What is Day Trading? We Break it Down!

By November 28, 2018trading

When people think about making money in the stock market, “day trading” is often a key phrase that pops up in many curious minds.

Whether you’re a new or an experienced trader, day trading has become quite a popular conversation topic among stock market fans these days. 

But what exactly is day trading? And why has it become so popular?

Day trading is the practice of buying and selling securities — primarily stocks — within the same trading day.

Unlike traditional investors and position traders who hold their positions for years or swing traders who hold a position for a few days, day traders don’t hold any trading position overnight. They stay 100% in cash.

Most day traders seek to capture small profits (even just cents) and are willing to take small losses during the trading day. This way, they can avoid the risk of major stock price fluctuations caused by news or events overnight.

Day trading is a practice that has gained popularity over the past few years thanks to the introduction and adoption of online brokerage and the ease with which investors can execute online transactions.

Download the key points of this post as PDF

Since day trading provides an opportunity to potentially generate income, it’s no surprise that many people are interested in this trading style. However, as with anything related to the stock market, day trading also has its downside — and it carries its own risks.

Here, we’ll cover day trading fundamentals, then focus on some key elements that can help you with your day trading path.

If you have any questions, feel free to ask in the comment section at the end of this post. We love ‘talking trading’ with you.

Day Trading for Beginners: How It Works

You know that day trading stocks involves the buying and selling of a stock the same day (or selling short and covering it the same day), but how does it work?

The first thing you should know is that regular trading hours for major exchanges in the U.S. are from 9:30 a.m. to 4 p.m. Eastern time, Monday to Friday (excluding some holidays).

For example, if you buy 100 shares of Apple (APPL) just after the opening at 9:31 a.m., and then 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 APPL shares at 9:31 a.m. and 100 more at 1 p.m., and then sell 200 at 3:59 p.m. before the closing bell. That’s also considered day trading.

As long as you buy and sell your position the same day, it’s considered a day trade.

Though technically you could make as many trades as you want, you must be aware of your trading activity for a couple of reasons …

First off, every time you trade you can potentially generate some income, but you can also possibly lose money if the stock takes the wrong direction — and a streak of losses could deplete your capital.

Second, If you make more than three day trades during a within any five-day period, your account could be labeled as a pattern day trading account, triggering a the minimum balance of $25,000 FINRA set for day trading accounts. Not all traders have that much available capital.

Now you understand that day trading is the practice of buying and selling securities the same day, seeking to capture small trading gains while risking only small losses.

It sounds simple — like something anybody could do, right? Not so fast. In practice, it’s not that simple. And it’s not a practice that’s a good fit for everyone.

So the real question here is: Is day trading right for you?

Let’s take a deeper dive …

Is Day Trading Right for You?

Naturally, we can’t answer that question for you. It depends on several factors, like 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 on a minute.)

That’s why several types of investment and trading styles are best 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 differently than other.

Trading styles are characterized by a series of factors, including:

  • The holding period of a trade
  • 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 trade over the long term; they can hold a position for years. They seek larger gains and are willing to deal with larger losses. They trade much less frequently, and their main goal is capital accumulation or income through dividends.

But swing traders and day traders take the opposite approach. They’re short-term types.

Swing traders hold positions for a few days and day traders only during the same trading day. They also trade more frequently and seek to capture smaller gains while taking smaller loses. Though they also seek to grow their capital, many become traders to generate daily income.

Can you spot the differences? They’re significant ones. Where do you see yourself fitting best?

You’re the only one who knows that answer. But no matter your preference, it’s important that we review another factor that you MUST consider: risk tolerance.

No matter your trading style, there’s always risk involved. But every trading style typically holds a different approach to risk, so you have to take this into consideration.

For example, day traders prefer taking smaller loses when a stock runs in the wrong direction. This seems less risky in comparison with the larger losses the position traders are willing to take, right?

But having small losses in every trade doesn’t necessarily mean day trading is less risky! If you trade more frequently and have a streak of losses, you could deplete your account quickly – then it’s game over!

That’s why becoming a successful day trader requires much more than a desire to succeed. It also takes serious commitment, studying hard, developing the right mentality, and using the right resources and tools.

Let’s expand on that now …

Tips to Help Boost Your Success

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 help boost their success chances in this field?

Here are three of the most important things: technical analysis, position management and developing the right mental state.

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 frequently. The sooner you develop an eagle eye for patterns, the better.

Remember that day trading isn’t gambling — it’s about identifying and trading the right patterns, under the right circumstances, to help you try and trade with the odds in your favor.

Position management is also a very important aspect to consider. It’s about trading only the patterns with a good risk/reward ratio and following a defined trading plan, to make sure you help maximize profits and limit any possible losses.

And finally — but no less important — you have to develop the right mental state. This is a big deal, and if you don’t learn to properly do this, you might as well kiss your capital goodbye.

Day trading is a challenging profession, so you must 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 would be a wealthy trader. But there is something you can do to potentially develop your skills faster: Never stop learning!

Make a point of continuously learning from successful traders and also from your own trading triumphs and mistakes. This is something you should always practice throughout your trading career.

Also, learn as much as possible from the reputable resources available to you. Our StocksToTrade library of blog posts is a great place to start.

Tools of the Trade

Day trading could be a potentially rewarding opportunity for you, but it also offers its fair share of landmines — especially when you’re just starting out.

How do you get quality stock charts? 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 …

With all those factors — and way more — in mind, we developed our StockToTrade Pro platform. Developed by traders for traders, it’s an easy-yet-sophisticated, all-in-one tool designed to help traders like you succeed.

With StocksToTrade Pro, you not only get charts, quotes, news, watchlists, and more, but you can also learn from lead trainer Tim Bohen, who live-streams his trading screens for the open and close of the market every day …

… That’s an invaluable experience!

Learning from others can speed up your learning process and boost your confidence to help you trade the market the right way, every day.

StocksToTrade Pro also gives you access to weekly strategy webinars, chat, and forums. You can share your experiences, ask questions, and learn from others. You don’t have to feel alone in 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. Sign up for the trial offer today!

Check out our Video Podcast on How to Day Trade here, you may juset learn something!

Have you started day trading yet? What are your biggest challenges right now? Share your comments below!

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