Day Trading Basics for Beginner Investors

When it comes to investing online in the stock market there are many different types of strategies. Day Trading is a strategy that requires prior experience, dedication, and very disciplined trading to be successful.

What is Day Trading

Day trading is simply the act of buying and selling a security within the same trading day. So, if we wanted to daytrade Google, we would have to buy our shares then turn around and sell them before the market closed that day. Most people think a day trader is someone who just trades a lot, and while that is true, the dynamics of day trading are not for the faint of heart.

Some Benefits Of Day Trading

1. One of the benefits of day trading is that since the positions are closed at the end of the trading day, any sudden news of events doesn't affect the opening prices of trading.
2. Awareness regarding day trading stock picks allows a day trader to gain maximum returns from the market.
3. The good thing about day trading is that you can make a ton of cash even when the market is heading south, as you can speculate that the market will go up or down.
4. One advantage of day trading is that you don't need to invest a lot of money to make profits.

Challenges of Day Trading

Day trading is difficult for several key reasons:
1. Commissions eat away at profits.
Even though free trades are now becoming more popular with top discount brokers, commissions are still a big factor to take into consideration. For sake of simplicity let’s say we are paying $10 per buy or sell, that means one trade to get in and then sell out will cost us $20 total. For an investor who only has $1,000 performing five trades will stack up to equate to $100 or 10% of the whole portfolio. This makes it nearly impossible to trade successfully.

2. Discipline is a requirement.
The aspect of discipline is so important with day trading because the process is very repetitive and one big loss can wipe out several successful trades. If we are turning over a .05% return on $5,000 every trade we make, we are making $25 per trade (before commissions). That’s all great and dandy, but what happens when our position is down 1%? Do we hold or sell? Holding a position and selling for even a 2% loss could spell huge trouble for our portfolio. Bottom line, discipline is critical.

3. Consistency is a key.
There are multiple buyer and sellers competing for our same orders to buy and sell, and as any active investor knows even a 50% success rate is a huge feat in itself. Thus we have to be extremely consistent with how we go about finding opportunities and more importantly executing both the buying and selling of the actual trade.

Contributing Factors of Day Trading

There are several factors that govern the sale and purchase of stocks is done via the Internet. Since this trading is through the medium of computer, an efficient computer with a 24-hour Internet connection is an essential requirement.

1. Liquidity of the stock.
Liquidity designates the amount of buyers and sellers for the stocks concerned. Liquidity of the stock is deemed to be directly proportional to profits ensued by it. Greater the liquidity of the stocks, higher is the comfort in vending them. But the liquidity value is never stagnant. It too depends on certain factors such number of share holders, outstanding shares, volume of transactions made and the number of market makers.

2. Volume.
Volume contributes to the liquidity factor. It can be conveniently evaluated. For instance a day trader’s stock should trade a minimum of 500000 shares each day.

3. Volatility.
Volatility stands for the ups and downs the stock experiences everyday. If the volatility is less or negligible then the stock does not undergo any fluctuations and is thus rendered bad for day trading. It is believed that stocks that are considered good go through at least a $2.00 variation per day of normal trading.

4. Price Transparency.
Price Transparency is the term coined for the market depth and the potential of the trader to acquire knowledge about the order of the stock.

SEC restrictions for US Stock Market Trading

The SEC (the US Securities and Exchange Commission) has placed restrictions on the day trading of US stock markets. US stocks can only be day traded if the trader has deposited a minimum of $ 25000 in their trading account, which is not the case for most beginning day traders. Beginning day traders can still trade US stocks, but the positions will need to be kept open for longer than usual (at least overnight).

The SEC considers a day trade to be any trade that is opened and closed within the same trading day, and considers a day trader to be any trader that completes 4 or more day trades within 5 business days. If a trader is classified as a day trader by the SEC, but does not have the required $ 25000 in their trading account, their account will be frozen for 90 days.

Initially, these restrictions may appear to prevent day trading completely, but this is not the case, as these restrictions only apply to the US stock markets, and not to either the futures or currency markets.

Day Trading Steps

The process of making a day trade can be summed up in a few steps:
  1. Find a stock that intraday meets buying credentials
  2. Decide if the stock fits your profit vs loss ratio
  3. Take the position
  4. Sell the position as soon as target is reached, or sell out before losses accrue
  5. Rinse and repeat
Day traders are actively scanning 1 minute, 5 minute, 10 minute, 30 minute, and 60 minute charts to try and find prospective stocks to invest in or short. When buying and selling, stock limit orders are the most commonly used as this allows for the best possible price to be attained.

Common Day Trading Strategies

The five most common strategies adopted by day traders who seek to make are profit are
* Trend following - used by all trading firms this strategy assumes that stocks that having been rising steadily will continue to rise.
* Playing news - this strategy is to buy stock in a company which has just announced good news
* Range Trading - this is where stock that has been rising and falling is bought near the low price and sold as it hits the high price range.
* Scalping - it is commonly defined as a very quick trade.
* Covering spreads - To play the spread or the make the spread simply means to buy stock at the Bid price and sell the stock at the Ask price. The difference between the bid price and the ask price is known as the spread. Because there is an historical tendency for the stock market to raise profit can be expected for this form of trading.

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