicate trends going the other way once completed.

Understanding trading patterns can help you decide what action to take. This knowledge also allows you to employ the appropriate trading strategy involving when and at what price level to enter or exit a position.

Psychology

The ability to control your emotions is an important trait when day trading. Sudden market changes and losing trades can cause you to make emotionally charged decisions.

To prevent making such mistakes and improve your decision-making, consider the following tips when day trading:

  • Even the best stocks can plummet in value and cause fear among traders. Recognising that fear and knowing how to respond to such events can help you maintain focus and react logically.
  • When you’re in a winning position, you may not know when to exit before the situation reverses and you start taking losses. Learn to keep your expectations under control to minimise losses.

Education

Learning about various trading concepts like terminologies and strategies can help improve your trades. Know more about day trading from any of the following resources:

  • Books
  • Ebooks
  • Podcasts
  • Blogs
  • Online day trading courses
  • Audiobooks
  • Message boards like Discord
  • Forums
  • Chat rooms
  • Newsletters
  • Webinars

What Assets Can You Day Trade?

When you trade with a trusted broker, you gain access to the following assets:

  • Forex
  • Shares
  • Commodities
  • Indices
  • Metals
  • Cryptocurrencies

Is Day Trading a Good Idea?

If you prefer trading on an asset’s short-term volatility and closing your position before the market closes on any given day, day trading may be a good idea.

However, if you’re uncomfortable with such conditions and the risks associated with short-term volatility, day trading may not be worth it.

Anecdotal information shows that an estimated 95% of day traders lose money. Furthermore, about the same percentage of unprofitable traders continue day trading despite losing money.

Such figures suggest the challenging nature of day trading and why beginners should consider starting with other trading methods before venturing into day trading.

Why Day Trading Is Controversial

Day trading’s profit potential is a heavily debated topic on Wall Street. Many financial advisors and professional money managers back off from day trading because they argue that the reward doesn’t justify the risks.

While profiting from day trading is possible, the success rate is inherently low because it’s risky and requires high skill.

Furthermore, many online day trading scams have lured amateurs with guarantees of enormous returns in a short period. Such promises indicate potential fraud because profits from trading are never guaranteed.

Benefits of Day Trading

Although day trading isn’t suitable for all traders, it has several benefits. The following sections explore these advantages.

Low Barrier to Entry

Some of the best day trading platforms usually have a convenient account opening process that takes only a few minutes to complete. Also, many platforms today allow traders to start with a small deposit.

Leveraged Day Trading Markets

Many online trading platforms allow you to use leverage to enter positions. Leverage enables you to open positions using a larger amount of capital than the money in your account.

Low-Risk Entry and Exit Positions

While all forms of trading have varying risk levels, experienced day traders can set up sensible entry and exit positions through limit and stop-loss orders to help manage risk.

Suppose you set a stop-loss at 2% away from your entry price. Any loss you incur from a bad trade shouldn’t fall any lower than that figure because the stop-loss order automatically exits your position.

Key Takeaways

  • Day trading involves selling and buying financial instruments within the trading day to profit from rapid price fluctuations.
  • You can use numerous strategies and techniques to capitalise on and profit from perceived market inefficiencies.
  • The technical analysis informs you of daily price movements but requires a high level of self-discipline and objectivity.

Day Trading Example

Suppose you perform a technical analysis on a company’s stock and determine that this asset has a pattern of price increases by around 0.6% on most days. Based on your prediction, you buy 1,000 shares of this stock when the market opens.

You can wait until your chosen stock’s price reaches a specific level, such as 0.6% above your entry price. Once you hit this level within the day, you can sell your entire position for a potential profit.

Alternatively, if your stock’s price decreases by 0.6%, you can exit your position before the trading hours close by selling your stock at a loss.

Books for Beginners

Part of your journey in learning day trading is reading trading sources like books and ebooks. If you’re a beginner, consider the following books to help improve your trades:

  • Interactive Day Trading: Ultimate Trading Guide by Satish Gaire
  • Day Trading for Dummies by Ann Logue

These books can provide you with basic day trading rules to live by. You don’t need to limit yourself to reading these books. As your experience and skills increase, you should read more books on more advanced topics to further improve your trading skills.

Swing Trading vs. Trend Trading vs. Buy and Hold

The following sections discuss how other forms of trading, such as swing trading, trend trading, and buy-and-hold, compare.

Swing Trading

As a swing trader, you hold assets for days or weeks before selling. This way, you have more time for a stock’s price to increase, giving you more profit opportunities while managing risk through stop-loss and limit orders.

Trend Trading

Short-term trend trading involves analysing an asset’s historical price movements to predict future behaviour. A trend is the direction in which prices move based on past actions.

Trend time frames can exist for weeks or months so you can buy and hold assets for this period.

If you’re a trend trader, you identify the price’s direction and enter a position as early as possible. You can hold for as long as the trend lasts before selling based on the price you believe the asset will peak.

Buy and Hold

This strategy typically involves buying and holding a security for months, years, or decades, regardless of what happens to the market.

You can choose this investing strategy to help offset short-term losses, knowing that your investment’s price will recover and continue to grow. You may find this strategy helpful for building your retirement account and achieving investment goals longer than five years.

What Are Some Indicators Used in Day Trading?

As a day trader, you’ll likely focus more on technical analysis than fundamental factors like a company’s sales and earnings. You can apply various trading indicators​ to help predict price movements, reversals, and trends.

Some of the widely used technical analysis tools are as follows:

  • Simple moving average (SMA): This indicator consists of a single line representing an asset’s average price over time plotted on a candlestick chart (a chart displaying a security’s opening, closing, high, and low prices).
  • Stochastic oscillator: This indicator helps identify overbought and oversold assets and highlights price momentum.
  • Relative strength index (RSI): This tool helps forecast potential reversals and evaluates whether a security’s momentum is accelerating or decelerating.
  • Bollinger band: This indicator uses a moving average with two bands above and below it. A moving average touching the upper band indicates overbought conditions. If the average touches the lower band, the asset is oversold.
  • Mean reversion: This theory suggests that asset prices eventually return to average levels after an extreme price move.

Who Makes a Living by Day Trading?

To become a professional day trader, you can work alone or in a large organisation.

Some day traders who make a living by trading work for large institutions like hedge funds and proprietary bank trading desks.

The advantages of these traders include having access to company resources like large amounts of capital, leverage, a trading desk, and expensive analytical software.

On the other hand, solo retail traders are likely limited by their funds, meaning they can’t always place large trades as institutional traders do.

The Solo Day Traders

Individual traders often use their own capital or manage other people’s money when trading.

If you’re trading solo, you’ll likely day trade using technical analysis and some leverage to generate good profits on small price movements in highly liquid assets.

Access to a Trading Desk

The trading or dealing desk provides you with instantaneous order execution. For example, when a company announces a merger, you can place orders before other traders can take advantage of the price difference.

Multiple News Sources

News provides many trading opportunities as headlines can inform you of when something significant happens that can affect the markets.

Institutional trading rooms usually have access to multiple news agencies, software that scans news sources for important stories, and constant news coverage.

Analytical Software

By relying on technical indicators, you’re likely to rely more on software than news. Some of these tools have the following characteristics:

  • Automatic pattern recognition: This trading program identifies technical indicators like channels and flags.

Channels are parallel trend lines at the resistance and support levels.

Support is where the price frequently stops falling and bounces up, while resistance is where the price usually stops rising and starts dropping.

Meanwhile, flags are areas on the chart showing tight price action consolidation.

  • Genetic and neural applications: These programs process data like a human brain to improve trading systems and make more accurate price movement predictions.
  • Broker integration: Some computer applications interface directly with the brokerage to provide instantaneous and automatic trade execution to improve processing times and eliminate emotion from trading.

What You Have to Do Before Starting Day Trading

Day trading stocks and other securities involve plenty of preparation and learning for you to become successful. The sections below discuss these activities to help you prepare for day trading.

Strong Knowledge of Day Trading Terminology and Technical Analysis

Day trading can be tough to master. Attempting to trade without education or training can increase your risk of loss.

Learning terminologies and technical analysis are some of the initial steps to becoming better at day trading. You can get such knowledge from reading books or watching videos.

However, learning day trading can be challenging because of the overwhelming and sometimes contradictory information. One reason is that the technical analysis for one strategy may not work for another.

If you’re a beginner, consider learning and sticking to one or two profitable strategies for your trading style. This way, you’re less likely to get overwhelmed by too many strategies.

Adopting a Proven Day Trading Strategy or Developing a Profitable Day Trading Strategy

You can create your strategy or adopt one that other traders actively use.

If you choose to create a strategy, prepare to spend months or years backtesting and refining it before you can use it to trade using real money.

However, if you’re a beginner, consider using a proven profitable strategy. After you master this strategy, you can customise it to fit your trading style.

Converting Knowledge to Skill by Practicing in a Day Trading Simulator

You should read several books about trading or take a few quality trading courses to help you feel ready to trade. Still, as a beginner day trader, avoid overestimating your ability because you may end up losing money.

Some credible trading platforms offer a demo account, allowing traders to practise trading without risking real money. Open a trading demo account and test strategies to determine which ones work in your favour before trading with real money.

Day Trading Tools – Everything You Need

Aside from education and practice, you also need various trading tools to determine how market behaviour affects price movements and help you decide entry and exit positions. The following sections explore what you need to know about these tools.

Trade Execution

Execution speed can be a significant factor in trading because a few seconds can spell the difference between catching and missing a potentially profitable breakout.

Many online brokers function as an intermediary between your order and the market. This setup can cause your trades to take a long time to execute as they have to pass through the intermediary.

One way to speed up trade execution is by trading through brokerage firms with direct market access (DMA).

A broker with DMA gives you direct access to the financial market exchange’s electronic facilities. You can order books to help execute your trades faster.

Commissions

Day traders who frequently trade know that fees and commissions can spell the difference between a profitable and a losing month.

Brokerage firms that allow day trading usually offer two pricing structures:

  • Per share: This structure is typical among proprietary trading firms and day trading brokers.

Typical per-share rates offered to low-capital retail traders hover around $0.005 per share. Other brokers require a $5.00 minimum, which may not be practical for undercapitalised traders.

  • Per trade: This commission structure is the most common in the industry. Each trade (a buy or sell transaction) you place requires you to pay a fee that can vary among brokers.

Stock Scanner

Stock scanners, also called stock screeners, are computer programs that filter the markets to find stocks that meet specific criteria.

If you’re into day trading, a good stock scanner can work for you, especially when you trade on very short time frames.

Charting Platform

A reliable and robust charting platform can help you visualise price action and make trade decisions.

Some brokers’ charting platforms don’t meet specific trader demands. Third-party charting software may help cover those requirements.

What Are the Day Traders’ Margin Requirements?

Margin requirements vary among brokers and can depend on what asset type you’re trading. Margin is the money you borrow from a broker to purchase an asset and is also the difference between your investment’s total value and the loan amount.

If your account has a 10% margin requirement and you want to buy securities worth $10,000, you must pay $1,000 ($10,000 x 10% = $1,000) and borrow the remainder from the broker.

How Much Money Do You Need to Start Day Trading? Are There Any Costs to Be Aware of?

Trading involves various costs like taxes and fees on top of the prices of the assets you buy. The following sections discuss these trade-related costs.

Day Trading With Cash vs. Margin

Day trading with cash means you only use the money available in your account.

With a margin account, you can use margin or leverage to increase your buying power by borrowing funds from your broker.

Cash Account

Suppose you have $1,000 as your trading capital. You can only trade assets worth that amount with a cash account. To increase your capital, you have to fund additional money or make more profitable trades.

Margin Account

This account is a brokerage account in which the broker allows you to purchase securities by taking a loan using your account as collateral. A few rules on trading with a margin account are as follows:

Day Trading Rules for Margin Accounts

One of the rules applying to day traders is the pattern day trader (PDT) rule. This rule consists of the following features:

  • The PDT rule applies to margin accounts
  • Executing four-day trades within five days qualifies you as a PDT
  • PDT accounts have four times the buying power for day trading
  • You have to maintain a minimum equity of $25,000 in your margin account to day trade once you become PDT

Ways Around the PDT Rule

The PDT rule doesn’t cover futures contracts, so you can day trade futures as much as you want.

The Financial Industry Regulatory Authority (FINRA) of the United States established the PDT rule. To be exempted from the PDT rule, open an account with a broker not covered by U.S. regulations.

Buying on Margin

Buying on margin involves using borrowed money to trade to help increase profits. With a margin account, you can use your assets as leverage to borrow up to a specific percentage of the value of the security you want to buy.

For example, a leverage of 500-to-1 means you can borrow up to 500 times your account deposit. If you have $100, this ratio means you can purchase up to $50,000 worth of assets ($100 x 500 = $50,000).

Tax on Day Trading: Is Day Trading Taxed?

Taxes on trading activities depend on the country’s tax laws. A common type is capital gains tax.

Capital gains are your profit when you sell an asset. You pay capital gains tax for the year that you sell the investment.

How to Start Day Trading: How Does a Day Trader Get Started?

If you want to begin day trading, the following sections discuss what you must know before making your first-day trade transaction.

What Is Day Trading’s First Rule?

The first rule when day trading is to never hold a position after the market closes for the day. Whether you profit or lose, you must exit your position before the day’s trading hours end.

Knowledge and Experience in the Marketplace

Individuals who trade without understanding the market fundamentals can lose money. Charts can deceive or confuse you if you don’t know how to interpret them.

Technical analysis involves evaluating assets and identifying trading opportunities in price trends and chart patterns.

Knowing technical analysis and how to read charts is a good start when getting into day trading. This way, you can analyse price changes and past trading activity to predict future price movements.

Sufficient Capital

When day trading, don’t risk your entire capital and use only the money you’re willing to lose. Doing so protects you from financial ruin and helps eliminate your reliance on emotion when making trading decisions.

If you use leverage with your margin account, ensure enough cash to cover potential losses. Market movements can be volatile enough to trigger margin calls on short notice.

A margin call occurs when your account runs low on funds. This call requires you to add more capital to bring your margin account to its maintenance requirement.

Can You Make Money Day Trading?

Despite the challenges and risks of day trading, it can still be profitable. When you succeed in predicting an asset’s movements and accurately timing the market, day trading can give you a chance to rake in substantial profits. However, you also must keep in mind the risks, and that only a small percentage of day traders are successful.

How Much Do Day Traders Usually Make?

As of March 2023, a successful day trader’s average annual salary ranged from $34,000 to $96,500.

Knowing how much exactly day traders make can be challenging to ascertain because you have to consider numerous variables like your skill level, the capital you have for trading, market conditions, and the leverage your broker offers.

What Is Day Trading’s Buying Power?

Your buying power is the total funds you have available for trading securities. This amount equals the cash in your account plus the available margin.

To calculate your buying power, divide your cash amount in your account by the margin percentage. If you have $5,000 cash and a 50% margin, your buying power is $10,000 ($5,000 ÷ 50% = $10,000).

Day Trading Strategies

As a day trader, you’ll use one or more strategies to help give you an edge in the market, improve your profitability, and manage risk. The following sections explain some of these strategies and recommendations.

Discipline

You can lose money if you don’t make trades that meet your criteria or fall outside your strategy. Without the discipline to stick to your trading plan, success can become difficult, if not impossible.

Bull Flag Strategy

This strategy involves finding an asset with high relative volume, such as a stock in a long-term uptrend.

To enter a position, buy the asset as it breaks above the consolidation pattern (sideways price movement) with higher volume. Once the asset’s price reaches your target level, exit your position.

When placing a stop-loss order, place it below the bottom of the consolidation pattern.

Demo Account Feature

You can use the demo account to practise entering positions without risking any capital if you’re a beginner. Demo accounts can help you learn how a specific trading platform works and get used to technical indicators and real-time pricing charts.

Limit Orders

As a day trader, you must consider entering and exiting a position with clear targets. Limit orders let you indicate the exact price to buy or sell an asset so that your transaction automatically executes at that price level.

Stick With Liquid Markets

Stick with liquid markets when you’re day trading for the first time. Liquidity is how quickly or easily you can buy or sell a security. When you have liquid investments, you can sell them readily without paying a hefty fee.

Blue-chip stocks (stocks from a large, reputable company), major forex pairs, and gold are some of the most liquid markets where you can day trade.

Learn Technical Analysis

To become a successful day trader, you must have a firm grasp of technical analysis. This strategy involves reading charts to help you predict future price movements.

Use a Copy Trading Tool

Sometimes, you don’t have enough time to learn technical analysis. In this case, consider using a copy trading tool.

This tool enables you to copy positions opened and managed by other traders automatically. After choosing a trader to copy, you can start day trading positions even without plenty of experience because you’re using similar actions that other successful traders use.

All Day Trading Strategies Require Risk Management

A risk management strategy can help you prevent or reduce losses if the market doesn’t go your way. Setting your limit orders, risk ratios, and stop-loss orders are ways to help manage your risk exposure.

For example, setting a profit-loss ratio of two-to-one means you’re seeking opportunities to gain $2 for every $1 you risk.

Learn to Play Defense

If you’re a new trader, consider focusing on how to mitigate losses. Once you learn the risk management strategies to help you manage or prevent losses, you can focus on making bigger profits.

One defensive tip is to set your stop-loss orders immediately after entering and holding a position.

Price Action Trading

Price action trading​ uses technical analysis to help you identify trends, reversals, and breakouts. The strategy examines a specific security’s price movement over a particular period to help you make trading decisions.

Scalping

Scalping is a short-term strategy wherein you buy and sell assets several times during the day to make numerous small gains that may add up to a cumulatively larger profit.

Short Selling

Short selling involves targeting an asset you think will decline in value and selling it at a high price. You can buy that asset later at a reduced rate to profit from the difference. Therefore, short sellers rely on a security’s drop in price to profit.

Short selling comes with high costs and risks. If you trade assets, any profit you make is subject to capital gains tax, and commissions are also charged for share positions. One significant risk is when the asset’s price rises after opening a short position.

Momentum Trading

Momentum trading focuses on price action and movements instead of fundamental factors like a company’s overall future or state affecting share prices.

Although you can use technical indicators to check price movement, you must also assess macroeconomic events like news stories that may suddenly influence those prices.

Risks of Day Trading

Day trading has risks like any other trading or investing method. The following sections discuss some of these risks to help you manage your account and reduce your exposure to such risks.

The Latest Craze

Some high-profile individuals and celebrities tout how day trading makes plenty of money for them. However, just because these individuals engage in this kind of investing doesn’t mean it’s the right strategy for you.

Every investment and trading activity has some degree of risk. Engaging in risky trading just because famous people do, even without proper knowledge, isn’t the best way to plan your financial future.

You Can Lose Everything and More

Day trading often involves minute-by-minute decision-making and leveraged trading that can cause potential losses if the market goes the other way. Additionally, markets can be highly volatile, meaning your asset’s price can rise as much as it can fall.

Even the most experienced trader can find day trading challenging at times. If you’re unprepared to take risks due to these conditions, day trading may not be for you.

Long-Term Investing Is the Best

Long-term investing is among the best ways to help you secure a stable financial future. When creating an investment plan, identify your financial goals, like saving for retirement, a new house, your child’s education, or a new business.

After identifying your financial goals, plan how much to invest to achieve those goals. This plan can include spreading your investment across stocks, bonds, and other financial instruments.

Understand What You’re Investing in

Prices can change instantly, and you may not have time to research every possible asset thoroughly. If you’re a beginner, consider thoroughly researching one or two securities first and avoid investing in securities you haven’t thoroughly researched.

Be a Smart Investor

If you’re creating an investment strategy for your financial future, don’t treat your investment like going to a casino to gamble. Instead, think of how to plan for what may happen in the days ahead and create a long-term investment plan to address those events.

How You Invest Your Hard-Earned Money Is Ultimately Up to You

If you want to day trade, one of the most prudent approaches is to trade an amount of money you can risk. Doing so ensures your losses are manageable enough even when the market turns the other way.

For example, you can trade no more than 10% of your portfolio’s value. This value can change depending on your risk tolerance and investing preferences.

Pattern Day Trader

Do you place four or more day trades within five business days? Do those trades account for more than 6% of your margin account’s total transactions in that period? If so, you’re considered a pattern day trader.

As a PDT, you must maintain $25,000 in your day trading account. If your balance drops below this threshold, you can’t trade further until the securities and cash in your account return to $25,000 or more.

Margin Call

If you have a margin account, your broker can require you to maintain a maintenance margin requirement.

Under FINRA rules, you must maintain a $25,000 equity in your account. Falling below this requirement can subject you to a margin call, requiring you to deposit more funds within five business days.

What Are Some Tips to Get Started?

Day trading can be challenging, complex, and time-consuming to prepare before buying and selling assets. The following sections discuss ways to help you get started with day trading.

Setting Up

Part of setting up is ensuring your computer or device has the proper technical specifications to handle your trading platform and other trading-related activities. A fast, secure, and reliable internet also helps you place trades on time.

Keep It Simple

You can trade or invest in several markets like mutual funds, blue-chip stocks, major currency pairs like the EUR/GBP (euro-British pound pair), commodities, or indices. However, consider focusing on only one or two, so you don’t get overwhelmed with trading too many assets.

Be Realistic

Just because movies and television shows make trading seem easy doesn’t mean it is. Many day traders invest time studying and practising strategies and don’t become experts after making only one trade.

Assess your current cash and assets to see if you have realistic profit targets. If you plan to earn $100,000 in a year through day trading, your daily profits should be enough to reach that goal.

Risk Management

Aside from stop-loss and limit orders, another way to help you manage risk is by spending only enough money you’re comfortable losing.

For example, you can risk up to 2% of your account balance on one trade. If you have $10,000 in your account, each trade must not exceed $200 ($10,000 x 2% = $200).

Keep a Record

One essential day trading practice is maintaining a spreadsheet with detailed earnings reports. You can use this spreadsheet to quickly see where you went wrong and identify any pitfalls to help minimise your losses next time.

Timing

Many markets worldwide operate in different time zones. One example is the NYSE (New York Stock Exchange), which operates from 9:30 AM to 4:00 PM Eastern Time (E.T.).

Suppose you start trading on the NYSE at 2:00 PM E.T. You may miss some of the best entry signals of the day, minimising many potentially profitable trades. In this case, consider adjusting your working hours or looking for another market that fits your schedule.

Sensible Decision Making

When you start day trading, you will encounter a host of challenging decisions to make. Do you have the proper computer setup? Is your internet connection reliable? What indicators work well for day traders? Is your broker regulated and licensed to operate?

Asking yourself these questions and more can help you make informed trading decisions and manage risk.

Terminology

Trading involves many technical terms you must familiarise yourself with to help lessen your confusion and improve your trades. The following sections discuss these terminologies.

General

  • Bear or bearish: A position wherein you expect the asset to decrease in value.
  • Bull or bullish: A position involving trading assets that you expect to rise in value.
  • Derivatives: A financial contract, set between two or more parties, deriving its value from an underlying asset or group of assets.
  • Entry points: The price level at which you buy an asset or enter a position.
  • Exchange-traded funds (ETFs): A group of securities trading on an exchange.
  • Exit points: The price at which you sell the asset or exit your position.
  • Market trends: The general direction of a security over a given time frame.
  • Penny stocks: Small company stocks that trade for less than $5 per share.

Charts, Graphs, Patterns and Strategy

  • Bollinger bands: These indicators measure an asset’s high and low prices relative to previous trades to help you recognise patterns and make systematic trading decisions.
  • Moving averages: These averages provide potential buy and sell signals and help you confirm if a current trend is ongoing.
  • Moving average convergence/divergence (MACD): This indicator computes the difference between an asset’s exponential moving averages to determine buying and selling signals.
  • Relative strength index (RSI): This indicator evaluates the strength of an asset’s price performance by comparing gains and losses over a particular period and measuring the speed and change of the security’s price movements.
  • Resistance level: This price level is where traders expect an uptrend to stop temporarily due to a concentration in supply
  • Support level: This price level is where traders expect a downtrend to stop due to a concentration in demand.

FAQs

  • Should I start day trading?

You can start day trading if you’re prepared to commit to the following steps:

  • Ensure you have sufficient knowledge of the trading world and a clear idea of your goals, capital, and risk tolerance.
  • Allocate time to practise and master your strategies.
  • Start small by focusing on a few assets. Trading too many securities can complicate your strategy and cause substantial losses.
  • Remain cool and keep your emotions out of your trades. 
  • How does the pattern day trading rule affect day traders?

If you’re a day trader, the PDT rule requires you to maintain $25,000 in equity and place four or more day trades in five business days.

  • Is day trading allowed?

Yes, day trading is allowed as long as your broker enables you to day trade on its platform.

  • Are there pattern day trading rules?

Aside from maintaining a $25,000 equity in your account, another requirement of the PDT rule is that your number of day trades must be more than 6% of your trades in your margin account.

  • Is day trading the same as penny stocks?

No, penny stocks and day trading are different terms. Penny stocks are shares that trade below $5. Meanwhile, day trading is buying and selling assets within the same day.

  • Why is day trading harder than passive investing?

Day trading is more challenging than passive investing for the following reasons:

  • If you’re a day trader, you compete daily with other professional day traders.
  • When day trading, you’re likely exposed to psychological and emotional biases that make this trading type difficult.
  • How do I read a candlestick chart for day trading?

Candlesticks indicate an asset’s opening, closing, high, and low prices for a specific time frame.

The candlestick’s top or bottom indicates the opening price, depending on whether the asset’s price moves higher or lower in the period. The thin lines above and below the candlestick represent price movements above and below the opening and closing prices.

  • Are there any day trading apps?

There are several trading apps you can use if you’re trading on a mobile device like a smartphone or tablet.

For example, some brokers allow you to trade using MetaTrader 4, a widely used trading platform you can download from Google Play or the App Store.

  • How do I choose stocks for day trading?

Some of the best stocks for day trading are those with robust trade volume and price volatility.

Trade volume allows you to get in and out of positions quickly. Meanwhile, volatility lets you take advantage of price movements.

  • What is forex day trading?

Forex day trading involves selling and buying currency pairs in forex markets within the day.

A currency pair is a price quote of two currencies, with one currency’s value being quoted against the other.

  • What is pattern day trading?

Pattern day trading is an activity wherein a trader with a margin account executes four or more day trades within five business days. A PDT differs from a standard day trader based on the number of day trades executed within a particular period.

 

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a recommendation to buy or sell any financial instrument or engage in any investment activity.

While we strive to provide accurate and up-to-date information, we do not guarantee its completeness or accuracy. We rely on various sources for the information presented, and we cannot guarantee the reliability or accuracy of these sources.

The information provided here does not necessarily reflect the products or services offered by our company. Any mention of financial products or services is for informational purposes only and should not be considered an endorsement.

All investments involve risk, including the potential for loss of principal.

This information should not be considered as financial advice. You should always seek professional financial advice from a qualified advisor before making any investment decisions.

References

  1. Is Day Trading Profitable? How to Get Started

https://www.investopedia.com/articles/active-trading/053115/average-rate-return-day-traders.asp

  1. Day Trading: The Basics and How to Get Started

https://www.investopedia.com/articles/trading/05/011705.asp

  1. Margin and Margin Trading Explained Plus Advantages and Disadvantages

https://www.investopedia.com/terms/m/margin.asp

  1. Trading Channel

https://www.investopedia.com/terms/t/tradingchannel.asp

  1. Flag

https://www.investopedia.com/terms/f/flag.asp

  1. Day Trading

https://www.finra.org/investors/investing/investment-products/stocks/day-trading

  1. Capital Gains Tax: What It Is, How It Works, and Current Rates

https://www.investopedia.com/terms/c/capital_gains_tax.asp

  1. Technical Analysis: What It Is and How to Use It in Investing

https://www.investopedia.com/terms/t/technicalanalysis.asp

  1. Buying Power (Excess Equity): Definition in Trading and Example

https://www.investopedia.com/terms/b/buyingpower.asp

  1. Liquidity (or Marketability)

https://www.investor.gov/introduction-investing/investing-basics/glossary/liquidity-or-marketability

  1. What Are Penny Stocks?

https://www.investopedia.com/terms/p/pennystock.asp

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