A Guide to Day Trading

Jun 15, 2011

Written by:
Al Hill

Day traders are investors who buy and sell securities that will close their positions the same day. Many casual day traders work from home instead of professionally on the floor at the New York Stock Exchange (NYSE) on Wall Street or as a specialist from a bank.

In the old days, investors contacted their stockbroker who then contacted the trader on the floor of the NYSE who would then make the trade and the brokerage would get a set commission of one percent. Fixed commission became illegal in 1975 by mandate of the U.S. Securities and Exchange Commission (SEC) giving rise to discount brokers who worked on reduced commission rates.

In theory, anyone can become a day trader, just like anyone can do your taxes. In order to be a successful day trader, you must possess certain essential personal and business characteristics:

  • Know the market fundamentals. If you can’t get the basics, you won’t succeed.
  • You have to have capital to leverage the market.
  • Have a business plan–after all, day trading is a business.
  • Working with risk capital takes discipline, if you are impulsive and let your emotions rule, you likely won’t make it as a day trader.
  • Have an up-to-date computer with the fastest possible connection.
  • Know how to read the market and its nuances.
  • Remember that day trading successfully takes trial and error and you have to be able to work with that to gain experience. There’s many “fake accounts” out there you can use to test the waters.

Day Trading
What it is and links to advice from the SEC.

How Day Trading Works
An introduction to day trading, includes the basics, history, characteristics of a trader, the popular markets and strategies to make trading successful. In layman’s terms.

What do Successful Day Traders Have in Common?
They keep their egos in check and keep an open mind.

Day Trading Simulator
Learn to day trade with a day trading simulator

The Strategies of Day Trading

Day traders use four basic strategies to profit from a trade: scalping, fading, daily pivots, and momentum. Scalping is popular because traders sell the stock they just bought as soon as it becomes profitable. They have a target price in mind to sell and as soon as they reach that target, bye-bye stock. Fading happens when the price target hits when buyers begin buying it again; in other words, shorting stocks after an upward rise. Likely the stock is noted as overbought. When day traders profit from a stock’s volatility, this is called daily pivots. Buy low, sell high, the sage advice of tradition. Lastly, trading on momentum means riding the waves of a bullish trend until it becomes a bearish one. Day trading strategies are just like any other investment strategy, the difference is knowing when to get out.

Day trading can be an expensive venture just like any other business. It depends on if you are an individual day trader working from home or if you operate a firm with employees registered with the SEC. No matter which, day traders get in and get out of stocks, they don’t invest in the market. Making a profit is tough and while in the learning curve you can suffer some severe financial loss. It’s stressful and for the initiated, it’s a 24/7 job of research and monitoring U.S. and world markets, and sifting through those who will profit off of personal seminars and hot tip sheets designed to line other pockets, not yours. To defray some of the costs of commission, use a direct access broker instead of a retail broker. Trade is quicker without the retail brokers higher commissions. Commission is based on the volume of the trade, thus commissions are cheaper the more you trade.

Know the Risk
Day trading is highly speculative, know the risks personally and financially.

Margin Trading
Should you borrow funds to pay for a stock?

Direct Access Brokers
How they work and save you money.

The bottom line is to do your homework and get ready for a long day in front of the computer and the TV. Know ahead of time what your plan and strategy is for every stock you buy and how you want to exit that stock–and stick to the strategy. Place your orders in stock as MMO. MMO means Market on Open Orders. This will ensure you get the stock at the same price with every open order received. Keep your own records and a trade log. You should have a stop price on every order to circumvent hard loss if you are margin trading. Don’t go into day trading with rose-colored glasses dreaming of big bucks and early retirement. The fact is that only three percent of day traders are consistently successful financially and about 20 percent turn enough profit to merit staying in business through the short term.

Do Day Traders Make Money?
This 2004 study cites no empirical evidence that marks a definitive yes to that question, although Taiwan day traders seem to have a good grasp on the concept.

Finding the Edge
Tutorials and articles on the skills and techniques of day trading. Covers market dynamics, day trading fundamentals and advanced technique, the math and charts involved in day trading.

Trading Mistakes
Do you let your small losses turn into big losses? Translate these general trading mistakes into your day trading mindset.

Global Trading Research
Know your audience, the global economic framework in which you are playing.


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