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How to Day Trade

Jason BondJason Bond ·

Day Trading

Only a few decades ago stock trading was viewed as a financial activity that took place inside specially designed environments called stock markets, since then though the internet has changed everything. The online community wants fast results, fast profits and convenient tools. This is why you can easily find a lot of information about day trading – it is the fastest way of generating profits in the stock market, but of course you should not ignore the risks.

Is day trading worth trying? And what are the main particulars to note about it? You will find out in the article.

Understanding Day Trading

Day trading may be viewed as synonymous with short-term trading. The range of time-frames and trade periods with this trading style are wide – the positions can last from several minutes to several days. If all the positions are opened and closed within the same day, we call it intra-day trading, although you can still view it as part of day trading. Generally, the day trading approach is very effective in cases where the trader wants to quickly react to market changes.

Day traders operate with the following time-frames: M1, M5, M15, M30, H1, H4, and D1.

It is worth mentioning that day trading is not a distinct strategy, as many beginners mistakenly believe, but is a style of trading that is mainly distinguishable by the period of trades or the selected time-frames. It falls within the same category as swing trading and position trading, which are particular styles that operate with larger time-frames than day trading.

Generally, day trading is the preferred style for stock trading beginners. It is because these beginners want better results in a shorter period of time, and their investment potential is much lower – usually it reaches several thousand US dollars as a lifetime value. However, one should note that day trading is probably the riskiest style in comparison to swing trading and position trading, so the relevant measures that would mitigate the risks should be implemented.

Here are some day trading particulars that should be considered:

  • Day trading works much better with technical analysis rather than fundamental analysis. It does not mean that the latter does not have any influence, but it suggests that you can’t trade it without technical analysis. There are many day trading strategies that are based exclusively on technical analysis;
  • The price chart in day trading is more volatile;  
  • Because of higher volatility and pressure, it is much harder to control your emotions, so day trading requires a particular psychology that suits the market conditions. Psychology in day trading is very important, because it can make the difference when making decisions – and the decisions must come at faster pace with this particular trading style;
  • Day trading requires more time and effort. A day trader will generally spend more time monitoring the price than in comparison with a swing trader;
  • It is more difficult to find the general trend because of regional trend changes;
  • A day trader deals with more false signals;
  • The return per trade ratio is much higher than in position or swing trading;

Day trading strategies

There are many different strategies that allow day traders to use their capital wisely. The professionals may even build customized strategies, because day trading allows so much flexibility. Even if the fundamentals don’t play a major role in this style, some strategies can combine technical analysis with fundamental analysis and let the latter pull the strings.

Some examples of day trading strategies include: scalping, fading, channel trading, trading on patterns like double tops and double bottoms, triangles, head and shoulders, trading on candlestick or bar charts, trading on volume, trend following trading, and so on.

The speed of decision-making and flexibility can make the difference when applying these strategies. Keeping an eye on fundamental data and tracking the technical performance would be the ideal approach for achieving goals.

Pattern day trading rules

As a day trader, you will have to stick to some rules imposed by the Financial Industry Regulatory Authority (FINRA). According to the FINRA, if you execute at least 4 day trades within 5 business days (for example, from Monday to Friday) in a margin account, you are viewed as a pattern day trader, with the condition that the day trades share exceed 6% of the total number of trades within the same period (of 5 days).  

The main rule says that a pattern day trader has to keep no less than $25,000 in his margin account during any day that he day trades. In the case when the account balance falls below $25,000, the pattern day trader won’t be possible to execute day trades anymore until the balance is restored to the $25,000 level. You can find more details on the FINRA official site: http://www.finra.org/investors/day-trading-margin-requirements-know-rules

If you are curious to know the reason of this rule, then we can only say that the regulatory bodies believe that day trading is much riskier than other trading styles, and the PDT rule has the ability to limit the potential losses. The Securities and Exchange Commission believes that traders, who have less than $25,000 in their account, are possibly not professional or experienced traders.

Pros and cons of day trading

Day traders must have a rigid self-discipline and be able to cope with their fears or greed. The main objective is to wait for the right signal and have an accurate market entry. Despite the risks, day trading comes with many advantages such as:

  • The risks can be easily managed;
  • Lack of gaps, particularly in intra-day trading;
  • Flexible tactics and strategies;
  • Good leverage;
  • There is always something to trade;
  • The news can be ignored;

Some disadvantages of day trading include higher risks, high stress and time consuming monitoring of trades. Also, the price movements are more random in smaller time-frames.

In conclusion, day trading might be right for you, but only if your nerves are strong enough to stay firm against the pressure. As for the strategies, they can be regarded as good if their profit/loss ratio is 3 to 1.

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