Interested in day trading?
Technology is changing everything when it comes to the markets. It’s easier than ever to learn to trade — there’s so much information available. And it’s a snap to open an account and place your first trade.
Slow down! You like your money, right?
You may crave the freedom that can come with trading. And you may see that more and more people enter the markets all the time.
But you have to know what you’re doing … or you might kiss your money goodbye all too fast.
And as for the average newbie traders … some think day trading is gambling … Others don’t think you need any discipline to pull it off…
… and then there are those who think they’ll get rich quick without having to work hard.
Trading is none of these things. In fact, it’s the exact opposite.
Today, you’ll get a lesson in day trading 101. Let’s take a closer look at what day trading is and how it works.
Table of Contents
What Is Day Trading?
When people think about making money in the stock market, day trading often comes to mind. But what is it?
Day trading is the practice of buying and selling securities — primarily stocks — within the same trading day.
What makes day traders different from other stock market players is how active they are in the market. Traditional investors and position traders tend to hold positions for years. Swing traders might hold a position for a few days or months.
Most day traders don’t hold trading positions overnight. They tend to stay 100% in cash.
They open and close a trade within the same trading day. This way, they can try to mitigate the risk of major overnight stock price fluctuations due to news or other events.
Day trading is gaining in popularity over the past few years. That’s thanks to the surge in online brokerages and how easy it can be these days to trade. You can execute nearly all your transactions online.
Since day trading can potentially generate income, it’s no surprise that many people are interested in this trading style. But as with anything related to the stock market, day trading also has its downside … And it comes with plenty of risk.
Here, we’ll cover day trading fundamentals, then focus on some key elements that can help you navigate your day trading journey.
Have trading questions? Leave a comment at the end of this post or hit us up on YouTube. We love talking all things trading.
Day Trading for Beginners: How It Works
Since day trading means getting in and out of a trade on the same day, it’s important to know market hours.
Regular trading hours for the major stock exchanges in the U.S. are from 9:30 a.m. to 4 p.m. Eastern every weekday excluding holidays. That’s the time frame when most stock trading takes place.
Something a lot of newbie traders may not know is that the stock market is open before and after regular trading hours, as well. That’s pre-market and post-market (or after-hours) trading. Pre-market hours are between 4 a.m. and 9:30 a.m. And post-market hours run from 4–8 p.m.
A trade is considered a day trade if you buy and sell (or sell short and cover) a stock within the same day.
For example, say you buy 100 shares of Company X just after the opening at 9:31 a.m. Then you sell those shares at 11:30 a.m. — that’s considered a day trade.
You can also make several transactions for the same stock during the day. For example, you could buy 100 shares at 9:31 a.m. and 100 more at 1 p.m. If you then sell 200 shares at 3:59 p.m. before the closing bell, that’s also considered day trading.
As long as you buy and sell your position on the same day, it’s considered a day trade.
If you day trade, it’s important that you track your trading activity. There are a few reasons for that…
First, losses — even small ones — can add up quickly. Ever heard of the saying “death by a thousand cuts?” Well, a day trader’s accounts can die by many small losses. More on this later.
Second, if you make more than three day trades within any rolling five-day period, your account could be labeled as a pattern day trading (PDT) account. That can trigger the PDT rule that says you need a minimum balance of $25,000. FINRA set that rule for day trading accounts.
Not all traders have that much available capital … so keep track of every single trade.
Is Day Trading Right for You?
Naturally, we can’t answer that question for you. It depends on several factors … So think about your trading style, goals, personality, and risk tolerance.
(It also depends on your willingness to learn and use the right tools and resources, but more on that in a bit.)
That’s why different investment and trading styles work better for different people. This isn’t a one-size-fits-all thing!
Every trading style has its own advantages and disadvantages. And depending on your personality, preferences, and goals, certain styles will fit you better than others.
Trading styles are characterized by a number of factors, including:
- A trade’s holding period
- Trading frequency
- The duration or level of attention required to trade
- The method used to analyze a trade
For example, fundamental investors and position traders have longer-term positions. They can hold a stock for years. They’re after larger gains and maybe even dividends. They tend to trade less frequently, and their main goal is capital accumulation and/or dividend income.
But swing traders and day traders take the opposite approach. Their trade goals and moves are more short term. They can also trade more frequently and seek smaller gains while taking smaller losses. They also seek to grow their capital, but many become traders to generate daily income.
Can you spot the differences? They’re significant. What do you think fits you best?
Know Your Risk Tolerance
Only you can know if day trading is right for you. But no matter what you decide, it’s crucial that we cover this factor: your risk tolerance.
No matter your trading style, there will always be risk involved. But every trading style typically holds a different approach to risk. So you have to take this into consideration.
For example, smart day traders prefer taking smaller losses when a stock runs in the wrong direction. This seems less risky in comparison with the larger losses that position traders might take … right?
But smaller losses don’t necessarily mean day trading is less risky! If you trade more frequently and have a streak of losses, you can deplete your account quickly. Game over.
That’s why day trading requires much more than a desire to succeed. It also takes serious commitment, studying hard, the right mindset, and using the right resources and tools.
Let’s expand on that now…
How to Start Day Trading
The first thing you need to gain access to the markets is an online brokerage account. There are many brokers to choose from, and some are better than others. You need to do your research and pick one that suits your trading style.
Then you need to fund your account. Some brokers have a minimum initial deposit. Remember that when you’re deciding which broker to choose.
Once you set up and fund your account, you’re ready to look up stocks. To actually purchase shares, you’ll have to put in either a market or a limit order. In StocksToTrade Pro, we recommend almost always opening up limit orders. It’s one way you can have more control over your price entries.
After your order executes, that’s it … you own your first stock!
Regulations and Restrictions
When you first open up a brokerage account, you have to choose between two account types: margin or cash. Your selection can make a big difference in how you can trade…
A margin account carries more risk out of the two. It allows traders to trade securities using borrowed funds. Basically, the broker loans the trader money, charges interest, and uses the trader’s account equity as collateral. By trading with borrowed funds, it opens up the possibility of both larger profits … and larger losses.
We briefly mentioned the PDT rule earlier. If a trader has less than the $25,000 minimum equity balance in their account, they’re limited to three day trades within a rolling five-day period.
If that trader breaks the PDT rule, their account could be suspended for 90 days.
With a cash account, traders are restricted the available cash in their accounts. It can be a less risky way to trade. The downside of this account type is that a trader has to wait for the cash to “settle” to use it again … This can limit the number of possible trades.
Settlement occurs when the securities officially transfer to the buyer’s account and the cash is officially transferred to the seller’s account. Stock trades settle two business days following the trade date. So, traders have to keep this in mind when they reuse their capital. Or they risk broker violations by trading with unsettled funds.
3 Day Trading Strategies for Beginners
Now that you know some day trading basics, we can talk about strategies to help you get started.
Risk Management
Risk management is one of the most important things you need to learn in any kind of trading. All traders deal with risk … but the most successful traders know how to limit them.
A lot goes into risk management. It’s something that you’ll improve on throughout your career. Here are some ways to start your journey while limiting your risk exposure…
Paper Trade
A smart way to learn to limit your risks is to practice day trading before you risk real money. You want to find trading setups that suit you. And you won’t discover what those are until you experiment.
Using software like StocksToTrade to paper trade — or trade with fake money — is a great way to do that. Sure, you won’t have the reality of actual loss looming over you (that makes a huge difference when you’re executing trades) … But you can practice different setups and see how well they work for you.
Have a Plan
You’ve probably heard the quote “those who fail to plan, plan to fail.” This especially rings true with day trading.
You should always have a trading plan … before you enter a trade. Or you won’t limit your risk at all. Instead, you’ll expose yourself to far more losses than necessary.
You should have a plan for every trade. And every plan should include at minimum the case for the trade, your research, your price entry, a stop price (to cut losses), and a profit target.
Track Your Trades
All great traders do this. And the reality is, you can’t really see what works unless you analyze your past trades.
Track your trades in a trading journal. It can be a doc or a spreadsheet — whatever helps go back review your results regularly. You might be surprised by which setups really work and which don’t.
If you can identify what setups really work for you, you’re more likely to find your stride in the market.
Hardware and Software Requirements
There are many different hardware and software options available for traders. Some are more complicated than others. Some even work better for specific trading strategies.
If you’re just beginning, a simple computer or laptop will do for hardware.
As far as software, you’ll need the following:
- Charting software: This is one of the most important tools that you will need. Charts are how you study the price action of the stocks you’re watching. And you can check out the stock’s history and view it in different time frames.
- Stock scanner: This tool will help you find the best stocks to trade out of thousands and thousands of stocks.
- News scanner: This can help you find relevant news that could be a catalyst. And catalysts can mean stock price movement. This is key — timing is crucial when it comes to trading.
How to Make Money Day Trading
So far we’ve talked about what day trading is and how it works. We’ve also covered some risk management basics and key tools.
These all are just pieces of the puzzle, though…
Yep, it’s good to have a good broker, to know the best setups, and to use the most powerful software. But, in reality, your process and dedication are critical.
Building toward consistent trading comes through hard work. You’ll try and fail a lot as a newbie. That’s just part of learning. And it helps you to refine your process so you can:
- Know which setups work for you
- Locate stocks that match your setups
- Execute your trade plans well (including limiting your losses)
- Adapt to market changes
- Continually improve
- Work toward trading consistency
Tips for Trading Smarter
By now you’ve learned that several factors can help you determine whether day trading is the right style for you.
But what else can new traders learn to trade smarter every day?
Here are three of the most important things: technical analysis, position management, and developing the right mentality.
Technical analysis is the study of chart patterns. You should learn to master chart patterns (such as the dead cat bounce) and recognize those that work for you. The sooner you develop an eagle eye for patterns, the better.
Remember: day trading isn’t gambling — it’s about identifying and trading the right patterns under the right circumstances.
Position management is also important. It’s about trading only the patterns with a good risk/reward ratio and following a defined trading plan. That can help you stick to your trading plan and limit your potential losses.
And finally — but no less important — you have to develop the right mental state. This is a big deal. If you don’t learn to do this, you might as well kiss your capital goodbye. Day trading is a challenging profession, so you gotta have proper mastery over your emotions — before, during, and after every trade.
There’s no magic way to master all these elements all at once. If there was, then everyone who tried trading would be wildly successful and wealthy. The reality: 90% of traders lose. But there’s something you can do to develop your skills throughout your entire career…
Never stop learning.
Make a point of continuously learning from successful traders and also from your own trading triumphs and mistakes. This is something the best traders do, no matter how long they’ve been trading.
Also, learn as much as possible from the reputable resources available to you. Our StocksToTrade blog is a great place to start.
Tools of the Trade
Day trading could be right for you, but don’t go in blindly. Trading is hands-down risky — especially when you’re just starting out.
Where do you find quality stock charts? How do you know which stocks should you follow? What news should you pay attention to? How can you connect with other traders on this same journey?
That’s where we come in…
The StocksToTrade Platform and StocksToTrade Pro
With all those factors — and way more — in mind, we developed our StockToTrade platform. Developed by traders for traders, it’s an all-in-one tool designed to help traders like you every day. See how it can help you navigate the markets. Get your 14-day trial for just $7 now.
And with StocksToTrade Pro, you get our robust charting software, stock screener, and news scanner … And you can also learn from lead trainer Tim Bohen. He live-streams his trading screens for the market open and close every trading session…
The right mentor can help you better understand the markets. You can learn lessons without having to do it the hard way — through trial and error.
STT Pro is also a great way to network. You’re part of our trading community. And we’re all here to learn. That’s invaluable!
Learning from others can help speed up your learning process and learn to trade smarter.
You’ll also get access to weekly strategy webinars, our chat room, and forums. You can share your experiences, ask questions, and learn from others. You don’t have to feel alone on this journey — we can all help each other.
Part of being successful in day trading involves educating yourself and using the tools that can leverage your game. You can get both with StockToTrade Pro.
What do you think? Is day trading for you? We’d love to hear from you!