Day Trading

What is day trading?

Day trading is when a trader buys and sells a stock within the same day for a profit. The trader will open a position by buying a stock, crypto or option and then sell that same entity before the end of the day. Day traders can make a career out of this practice. Day traders have a strong knowledge and skill set to be profitable over days. With their knowledge and skill set, they use different strategies of their choice on a stock that they select to get in and out of a trade at a target stock price. There are multiple strategies in day trading such as scalping, shorting, etc. The overall goal of a day trader is to make profitable trades and in the case that it is not, to cut the losses at a minimum. This practice over time is what we call day trading.

Day trader do not hold any positions over night. A position that is held overnight and sold the next day is called a swing trade. Swing trade can be held for up to a year, anything more than a year would fall in the category of investing. For the most part, the main goal of a day trader is to make same day trades, however, depending on their trading preferences, they may decide to hold some position overnight or for a few days.

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Main Advantages and Disadvantages of Day Trading
Advantages:     

  • The ability to make profits despite the market fluctuating sideways or downwards.

  • Worry-free of the stock movements in the after-hours and overnight.

  • Ability to take multiple trades within a day back-to-back using the same funds.

  • Compounding your money if you always trade with your initial investment + your profit.

 
Disadvantages:

  • Any margin accounts with less than $25,000 will be under the PDT rule which is a rule that limits the account to only perform 3 day trades per week.

  • Emotions and stress may influence and bias decision making.

  • Need to learn and adequately cut losses when needed.

  • Hard to catch the entire movements of a stock in the day.

  • Hard to day trade as a beginner and intermediate trader.

  • Must study the market daily before trading.

 


What do I need to start day trading?

The initial set up to start day trading is a computer, internet service, a brokerage account, and funds to trade with.
 


How to become a day trader?

To become a day trader, you need to learn the game of the market you choose to get into whether it is in the crypto world, the stock market or both. The process of becoming a successful day trader will take a lot of time and practice. The best way to start is to first learn about trading and then practice by paper trading, which is a way to trade in real time with real stock using ‘fictional money’. Once you notice that after multiple days of practicing with paper trading and that overall, your trades are positive, then you can slowly start trading with real money.

Trading with your own money is riskier and more stressful, therefore it is suggested to start with a reasonable amount. Reasonable amount is a sum of money that you can afford to lose. As you continue to improve your ability to make profitable trades, you could increase your position size. If you keep losing over time, you should reduce your position and study what went wrong and how it could be improved. Since the market is unpredictable, loses are inevitable, however the key lies cutting your losses to a minimum.

 


How do you day trade?

One of the most important elements to day trading is to choose a set of stocks that matches your criteria. The main criteria being that the chosen stock need to have volatility in order to catch quick movement within a day. These movements can be within seconds, minutes, or hours.

A stock that is volatile will have more volume, which means that is easier to get in and out of the trade. Along side the high volume to a volatile stock, there needs to be a good price action to make good moves with high percentage to make quick profits. In other words, it is more advantageous to make a trade when the one second candlestick of a stock makes a 0.8% movement than to trade with a stock with a one second candlestick moving at 0.002%. Meaning that if you take a 2-minute trade, with the 0.8% candlestick move, you will have a 1.6% gain compared to 0.004% gain with the 0.002% candlestick stock. The previous example given are fictional numbers, every one second candlestick of a stock does not make the same length of move every second. It always varies.