Day Trading

By   October 9, 2012

Definition

Day trading is the act of buying and selling (or shorting and covering) a stock or other investment in the same day.

Day trading has become a very popular way of making money. It can be very profitable or you could lose that money just as quickly as you made it.

Details

Difficulty

One of the greatest barriers to entry for day trading, not withstanding skills and knowledge, is the amount of money necessary to succeed. If we set a goal of beating the market (because otherwise it wouldn’t be worth the day trader’s time) he would have to make about 10% profit.

It means you would need more than $150,000 just to make minimum wage, without taking into consideration taxes (the capital gains tax owed on day trading is significant), cost of an office, equipment, and any analysis software you might be using. Even with that investment, only about 1 in 100 investors who day trade on their own turn a profit.

Another pitfall is that people wrongly believe that they can be just as good as the institutional investors because they can “get lucky”, or learn while doing.  However, the greatest success can be found by either working through a day trading firm (and get access to their tools and reseach), and by using a simulator first to test your strategies.

Having what it takes

Let’s face it, day trading is not easy and can be very stressful. The following are some characteristics of good day traders:

Finance Knowledge – A wealth of knowledge of Technical Patterns, understanding how news affects stock prices and a very good understanding of the basics among others, is necessary.

Interest – You will need a strong interest to watch stocks and market news if you are doing this on a regular basis. If you do not have sufficient interest, the likelihood is you will quit before becoming profitable.

Perseverance – There can be very high high’s and very low low’s so it’s important to be able to persevere through the low’s.

Quickness – Day trading is measured in seconds and milliseconds, being able to react quickly and place trades quickly is essential.

Multi-Tasking – Just like being a fast trader, one must also be able to see and look at multiple different screens with large quantities of information to make quick and informed decisions.

Independence – Day trader’s frequently spend their time in front of a computer screen, oftentimes alone in their office. It can be quite daunting to have little human contact.

Managing Stress – As we stated earlier, day trading is stressful, more than many other jobs as there are constant demands for your attention and one big mistake could be incredibly costly.

Organized – Being prepared is also very important to day traders, a lot of the work can be done after the market closes at night or before the market opens in the morning. If you are not able organize and prepare your information before the chaos begins, it will be that much harder to manage.

Technologically Inclined – Charts, news feeds, trading screens, internet, these are all things that are absolutely necessary to get an edge on the competition in the day trading game. Without a technologically inclined mind, fixing internet problems and upgrading your layout to multiple screens could be quite daunting and expensive.

Tips

So you’ve decided to start day trading, what’s next?

Learning – What’s important is to start learning hands on as much as possible before losing your money learning. Then, once your consistently profitable, you can apply what you’ve learned without losing money while your learning.

Selection – One of the main challenges for a day trader is that stock prices usually change very little throughout the day and is usually reserved to the first few hours of trading. In order to make profitable trades you will need to find stocks with higher volatility, have sufficient volume and have a low enough price to be able to invest larger quantities of money and thus be able to buy more shares.

Spread – The other problem you must overcome is the bid/ask spread. Finding stocks that meet the criteria for profitable trades should also take into account the spread. A large spread with a liquidity problem could easily make even the most successful day trader lose money.

Commission Commission can be around 10$ a trade and can quickly eat your profit, especially if you only trading small amounts. Luckily, there are many different brokerages with cheaper commissions which are often based on how many trades you make, so it’s important to shop around.

Taxes and Businesses Day trading could be considered a business where you live and therefore require certain procedures to be followed before you start day trading, especially if you are investing other peoples money. Tax considerations can also be very important to the overall profit you make. It is very important to get informed about these before

Day Trading RulesDon’t forget! Make sure to check the Day Trading Rules before opening a real brokerage account and day trading!