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Day trading, as the name suggests, means trading-buying and selling-the stocks on the same trading day. The trading positions, usually though not always, are closed before the market closes for the trading day.
What is Day Trading?
Day trading is different from after-hours trading where the trading activity continues even after the regular marketing hours when the stock exchange closes.
Sellers and buyers who participate in day trading are called day traders. Although day trading evokes the image of hectic trading activity in the trading day, it may not be so in actual practice. You may make several trades, say a dozen, in a trading day, or, you may limit yourself to just one trade.
You may, in some cases, just buy a stock on one day and sell it on the next day, if you think that selling it on the same day would not prove profitable. There is no legal restriction such as that you must finish off your trading activity the same day. You may, at the most, have to pay some differential on brokerage if you carry your trade to the next day.
In standard practice, traders usually tend to close their trading positions by the end of the same trading day. In any case, your trading frequency depends entirely on your trading strategy for that particular day, or, your general trading style and outlook.
Some traders focus on very short or short term trading. They finish off their trades in a matter of few minutes or even seconds. Such traders buy and sell several times a day and usually their trades consist of high volumes. They are the favorites of the brokers who reward them with big discounts on commissions.
Some traders, however, do not hanker after reduced brokerages. They focus on the momentum or trends of the stock movement. They are very patient during their wait for a strong move, which may occur during the trading day. Such day traders make only a few trades.
Some traders prefer to sell off their stocks before the close of the market day to avoid the risks arising out of the price gaps between the closing price on the day they bought a stock and its opening price on the next day. They consider this practice as a golden rule and follow it almost religiously.
Other traders believe in allowing the profits to run so they stay with the position even after the market closes.
As said earlier, the number of trades you make on a trading day depends upon your trading style or trading strategies.
Profits and risks in day trading
Day traders make quick bucks and also quick losses in a matter of minutes or at the end of the trading day. Day trading may evoke the visions of gamblers gaming in casinos. There is, however, a marked difference between day trading and gambling.
While, you cannot make any calculated moves or devise any intelligent strategies in gambling, except when you are out to cheat others, day trading involves a very serious understanding of the process of trading.
You study the general market trends and the movement of the stocks. You make fundamental and technical analysis and keep yourself abreast of the latest news flashes about the stocks of the companies that you trade-in and much more.
Day trading is not playing a blind man’s buff or just throwing away a dice. You have to be very alert and cautious before every move. It would, therefore, be unfair to call day traders gamblers or bandits as some frustrated losers in day trading are apt to do.
Experienced and intuitive traders generate a huge percentage of returns from day trading. Some stock traders manage to mint millions per year solely on day trading. A large number of persons have successfully made day trading a sole avenue of making their livelihood.
This, however, is not to deny the risks of huge losses in day trading. Those who trade without a calculated and intelligent strategy and discipline are more likely to incur huge losses in day trading. This happens more with those who use borrowed funds, a practice known as buying on margins. They have to pay back the borrowed amounts with huge interests and other penalties if fail to make profits. This is what makes day trading risky.
7 Keys To Successful Day Trading
1. Successful traders stay neutral:
Staying neutral means to be emotionally detached from your trading decisions. I’ve met many day traders that were emotionally suffering for the rest of the day after losing $100 or even less and when they made $1000 they would be “on top of the world”. They are not trading neutral.
If you are like that, then your trading will be driven by fear and greed; if you are down $100 you probably don’t want to take a loss, just because you know that you will be emotionally suffering. If you are up to $1000 you might want more, even though you should take profits. Or you might end up taking profits way too early because you are afraid that the position might turn against you. The professionals don’t let the day-today oscillations in their account faze them. The results of one week don’t matter much, not even the monthly results. It’s just a small blip of time in their career, so the day-to-day oscillations don’t matter. Emotional ups and downs are pretty normal for beginners. If they influence your trading decisions too much, then I would strongly advise you to go back to paper trading to gain the confidence you need to not let those oscillations affect you too much.
Staying neutral also means to see the price movements like they are, not how you want them to be. You might all know the situation where a trade is going against you, and you start looking for other reasons why it is still a good trade and you should hold it. This is very dangerous since it leads people to break their stops and to lose big. Your entry and exit criteria has to be clear before you make a trade. Switching strategies, while you are in a trade, is one of the worst things you can do. You can always find a reason for your position to go up or down, but you don’t see the actual price movement anymore. You are shifting from reaction to prediction! A day trader should under no circumstance try to predict future price movements. As traders, we have to play the actual price movement, not what we think the movement should be! Please leave prediction to investors. A lot of times I see traders taking positions in stocks they know very well fundamentally. They mix trading with investing. This is very dangerous too. While there might be reasons to enter a position for a short-term trade they often end up holding it as an investment if it goes against them. Just think about Enron.
Yes, there were points during the Enron sell-off where a trade would have been justified. Even I held Enron for a short recovery from about $8.5 to $10. The problem is, that if you base your entry on the belief that the company is cheap and it has to recover, you will be more and more inclined to hold your position or even add to it once it goes lower. The stronger your opinion on a stock, the harder it is to make decisions based on the actual price movement. I would strongly advise you to have a separate account for fundamentally based trades. A day trading account gives you too much leverage, making it very tempting to take risks that are way too high!! I am not saying that it is not good to have expectations; everyone should know what his potential trades are most likely going to do. Should those expectations be wrong though, then we have to accept that and react according to what is happening.
2. They are not afraid to place a trade:
Fear or a lack of confidence in your trading decisions makes it hard to enter trades in the first place. You will often find yourself letting good opportunities pass by, or you are waiting for additional confirmation that the stock is going your way, which makes you enter trades too late and you end up chasing the stocks; often getting in at the end of the movement. Fear of losing money makes it harder to take losses. To much fear will either make you not take losses at all and cause significant drawdowns, or it will make you take losses to soon before the actual stop price was hit. Confidence in your ability to make good trading decisions will help you to be patient since you know that eventually there will be good opportunities. Traders with a lack of confidence tend to look for different trading strategies every time something goes wrong for them. They are therefore never able to focus on one strategy and master it. Even if you are an experienced trader you might lose some confidence once in a while. Go back to paper trading or to trading small shares to get yourself back on track.
3. Successful day traders only use risk capital for trading:
If you are day trading with all the money you have without having another income you will be way too scared to make any neutral decisions. There is a saying that scared money never wins. I have yet to see a trader who was able to live off a 5K trading account without any additional income.
4. They focus on a few strategies that suit them well:
Many traders try to implement too many strategies at once. They think they have to make money every day. The most successful traders I know only have a few strategies that they are highly successful with, sometimes only one. The goal is to find a strategy that YOU are comfortable with and to master it. This won’t come overnight. Of course, you need to have a look (and try) different strategies until you find something that you are comfortable with. Keep in mind that no strategy works in every market. Therefore it is normal to sit on the sidelines every once in a while. You don’t have to make money every day. The key is to only trade when the odds are in your favor and to stay in the game. Once you have established a “bottom line” strategy you should slowly move on and implement other strategies.
5. They are patient:
This starts with patience in your learning process. Take time to trade on paper for a while. You will make mistakes and it will take time to get comfortable with your trading decisions. Please make your mistakes on paper; this will keep you in the game. If you want to trade live right away please do so with a very small amount of shares. You can make a lot of mistakes if you are trading a small number of shares. If you use your full buying power though one blown stop can wipe you out. I have yet to see a trader (including myself) who didn’t blow a stop at least once!!
Patience to wait for trading opportunities is very important too. As stated above, not every strategy works every day. You might have to wait a while to find a good trade. It can also happen that you have a losing streak. A good trader will not worry too much about that and will do something else. Sitting in front of your computer trying to make back losses is the worst thing you can do. I would strongly advise you to set maximum losses per day, week and overall. Stop trading immediately if your maximum losses are hit. Remember, as long as you stay in the game there will always be another day with new opportunities.
6. They are great money managers:
A good day trader will never risk more than 2% of his trading capital on a single trade. This means that if he has to make a stop, the amount of money he is willing to lose will be no more than 2% of his capital. 2% is the absolute maximum. You should attempt to risk less than that. The reason why this is so important is that even if you are right 99% of the time you can still lose 10 times in a row. Every once in a while this might happen to you. Only if you risk little money you will be able to survive such a drawdown.
7. Successful traders – Trade with Confidence:
I believe that trading with confidence is by far the single most important key to successful day trading. The most successful traders I know only to use a few basic strategies. What made them so successful was the confidence in their trading strategy, their ability to stay neutral and to execute their trades according to what they see.
Disclaimer: Trading financial instruments of any kind including options, futures, and securities, has large potential rewards, but also large potential risks. You must be aware of these risks and be willing to accept them to invest in these markets. Don’t trade with money you can’t afford to lose.
source (https://businessgems.siterubix.com)
What is Day Trading?
Day trading is different from after-hours trading where the trading activity continues even after the regular marketing hours when the stock exchange closes.
Sellers and buyers who participate in day trading are called day traders. Although day trading evokes the image of hectic trading activity in the trading day, it may not be so in actual practice. You may make several trades, say a dozen, in a trading day, or, you may limit yourself to just one trade.
You may, in some cases, just buy a stock on one day and sell it on the next day, if you think that selling it on the same day would not prove profitable. There is no legal restriction such as that you must finish off your trading activity the same day. You may, at the most, have to pay some differential on brokerage if you carry your trade to the next day.
In standard practice, traders usually tend to close their trading positions by the end of the same trading day. In any case, your trading frequency depends entirely on your trading strategy for that particular day, or, your general trading style and outlook.
Some traders focus on very short or short term trading. They finish off their trades in a matter of few minutes or even seconds. Such traders buy and sell several times a day and usually their trades consist of high volumes. They are the favorites of the brokers who reward them with big discounts on commissions.
Some traders, however, do not hanker after reduced brokerages. They focus on the momentum or trends of the stock movement. They are very patient during their wait for a strong move, which may occur during the trading day. Such day traders make only a few trades.
Some traders prefer to sell off their stocks before the close of the market day to avoid the risks arising out of the price gaps between the closing price on the day they bought a stock and its opening price on the next day. They consider this practice as a golden rule and follow it almost religiously.
Other traders believe in allowing the profits to run so they stay with the position even after the market closes.
As said earlier, the number of trades you make on a trading day depends upon your trading style or trading strategies.
Profits and risks in day trading
Day traders make quick bucks and also quick losses in a matter of minutes or at the end of the trading day. Day trading may evoke the visions of gamblers gaming in casinos. There is, however, a marked difference between day trading and gambling.
While, you cannot make any calculated moves or devise any intelligent strategies in gambling, except when you are out to cheat others, day trading involves a very serious understanding of the process of trading.
You study the general market trends and the movement of the stocks. You make fundamental and technical analysis and keep yourself abreast of the latest news flashes about the stocks of the companies that you trade-in and much more.
Day trading is not playing a blind man’s buff or just throwing away a dice. You have to be very alert and cautious before every move. It would, therefore, be unfair to call day traders gamblers or bandits as some frustrated losers in day trading are apt to do.
Experienced and intuitive traders generate a huge percentage of returns from day trading. Some stock traders manage to mint millions per year solely on day trading. A large number of persons have successfully made day trading a sole avenue of making their livelihood.
This, however, is not to deny the risks of huge losses in day trading. Those who trade without a calculated and intelligent strategy and discipline are more likely to incur huge losses in day trading. This happens more with those who use borrowed funds, a practice known as buying on margins. They have to pay back the borrowed amounts with huge interests and other penalties if fail to make profits. This is what makes day trading risky.
7 Keys To Successful Day Trading
1. Successful traders stay neutral:
Staying neutral means to be emotionally detached from your trading decisions. I’ve met many day traders that were emotionally suffering for the rest of the day after losing $100 or even less and when they made $1000 they would be “on top of the world”. They are not trading neutral.
If you are like that, then your trading will be driven by fear and greed; if you are down $100 you probably don’t want to take a loss, just because you know that you will be emotionally suffering. If you are up to $1000 you might want more, even though you should take profits. Or you might end up taking profits way too early because you are afraid that the position might turn against you. The professionals don’t let the day-today oscillations in their account faze them. The results of one week don’t matter much, not even the monthly results. It’s just a small blip of time in their career, so the day-to-day oscillations don’t matter. Emotional ups and downs are pretty normal for beginners. If they influence your trading decisions too much, then I would strongly advise you to go back to paper trading to gain the confidence you need to not let those oscillations affect you too much.
Staying neutral also means to see the price movements like they are, not how you want them to be. You might all know the situation where a trade is going against you, and you start looking for other reasons why it is still a good trade and you should hold it. This is very dangerous since it leads people to break their stops and to lose big. Your entry and exit criteria has to be clear before you make a trade. Switching strategies, while you are in a trade, is one of the worst things you can do. You can always find a reason for your position to go up or down, but you don’t see the actual price movement anymore. You are shifting from reaction to prediction! A day trader should under no circumstance try to predict future price movements. As traders, we have to play the actual price movement, not what we think the movement should be! Please leave prediction to investors. A lot of times I see traders taking positions in stocks they know very well fundamentally. They mix trading with investing. This is very dangerous too. While there might be reasons to enter a position for a short-term trade they often end up holding it as an investment if it goes against them. Just think about Enron.
Yes, there were points during the Enron sell-off where a trade would have been justified. Even I held Enron for a short recovery from about $8.5 to $10. The problem is, that if you base your entry on the belief that the company is cheap and it has to recover, you will be more and more inclined to hold your position or even add to it once it goes lower. The stronger your opinion on a stock, the harder it is to make decisions based on the actual price movement. I would strongly advise you to have a separate account for fundamentally based trades. A day trading account gives you too much leverage, making it very tempting to take risks that are way too high!! I am not saying that it is not good to have expectations; everyone should know what his potential trades are most likely going to do. Should those expectations be wrong though, then we have to accept that and react according to what is happening.
2. They are not afraid to place a trade:
Fear or a lack of confidence in your trading decisions makes it hard to enter trades in the first place. You will often find yourself letting good opportunities pass by, or you are waiting for additional confirmation that the stock is going your way, which makes you enter trades too late and you end up chasing the stocks; often getting in at the end of the movement. Fear of losing money makes it harder to take losses. To much fear will either make you not take losses at all and cause significant drawdowns, or it will make you take losses to soon before the actual stop price was hit. Confidence in your ability to make good trading decisions will help you to be patient since you know that eventually there will be good opportunities. Traders with a lack of confidence tend to look for different trading strategies every time something goes wrong for them. They are therefore never able to focus on one strategy and master it. Even if you are an experienced trader you might lose some confidence once in a while. Go back to paper trading or to trading small shares to get yourself back on track.
3. Successful day traders only use risk capital for trading:
If you are day trading with all the money you have without having another income you will be way too scared to make any neutral decisions. There is a saying that scared money never wins. I have yet to see a trader who was able to live off a 5K trading account without any additional income.
4. They focus on a few strategies that suit them well:
Many traders try to implement too many strategies at once. They think they have to make money every day. The most successful traders I know only have a few strategies that they are highly successful with, sometimes only one. The goal is to find a strategy that YOU are comfortable with and to master it. This won’t come overnight. Of course, you need to have a look (and try) different strategies until you find something that you are comfortable with. Keep in mind that no strategy works in every market. Therefore it is normal to sit on the sidelines every once in a while. You don’t have to make money every day. The key is to only trade when the odds are in your favor and to stay in the game. Once you have established a “bottom line” strategy you should slowly move on and implement other strategies.
5. They are patient:
This starts with patience in your learning process. Take time to trade on paper for a while. You will make mistakes and it will take time to get comfortable with your trading decisions. Please make your mistakes on paper; this will keep you in the game. If you want to trade live right away please do so with a very small amount of shares. You can make a lot of mistakes if you are trading a small number of shares. If you use your full buying power though one blown stop can wipe you out. I have yet to see a trader (including myself) who didn’t blow a stop at least once!!
Patience to wait for trading opportunities is very important too. As stated above, not every strategy works every day. You might have to wait a while to find a good trade. It can also happen that you have a losing streak. A good trader will not worry too much about that and will do something else. Sitting in front of your computer trying to make back losses is the worst thing you can do. I would strongly advise you to set maximum losses per day, week and overall. Stop trading immediately if your maximum losses are hit. Remember, as long as you stay in the game there will always be another day with new opportunities.
6. They are great money managers:
A good day trader will never risk more than 2% of his trading capital on a single trade. This means that if he has to make a stop, the amount of money he is willing to lose will be no more than 2% of his capital. 2% is the absolute maximum. You should attempt to risk less than that. The reason why this is so important is that even if you are right 99% of the time you can still lose 10 times in a row. Every once in a while this might happen to you. Only if you risk little money you will be able to survive such a drawdown.
7. Successful traders – Trade with Confidence:
I believe that trading with confidence is by far the single most important key to successful day trading. The most successful traders I know only to use a few basic strategies. What made them so successful was the confidence in their trading strategy, their ability to stay neutral and to execute their trades according to what they see.
Disclaimer: Trading financial instruments of any kind including options, futures, and securities, has large potential rewards, but also large potential risks. You must be aware of these risks and be willing to accept them to invest in these markets. Don’t trade with money you can’t afford to lose.
source (https://businessgems.siterubix.com)
