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Day Trading Basics
by John B. King
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Overview
Many people become interested in day trading and think it may be an easy way to make quick money. Unfortunately, it's usually not. With the right techniques, however, it is possible to profit from day trading. Here are some basics to get you started.
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Definition
Very simply, day trading is buying and selling the same stock or another kind of security on the same calendar day. A trade is only considered a "day trade" if it's closed out on the same day that it's opened.
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Stocks to Pick for Day Trading
It's crucial to know the likely direction of a stock's price movement before day trading, so day traders follow a stock's price movements for many days before trading it. They understand what's driving its movement and follow any news on the stock and the trends in its trading volume.
Make sure you read up on any stock you want to trade,and gain some insight into what is causing its price to move and keep your initial trades small until see if you can make money.
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Set Realistic Goals
Many people hold on to a stock for too long during the day. You can profit from even a small change in price, as long as you cover your transaction costs. Set a reasonable goal for how much you're looking to make on each trade. This goal should be a modest one, and you should be prepared to sell as soon as you reach it.
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Keep Transaction Costs Low
Since day traders only make a small profit on each trade, it's important to keep transaction costs low. Use a discount broker. Also, make sure that your broker has a good online trading system. You'll constantly monitor the prices of the stocks your trading, so access to a system that offers real-time streaming quotes is important.
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Set "Stop Loss" Orders
When you make a new day trade, set a "stop loss" order that specifies the lowest price that a stock you're holding can go before it will automatically be sold. This will protect you from suffering a large loss on a stock that may move a lot lower in a short time.
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Pattern Day Trading Rule
The SEC requires that "pattern day traders" maintain $25,000 in equity in their brokerage accounts. You will be considered a "pattern day trader" if you make more than four day trades in a five-business day period. Be prepared to satisfy this requirement if you're planning to become a serious day trader.
