What is Day Trading?
Day trading consists of buying and selling the same securities within one day. It’s not investing, per se, but capitalizing on the price movements found within a 24-hour period and making money that way.
What Day Traders Look For
Day traders look for three elements in securities. These are:
- Liquidity –easily obtained securities, so there is little lapse between purchase price when ordering and purchasing
- Volatility –securities changing in value over a short time, ideal for day traders
- Volume –how much a security is traded during a specific time period. Analyzing volume indicates trend health.
How Traders Choose a Brokerage
Day traders choose a brokerage based on various factors, including an easy-to-use trading platform with up-to-the-minute data. Other important aspects include:
- Rates – fees for various trades eat into the day trader’s profit margin, so day traders want competitive rates
- Service – customer service is crucial. Look for a brokerage with 24/7 customer service access via phone, text or email
- Leverage – a borrowing amount for a margin account, expressed in ratios. A 2:1 ratio means you could purchase 100k of stock if you had 50k in your account.
- Commissions – lowest commissions are not always the best – day traders want brokerages offering a discount on long-term accounts.
Types of Day Trading Orders
- Market orders – buying or selling a security at an asking price.
- Limit orders – buying or selling a security when the price reaches particular threshold. Buy is below the current price, while sell is above the current price.
- Stop Order- the opposite of limit orders. Buy the security when the threshold is above the current price, and sell when it is below the current price.
- Stop Limit Order – similar to stop orders, except it can be used at a better price than threshold.
What You Can Trade
- Stocks – shares of publicly traded companies
- Options – derivatives allowing purchasers a contract to buy or sell securities at a certain price at a specific time
- Forex – foreign exchange markets, open 24 hours a day on weekdays, with no daily closures necessary
- ETFs – exchange traded funds, securities tracking indexes, commodities or bonds, traded like securities.
Pitfalls to Avoid
When day trading, never let emotion rules your decisions. Rely on data rather than “feelings.” Learn to discipline yourself and develop a strategy. Keep good records so you can learn from your mistakes.