Day trading is a strategy of buying and selling stocks and other tradable securities on the same trading day. Day trading can last as long as an entire trading day or as less as a few seconds. Traders take advantage of quick moves that happen in particular stocks and use technical analysis to enter and exit trades.
If you don’t want to read the entire article, you can click on the following links to read sections that interest you.
Table Of Contents
- How long day trades last?
- Day trading strategies
- Rules of day trading
- Benefits of day trading
- Disadvantages of day trading
- Tips for successful day trading
- Qualities you need to be a successful day trader
- Where and how to buy stocks?
1. How long day trades last?
As the name explains, stocks are bought and sold during the same trading day. That is, all shares in each stock must be sold by the end of the trading day. This is different from Swing trading where traders buy shares in stocks and hold them for days or weeks before they sell them.
When day trading, you don’t need to hold shares the entire day. You can enter and exit the stock market in a few seconds.
2. Day trading strategies
a. Scalping
This is a great technique used by many traders around the world in many trading markets such as stock, Forex, etc. The idea is that a trader will start getting out of their position as soon as stocks become profitable.
The goal of traders who use this method is not to make a huge profit on a position. Instead, they want to make little profit that accumulates to a bigger reward over time.
If you want to make a big profit using this method, you will need to take a big position size. For example, if you are making 2 cents per share and you have 1000 shares; your profit will be $20. What if you have 10000 shares and making the same profit per share? You can see that your profit will be $200.
You must be careful when scalping. One big loss can wipe out all small gains you have been accumulating and put you in a deep hole. I have been there, it is not fun. The best way to avoid major losses when scalping is to have strict exit strategies. Learn about these strategies in the next few sections in this article.
b. Breakout
Breakout strategies are used when the price breaks above or below a predetermined level. Traders use trading patterns and indicators to set and analyze breakout levels. Once the price breaks above or below these levels on a high trading volume, traders take positions. Depending on your trading strategies, you can take a long position or short sell the stock depending on the location of the breakout.
When you are using this strategy, you must be aware of false breakouts. If you take a long position on a false breakout, you will lose your money. This is why a combination of indicators and trading patterns will help you access the credibility of the breakout.
Breaking below could be a high indication that the stock is changing the trend. When this happens, traders short the stock and exit using exiting strategies.
A breakout on high volume implies high volatility in the stock. You can make a big profit in a very short time if the price moves in the direction you anticipated. However, it is possible to lose a lot of money very quickly if the price moves against you.
For this reason, it is important to have strategies on how you will trade the stock before you take a position.
c. Momentum
Momentum is a popular trading strategy among many traders. Those who use this technic rely on news in the market or about a particular stock. When good or bad news is released, the volume of affected securities or stocks increase. A stock can experience heavy buying activities if the news is good and the opposite if the news is bad.
For example, a stock that beat earning expectations will have a huge rally whereas the one that missed will tank.
Traders wait for news that will trigger momentum trading strategies. Once everything is in place, traders take positions in their preferred securities and exist when they see signs of reversal in their trading trends.
Momentum trading is a good strategy. However, you must be careful all the time. A false news alert can lead you into a trade that will erase your portfolio. By getting your news and strategies right, you will make a lot of profits.
d. Reversal
Reversal trading strategies are used in an attempt to trade a stock when its trend is reversed. To succeed as a trend reversal trader, you must have an insight into capturing trend reversal and how long they will last.
With enough knowledge of the market, you can successfully enter and exit trades with a huge profit. However, if you don’t know what you are doing, you will wreck your portfolio. One false reversal in the trend can send you back to school.
3. Rules of Day Trading
People who make 4 or more day trades in 5 consecutive trading days are considered to be pattern day traders. These people are regulated by the Pattern Day Trading (PDT) rule established by the Financial Industry Regulatory Authority(FINRA). FINRA requires all pattern day traders to maintain a minimum of $25,000 in the account at all times.
If you make more than 3-day trades without this money in your account, your account will be restricted from day trading for 90 days or until you bring your account to $25,000.
If you exceed your buying power limit(for those with margin accounts), your broker will issue a day trade margin call. You will have 5 days to deposit the required funds to meet margin call requirements. If you do not deposit the funds, your account will face restricted from making day trades. Learn more about day-trading margin requirements.
The rules for margin accounts are different than the ones on cash accounts. With a cash account, you are required to pay in full all transactions. In addition, you cannot borrow money or shares of securities from your broker as a trading strategy.
4. Benefits of day trading
- Big and quick profits: Day trading is one of the fastest ways you can make a lot of money. It is possible to double your account in a matter of seconds. This is because traders take advantage of quick moves that happen on stocks they are trading due to good news or bad news depending on their strategies.
- Protection against huge loss: When you day trade, you buy and sell securities during the same day. This gives you advantages and protects you from unexpected future events in the market. Should the market crash the next day? No problem. You will be out already!
- Too much adrenaline: Yes, it is easier for millions of traders to swing trade or do longterm investment. This is because the fear of losing money is not taken in at once. You always have that feeling that the stock will somehow go up. Therefore, you are not worried about short term fluctuations in the market. On the contrary, you take in all these emotions at once when you day trade. This makes day trading a little more exciting. Some traders argue that you can lose weight from day trading! The adrenaline rush you get when you are day trading makes the whole idea exciting.
- Easy to get started and quick learning opportunities: You don’t need a lot of money to get started with day trading. You can buy and sell shares of stocks very quickly. This gives you the advantage of learning and correcting your mistakes in a very short time. As a result, you become a better trader very fast If your emotions can let you learn!
- Overnight Risks are avoided: Day trading protects you from overnight risks associated with individual stocks or the market as a whole. For example, let’s say that you are swinging a stock with $1000 for a few days. You could lose 50% of that money overnight if the stock loses 50% of its value due to bad earnings, for example.
- You can find success in unfavorable markets: When markets are rough, you can benefit from them. These methods are effective when the market is highly unpredictable. During the trade wars, for example, the market moves up and down unexpectedly. In these conditions, you can day trade and make a profit on good days. Should something happen in the market the next day? It is not a big problem because you would have exited the market.
5. Disadvantages of day trading
- A limited number of trades per week. Unless you maintain at least $25,000 in your trading account, you will not be able to make more than 3-day trades in 5 consecutive days. We all know that not everyone has that kind of money laying around. Therefore, this is one of the biggest reasons new traders spend a lot of time building their accounts.
- Trading commissions: Trading commissions used to be a major setback as well. What it means is that for every trade you make; you will pay a commission on it. Trading commissions are no longer a problem on many brokerage firms. Not long ago, commissions for trading stocks were between $4.9-$10 for buying and the same for selling. In other words, you would pay between $10-$20 to complete a trade.
- Time-consuming: When you day trade, you have to watch a stock until an entry point is formed. This is time-consuming. You would need at least 2 hours to successfully day trade. It is possible to make your trades right after the market opens and get out within minutes. But this is not always the case. Without taking a position at the right time, you would lose a lot of money on trades.
- Missing out on bigger gains: It is possible to miss out on bigger gains when you day trade. For example, if a stock has really good news and you day trade it; there are chances that it could continue the upward trend for a while. For this reason, you could end up losing these gains because you got out quickly.
- Taking a loss on trades that could make you money if swing traded: When you buy and sell shares of stocks on the same day, you risk taking losses on stocks that would rebound the following day or even the same day.
- Major losses in every short time: When you day trade, it is possible to lock in a huge loss in a matter of minutes or seconds. A stock can go against you and if you are not using stop losses, you can go back to an 8-5 pm job from a single trade.
6. Tips for successful day trading?
This is a very important question you have been waiting for. There are benefits and problems related to any trading technique you can think of. However, with the right strategies, mindset, and rules you can become a very successful day trader.
You must actively be involved in the stock market when you decide to pursue a day trading adventure.
The following are a few tips to help you succeed as a day trader.
- Learn and Learn: Learning is the first step you need to take before you start trading. You will need at least basics on technical analysis. That is; you must know how to read candlestick charts, how to use trading indicators, and trading patterns. It is equally important to learn the basics on the stock market in general.
- Avoid penny stocks: Penny stocks are considered more volatile and have low float compared to other stocks. It is possible to double your portfolio on a single trade or lose all of it. For this reason, avoid trading penny stocks if you are not an experienced trader.
- Always use limit orders: A Limit order gives you a chance to buy or sell shares of a stock at exactly the price you want. Without limit orders, you could pay much more per share than you wanted to which could minimize your profits and increase your chances of losing.
- Always use stop-loss orders: Your success in the stock market will depend on your ability to cut your losses. Without minimizing your losses, you will see your portfolio sinking trade after trade. One way to minimize your losses is to use limit orders.
- Do not be greedy: When you are trading, it is possible that you will want to maximize your profits on your trades. There is nothing wrong with it. However, you must do it safely. Your winning stock could turn into a losing one. Always lock in some profits. That is you sell some of your shares for profits and minimize your position in the stock. Should the stock reverse the trend on you? You would have some profits already and the loss on your remaining position would be minimal.
More tips, don’t get bored….!!
- Stay ahead of the news: There is no way you will succeed as a day trader without having a complete understanding of what goes into the market. You need to be informed about news in the market and around the world in general. You will need to be a politician, an economist, etc. to keep up with the market. Why do you need all these? Few blue-chip stocks with bad earnings can move the whole market in the red. How can you trade these stocks if you don’t know why the market is red? Shorter-term market directions are heavily affected by the news, political dilemma, natural events, etc. Your trading strategies will depend on movements in the market.
- Watch your emotions: Almost every losing trade you will make will be a result of your emotions. Your mind will tell you to stay in a losing stock hoping that it will go back up until the loss is doubled. The same mind will tell you to stay in a winning stock until it becomes a losing stock. This is real, I have done it. You need to not give in to these emotions. They will ruin your career and make you hate stock mark. Is your stock moving in the direction you did not anticipate? Get out as soon as you find out. A small loss can turn into a huge loss in a matter of seconds.
- Have a plan and stick to it: This is another important item that should be on your list. Having a plan will help you decide what stock to trade, how to trade it, when to enter, and when to exit. Making a plan is always easy. The hardest part is sticking to it. Always stick to your plan.
- Start with paper money: There are a lot of stock simulators out there. Using a stock simulator can definitely help you learn the basics of trading. In addition, this can help you practice controlling your emotions when you win or lose money. Investopedia has a free simulator you can use to get started. There are other free online simulator providers. You just need to do your homework. Remember, never test the depth of the water with both feet. Some nerd said that.
- Start small: Starting small will help you learn the rules of the game while losing less money. 10% on $1000 is much less than 10% loss on $10,000. You can increase your portfolio later on.
- Trade during the first few hours after the market opens. The market is more active in the first few hours from opening. The volatility is high and there are enough buyers and sellers in the market. Therefore, you will find enough shares to buy when you want to. Also, there will enough buyers of your shares when you want to sell them. As a result, there are small spreads and high trading volumes in the mark. You must find a way to trade during these hours.
- Wake up much earlier before the market opens. Getting up at least 2 hours before the market opens gives you a chance to read the news, scan the market for gappers and movers, etc. What you learn before the market opens helps you know how the market will react and how to trade in that market.
7. Qualities you need to be a successful day trader?
It is hard to imagine the number of amateurs who lose millions of dollars trying to get rich. We can’t blame them. Trading is not easy and many inexperienced forks are drowned every day.
This can’t stop you from being the one who can make it in the market. You can definitely make day trading your new career.
However, I am not telling you to open an account and start buying random stocks and hope that you will make it.
The truth is, you will never make it this way. You will need to be different than the rest. Why is it urgent that you be different? Because 90% of traders lose money in the stock market.
If you want to be in the 10% that makes it, you must do what 90% are not doing.
The following are some of the qualities you will need to be a better day trader and hopefully find yourself among the 10% that wins.
Try to build the following qualities and many more you will learn somewhere else like a training guide.
1. You need enough knowledge of the market
This is probably what sets a huge difference between winners and losers. Having theoretical knowledge of the market helps you navigate through complex situations with ease.
Earlier, I emphasized the idea of predicting short term movements of the market and individual stocks. How will you predict them if you don’t know how the market works?
Tips: Start by learning the stock market, in general, using free online resources. These are some of the online tools you can use in your learning phase.
- Yahoo finance
- MetaStock
- Bloomberg
- Seeking Alpha
- Investopedia
- Zacks
- The Motley Fool (fool.com)
- MarketWatch
- The Wallstreet Journal
- Your broker should have free learning resources if you have one already
- Books
These resources will help you get started with the theoretical part. You must keep learning as much as you can even after getting better. The more you learn the better.
2. You need a plan
This is the part where many traders fail. A trading plan is different than a business plan. Your trading plan is like the blueprint of your trading strategy for a particular stock.
You can use the same strategy for many stocks or change it depending on the set up you have and changes in priorities.
For example, you can decide what your position size, entry point, and exit strategies will be, before taking a position in a stock. These plans can be replicated to many stocks or modified. You are the one to make that decision.
If you have a plan, it is important that you stick to it. Otherwise, you would not be different than someone who did not have it.
3. You need a strategy
If someone asks you this question: Why did you take a position in that stock? Do you think you can find an adequate answer?
What I am saying here is that you need a valid reason to take a position in a stock. The reason you entered a position should be justifiable by technical analysis. These are the ones that will help you know why you should enter and exit trades.
Without strategies, you are no different that a gambler at a Casiso.
4. You need enough capital
You will need to maintain at least $25,000 in your brokerage account to have unlimited day trades. This is true across all trading platforms.
Less capital can still give you profit, but it will be hard to make a living while trading only $2000, for example. It will take you a lot of time to reach financial independence with this account.
Having a big account will give you a chance to make more profit with low risk. For example, you can still trade with $2000 on an account that has $50,000. It will be safer this way.
The similarity between these two accounts is that you are trading with the same amount of money. The difference is that you can have only 3 trades in 5 consecutive days on one account whereas you will have an unlimited number of trades on the other.
Although, it is not necessarily true; the account with more trades will give you more profits. If you want to make day trading your new career, you must use a big account.
It is important to know that the chances of losing on a big account are high. Yes, the more money you have, the more you can lose.
For example, let us assume that you decided to trade with $2000 on an account with $50,000. What do you think will happen if your stock starts losing? If you said to get out, it is a great idea. However, some of us get tempted to average down or average up which increases our position size, hence, more losses.
5. Discipline will be your greatest weapon
Your discipline will be your ability to obey the rules and strategies you set for yourself.
Traders tend to override their own rules. If this has not happened to you, it will happen soon. Maybe you have not started trading yet. If that is the case, you need to start with the right food. Focus on discipline. Set rules and have the gut to follow and respect them all.
If you said you will get out at a particular price, get out. And more importantly, if you said you will exit a position if you lose 2%, get out at 2%. Don’t make it 4% even more hoping that it will bounce. Take a small loss or profit and move on.
6. Avoid trading stocks based on rumors or online tips
Our world has gotten smaller and smaller. Although this can be a good thing, it can also be an enemy for day traders. If you go online right now, there is a chance that you can see where a person even trusted media says that a stock is about to boom.
Do these rumors really happen all the time? The answer is no. You need to focus on real news and avoid online or friends tips. Just because news came from a trusted friend, it does not mean that it is accurate.
Unless it is inside trading which is illegal and we DO NOT recommend doing it; you will end up in failure. It is also unethical to cheat the system. If you win, win like a man and if you lose, lose like a man.
7. Access to reliable news sources
Yes, we talked about news a lot and we are still talking about it. News is important when day trading.
It could be news about a stock or a market. News is to blame for short term movements of markets and economic conditions.
For example, a stock can jump 200% in a single trading day because of good earnings. The opposite can happen. A stock can lose more than 70% overnight because of bad earnings or a bankruptcy announcement.
There is a trader who once said ” You can be rich as a trader if you can predict tomorrow’s newspaper headline”. In other words, your ability to predict near term market movements will increase your odds of winning.
For example, if oil markets have been down due to conflicts among major producers; you could predict positive news when they are having a talk on this matter.
By knowing what is shaping rules of the game, you will know how to play it.
8. For technical analysis: You need a FAST and RELIABLE trading platform
This is like the air you breathe. Don’t think that you will be a successful day trader if you only trade on Robinhood. I am not against Robinhood by the way. I like this platform. It saved our lives with commission-free trades and contributed to the abolition of commissions on other platforms for stocks and other securities. Yeah, Robinhood was a game-changer.
Although Robinhood is good and easy to use, it lacks advanced technical analysis qualities. This is why you need a platform that is built for day trading activities where you make trades in microseconds.
A platform where you get in and out of a trade in a blink of an eye. Only advanced computer systems can to that and I don’t think the one you are using in your basement can do it. Sorry! I will come back to these advanced programs in a few minutes.
There are many brokers that offer advanced and active traders’ platforms.
You can look into TD Ameritrade, Charles Schwab, E-Trade, Trade Station, etc. Learn more about these platforms. You just need to do your homework. These platforms can be faster than Robinhood and offer a ton of technical analysis options.
Back to super fast trading….
When you are trading that fast, you are competing with pros. I mean High-Frequency Trading(HFT). Yes, this is a real thing. Think of HFT as automated advanced computers with complex algorithms that big guys use to make transactions in the fastest time possible.
That is, they have bought and sold millions of shares before you even think about it. These systems are used by Hedge Funds, Mutual funds, Big Banks, Institutional investors, etc.
Do you see what you are up against? Are you still wondering why many people lose? Or are you still wondering why you should learn first? Yeah, the game is rigged to benefit the big guys and you will drown if you jump in unprepared.
9. Be patient
Your success in the stock market is not shown by how much money you made. Rather is whether you made or lost money in the market. If you made $1, you are better than 90% of people who traded. You can later learn how to increase your gain from $1 to $2. First, you need to learn how to make it.
Do not focus on the dollar amount you make or the percentage you gain per week. It would be good if you can set a percentage and reach it. There is nothing wrong with it. Matter of fact this could be part of your strategies.
However, I advise you to focus on not losing, and if you do lose, manage your losses. The little profit you make will add up to a big thing. Unfortunately, they can’t if you lose them. Do not worry about getting rich fast.
You can always get there as long as you are making something. Take your time and grow your portfolio. Stay away from the get rich quick schemes.
10. Do not use a strategy because someone said it will work
There are a lot of people out there who will try to sell you courses, telling you there is one pattern that works. The truth is, they are lying to you. There is no such thing as one pattern that works for everything and everyone.
A person who will try to cut your learning curve in half is a lair and you should run for your money. You will give them your hard-earned money, take the course, learn about the magical pattern, and later see yourself in front of your screen(s) confuse more than before.
I am not saying that all online trading courses are bad. Instead, I am saying that most of them are really bad and it is your responsibility to find the needle in the hay.
My advice is to start small probably with a paper money account, learn as much as you can, and switch to real money after learning basics.
Start small with real money and increase your account as you go.
11. Find a mentor
If you think you cannot navigate these rough waters by yourself, use a mentor.
Find a person who has gone through it with enough practical and theoretical experience. I am not talking about your investment professor.
Although professors are good at teaching, most of them lack real-life experience. How is your professor going to help you manage your emotions while trading if he/she never been there? They follow the books and it is not always the best way to do it.
A person who has traded and succeeded would be an ideal one. A person who has been tested through time will be ideal. This person knows what it is to lose money in stocks. He/she knows how to manage emotions whether you are winning or losing. He/she knows what to avoid, what do keep, what to reject, etc.
Again, avoid the get rich quick schemes online. They are lions and will devour your dime.
8. Where and how to buy stocks?
If you are interested in day trading, you probably have a brokerage account. Don’t worry if you don’t have it yet. You can always go online and create one. There are a big number of brokerage firms that you can use.
You can follow this link to learn about top brokerage firms in the USA. Once you have learned the pros and cons of each one, you will know which one to work with. I recommend watching a lot of videos and tutorials on Youtube on each one to help you decide.
Creating an account is not hard. You will follow the required steps from a broker of your choice and provide all information they will be asking you. Once your account is up and running, you will need to fund your account.
You cannot buy stocks without money. You will link a bank account to your brokerage account. This will help you transfer money from your bank account to your brokerage account and vice-versa.
Keep in mind that it may take a few business days to verify your bank account.
I recommend starting with a cash account. Margin accounts are complicated and your chances of losing money are exponential. They have different rules. Only experienced investors and traders succeed using them.
Learn basics on a cash account from this link and a margin account from this link.
What to do next?
In the meantime, you will need to learn as much as possible. Knowing about companies you are trading, their industries, and the stock market, in general, will help you succeed. There are free resources you can use online. If you visit sites like yahoo finance, fool.com, investopedia.com, marketwatch.com, WSJ, etc, you will find enough materials.
Since you are going to be day trading, you must understand how to use technical analysis. Start with simple things like support and resistance levels, moving averages of all kinds, trading volume, Relative Strength Index, candlesticks, and many more. Learn how you can minimize your losses.
I provided some of these methods in this article, but, do not stop there. Keep learning and making yourself better. The more you know the better.
Do not test the depth of the water with both feet. Consider trading with paper money first.
I highly recommend opening a paper money account. This account will simulate trading activities of stocks using fake money and you will be using technical analysis. You can buy and sell any stock and other securities available to trade.
This will help you learn the market, technical analysis, and manage emotions when winning or losing. Try opening an account with Investopedia.com from this link or use your brokerage account if they have that option. You can also open a stock simulator account form any other place you want. You will learn how to make decisions when trading and watch your account grow and slide.
When you are ready to trade, start small since you will be learning how the market works. Always keep your mind on improving your strategies and know that there are high chances of losing.
To learn how you can buy stocks step by step, read this article. It has more information and resources than I can put here.
Happy Trading
I thought this post was going to be small but it turned out longer. If you made it to these last lines, congratulations! You are a very dedicated person and I think you will find success in day trading.
Never give up. You are only one step away from your success. Keep going. We will soon be popping champagne celebrating your success!
