Day trading can be a very promising endeavor considering the rewards it can potentially yield. You get to stay on the top of the most profitable trends in the market and get your hands on lucrative deals provided you know what you’re doing.
The main question is, what are the essential day trading rules to follow for success?
We’ll first learn what day trading is briefly to establish the context and proceed further from there towards some golden day trading rules, rules to remember. And we will share six of our favorite tips that will help you excel in day trading!
Day Trading Explained
Day trading, in the simplest terms, refers to the act of making trades in financial instruments such as stocks in a single day or even several times over the course of a single day. So, you will immediately understand that the whole point is to tap into small movements in price and profit from them.
However appealing as it seems, day trading is not without its risks. We recommend that you check out this great article on what day trading is if you wish to explore the topic in more detail.
How You Can Begin Day Trading Right Now
Now that you know what day trading involves, it’s time to help set up a system sophisticated enough to support your day trading activities.
Get The Right Computer System
At the most basic, you will need a computer with a trading program installed. You will find many options to choose from but ensure that your computer is reasonably fast with adequate memory. You do not need a supercomputer to engage in day trading, but you certainly do not need to use an ill-equipped machine that crashes when you’re trading! This is not a fun position to land yourself in.
You will need an adequately fast internet connection as well. Day trading platforms will keep updating often, and you can soon find yourself staring at multiple monitors with several windows and tabs open. The faster your internet, the better.
The Right Trading Platform
When it comes to the trading platform, there is no one size that fits all. What suits you might not suit another day trader and we all have our different trading styles and target different market segments. It is worth trying several different types of software before choosing to go with one, and then select the most comfortable one for you. Remember, you will be spending a considerable portion of your day working with this software, so it is essential to find the right one!
Choose Your Broker Wisely
Day traders will also need to choose a broker who will facilitate your trades in exchange for a certain commission. While it’s quite understandable if you prefer a low-fee broker, remember that you are also paying for the quality of service.
The commission reduces your share of the profits but remember that cheaper brokers might not necessarily be around when you need support, leaving you hanging in the middle, so beware!
Consider the Market
It is really critical to decide what type of trading you want to do as a day trader. It’s not just stocks, there are several choices really: day traders can specialize in options, forex, and derivatives as well to name a few.
You will need first to understand the nuances of the market type you wish to trade in, which will have a significant bearing on your success as a day trader.
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Day Trading Rules You Need to Follow
FINRA, the Financial Industry Regulatory Authority, has established specific margin requirements day traders must follow. We’ve outlined these day trading rules here in this section. Before we do that, however, you must know what “pattern day trading” means.
According to the FINRA regulations, someone undertaking trades within the same day at least four times in five business days such that the number of these trades exceeds 6% of the total trading endeavors of the customer for the same 5-day time period is called a Pattern Day Trader (“PDT”).
Now come the regulatory requirements for these pattern day traders. You see, the rules require a pattern day trader to maintain at least $25,000 as the minimum equity before trading can commence. What if the account balance falls below the minimum equity requirement later? In this case until the minimum level of capital is restored within the account the trader is unable to trade further.
6 Powerful Tips You Should Always Remember
Here are some powerful tips that can help make your day trading activities much more impactful.
- Move one step at a time: It is easy to get caught in the complexities of day trading, especially if you’re a beginner. That’s why we always advise beginners to move one small step at a time. It would help if you focused on a small number of stocks when you start since tracking positions is more comfortable that way. It is also a great way to master the technicalities before you make more significant trading decisions.
- Study before trading first: Too many beginners make the mistake of jumping right in at the start of the day when they should first study the market moves for a good 15 minutes. Yes, the periods of volatility are also where the higher profits lie. Day trading is ideal in the 2 hours past the market opening and within the last hour of each trading day. There’s no denying the fact that rush hours are laden with the profits but they might not the best places to start for beginners right away!
- Research everything: You cannot merely trade without understanding market trends first. It is best to follow the news and factors that can affect market and individual stock movements. Think about the stocks you’d like to trade and do your research thoroughly. Finance blogs, magazines, and news channels are great places to continuously track for the latest updates and opportunities that might be hiding in plain sight, so be on the lookout!
- Be consistent: It is also a great idea to be consistent in your trading timings, which means you should trade at more or less the same time every day. Day traders can trade for either the whole session duration or for a specific part of the day.
- Patterns are everything: When it comes to day trading lookout for repeating patterns that have yielded profit before and can be reapplied. It’s all about developing your own strategy or formula that works for you and sticking to it. Do not always fall for the temptation of making as much profit as possible; believe in your strategy and give it time.
- Take notes: The importance of keeping your trading records is imperative. Write down your strategies, including what worked and what did not. It is of the essence to measure and analyze your performance if you are to succeed in the long-term, and you will be surprised at the rich insights your journal will provide you when you need them the most.
You should also check out these great day trading tips for beginners, which will help you formulate your action plan when starting in this field.
Day trading can be a very profitable endeavor, certainly for those who have mastered their craft. It surely takes time and effort, but once you’re there, you will have learned a lot. The best strategy is to practice as much as you can.
You will also want to follow the margin requirements for day trading as established by FINRA that detail the minimum equity you should maintain. The day trading rules, however, only apply to traders identified as pattern day traders as we discussed.
Do not strive to master everything at once: mastering day trading comes with time, and you’ll eventually understand it. The key is to keep observing the market and looking out for patterns that can work. It is also a great idea to start a demo or paper trading account and to practice your strategies there.
You will find here some great day trading strategies that our experts have been using to maximize your chance of success.