Day Trading has increasingly become a popular way for many people to attempt to generate income. This makes complete sense because, on the surface, day trading seems very simple. Most people believe that you just need to know the secret of when and how to place trades, and then making lots of money will be a snap. With our home computers, Google, and an internet connection, we can get started learning about and eventually starting to day trade. If you are thinking about day trading and learning the best way to do it, then you may have stumbled across this article. Hopefully, you will learn enough to get you started.
Day trading can develop into a successful profession as long as you approach it as you would any other profession. But it can be difficult for new traders that don’t have realistic expectations and a solid plan. And remember that even the most experienced day traders can run into trouble and lose money.
What is Day Trading?
Day trading refers to buying and selling securities and other assets, then selling them within the same day with the goal of making a profit. A day trader must have all of their trades closed by the close of markets that particular day. Day Trading employs a wide range of strategies and techniques to capitalize on perceived market inefficiencies.
Day Trading is the opposite of a long-term investment strategy, which involves holding stocks or other securities in the belief that their value would increase over time. Instead, buying on dips and selling high in the near term is the focus of day trading. The long-term prospects of a stock or asset are of much less importance than the current volatility.
Day Traders are happy to take many small profits during a trading session, which, over time, can really add up to a substantial income. Some of the more commonly day-traded financial instruments are stocks, options, currency, cryptocurrency, and futures contracts such as stock market index futures, interest rate futures, currency futures and commodity futures.
Day Trading Basics
Executing trades within a single day is commonly referred to as day trading. Nothing about it relates to investment in the conventional sense. It is taking advantage of the regular up-and-down price swings that take place during a trading session.
Day Traders often have a strong financial foundation and have knowledge about all details of trading. Many of them use debt or leverage to enhance the amount of their trades, which if used incorrectly can add to the potential of losing more money than originally risked.
Successful day traders are tuned into the things that trigger quick changes in the market. Some traders feel that they have an edge by trading in response to scheduled news reports. Market expectations and market psychology can affect scheduled announcements like the release of economic statistics, corporate earnings or interest rate changes. That is, when those expectations are not realized or are surpassed, the market responds, typically with swift, large movements that the best day traders will know how to use as a edge to create profits.
In addition to news trading, day traders will typically employ one or more of these strategies to gain an edge:
High Frequency Trading (HFT): The traders that employ HFT’s typically have huge resources of technology and available funds to actually manipulate the markets. These manipulations take place very quickly, sometimes in milliseconds, and then the HFT operators take their profits, typically from small retail traders that do not understand what is happening. You may also here of these HFT traders referred to as hedge funds or “Smart Money”.
Trend Following: A trend-follower will buy when prices are rising or short sell when prices are falling. This is done under the premise that prices that have been steadily rising or falling will keep doing so.
Scalping: This approach is centered on making a lot of little profits off of fleeting price swings that happen throughout the day. These traders are focused more on consistency of winning trades versus the size of a winning trade.
Support/Resistance or Range Trading: Predetermined levels where price may be perceived to be overbought or oversold will show support for holding the price up, or resistance to allowing price to climb any higher. These traders will anticipate price direction changes based on these levels.
Those that have made a profession out of day trading have typically worked very hard to get there. Most professionals have a specific style or strategy that they employ each day. Some days, based on market conditions, may dictate which style or strategy to use. Day Traders that have a single strategy that they employ each and every day typically see more consistency than those that try predicting what the markets will be a doing throughout the day and jump from one strategy to another each time a new market condition is realized. It is important to find a strategy that is simple but powerful and can be practiced. Learning how to use technical analysis and trading indicators is a good starting point. Technical analysis helps the trader to understand the underlying sentiment of an assets current price and whether the market feels it is too high or too low. If a trader knows what the other traders in the market are feeling about the current price, then that gives the trader an edge in understanding what price is likely to do next and thus where, when, and how to place a trade.
Do Not Rush
Because day trading seems so simple, most would-be traders want to start trading with real money right away. It is not advisable for a person that is learning day trading to trade with real money because there are a lot of very experienced traders that are in the markets eager and willing to take it away. Most trading platforms and brokers provide traders with simulation accounts. It is basically play money that allows the trader to begin trading without any risk to their capital. Once they have been able to consistently grow their simulation trading account, a trader may want to consider trading with small amounts initially until seeing their trading account grow. Then, trade sizes can grow relative to the size of the trading account.
What to trade
When new traders decide that they want to learn to day trade, it is typical that they choose the lowest barrier to entry if they do not have a lot of capital they feel comfortable putting to risk. This is exactly why there are so many people interested in trading the Forex (Foreign Currency Exchange) markets. An account can be opened with as little as $50 and the trader can be trading in minutes.
Because Forex trading has no centralized exchange and is unregulated, it is completely driven by brokers. There is little transparency, and a trader may not have any influence over how his trade order is carried out, may not receive the best price, or may only receive a limited range of trading quotes from his chosen broker. This actually has the trader in the position of competing against his own broker. This does not give the trader the best odds unless they are trading huge amounts of money have direct access to the broker.
Although the barrier to entry is low, Forex is not the best or safest place for most new day traders to learn to day trade.
When day trading stocks and benefitting from broker leverage, a minimum account value of $25,000 is required due to “Pattern Day Trader” rules. For day traders of individual stocks, this may be a significant financial limitation. If a trader is not well versed in the PDT rules and able to commit to a very large trading account balance, stocks is not the best place to begin to learn how to day trade.
Futures markets are highly regulated and much more transparent than Forex. The playing field for small retail traders is much more level and fairer and is not as heavily weighted to the professional traders, such as the Forex brokerage firms.
There is also no pattern day trading rule with Futures trading. Like stock brokerage firms, future brokers provide leverage so a trader can actually trade and control more money than actually exists in their trading account. But unlike stocks, futures traders can trade as many times a day as they like, including selling short which is not typically allowed in stocks.
With the introduction of Micro futures in 2019, the barrier to entry is now somewhat equivalent to Forex. A trader can open a trading account with only $50 to get started.
Risks of Day Trading
Because of all the dangers involved, day trading might be intimidating for the typical investor. The U.S. Securities and Exchange Commission (SEC) outlines some of the risks of day trading:
- Be ready to experience significant financial losses: Day traders frequently experience significant financial losses in their initial trading months, and many never turn a profit.
- Day trading can be a very stressful profession: A trader must stay focused for small signals in the markets that align with the traders style of trading and trading plan for hours on end.
- Day traders borrow money to gain leverage: Leverage is borrowed money to amplify potential profits. Many day traders not only lose all of their own money, they can often acquire debt.
- Claims of easy profits are often exaggerated or false: Be very careful listening to all of the advice and salespeople claiming that trading is easy and you can do it successfully with their secret formula. Much of the advice offered on the internet is intended to sell something. Do a thorough internet search first to see if the advice and the offeror have a good reputation.
If one is intent on learning how to become a day trader, here are a few tips to think about on their day trading journey.
- Do not trade with real money until you have exhibited consistent profits while simulation trading.
- Although confusing at first, day trading does not require the trader to know everything about all aspects of day trading. Find a style of trading that feels right and is not complicated to learn.
- Practice, practice, and then practice some more. Many trading platforms provide a utility that allows the trader to playback the markets just like a DVR. Experience can only be earned by hard work and practice.
- Successful day traders are typically not trading part time, as many would have you believe. Successful day trading takes a lot of work each and every day.
- Day trading is a zero-sum game. That means, for every winning trade, there is a losing trade that somebody else was involved in. When a trader enters a trade, they need to have a lot of confidence that they have better information than those that are willing to trade against them.
Day Trading can be a very lucrative career but is also high risk. Most day traders never see a profit and in fact lose a lot of money because they do not have realistic expectations of what is involved in day trading to become successful at it. But with realistic expectations and the willingness to devote a lot of time and effort to day trading, it can be an exciting and fulfilling career choice.