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Profitable In Day Trading – Years ago, the only people who could actively trade the stock market were those who worked in large financial institutions, brokerage firms, and trading houses. The advent of internet commerce has coincided with the instant delivery of news – or should we say commerce -. Easy-to-use trading apps and 0% commission services like Robinhood, TD Ameritrade, and Charles Schwab have made it easier than ever for retail investors trying to trade like pros.
Day trading can be a profitable career (as long as you do it right). But it can be challenging for newbies – especially those who don’t have a well-planned strategy. Remember that even the most experienced day traders can experience rough patches and losses.
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Day trading is the buying and selling of lots of securities within a day or within seconds. It has nothing to do with investing in the traditional sense. You exploit the inevitable up and down price movements that occur during a trading session.
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Day trading is most common in the stock and foreign exchange (forex) markets, where currencies are traded.
Day traders are usually well-educated about trading and tend to be well-funded. Many of them add an extra level of risk by using leverage to increase the size of their assets.
Day traders adapt to events that cause short-term market movements. News-based trading is one popular technique. Scheduled announcements such as the release of economic statistics, corporate earnings or interest rate announcements are subject to market expectations and market psychology. That is, the market reacts when those expectations are not met or exceeded – usually with sudden and significant moves that can be very beneficial to day traders.
The profit potential of day trading is an often discussed topic on Wall Street. Internet day trading scams have lured enthusiasts with the promise of huge profits in a short period of time.
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Some people day trade without enough knowledge. But there are day traders who make a successful living despite – or perhaps because of – the risks.
Many professional money managers and financial advisors fear day trading. They argue that, in most cases, the reward does not justify the risk. Additionally, many economists and financial professionals argue that all types of active trading strategies tend to outperform a more basic passive index strategy over time, especially after fees and taxes are taken into account.
Day trading can be profitable, but the success rate is inherently low as it is risky and requires considerable skill. And don’t underestimate the role played by luck and good timing. An unlucky stroke can sink even the most experienced day trader.
Professional day traders – those who trade for a living rather than as a hobby – are usually well established in the field. They also usually have in-depth knowledge of the market. Here are some prerequisites to become a successful day trader.
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People who try to trade daily without understanding the basics of the market often lose money. A working knowledge of technical analysis and chart reading is a good start. But without a deep understanding of the market and its unique risks, charts can be deceiving.
Wise day traders only use venture capital they can afford to lose. This protects them from financial ruin and helps remove emotion from their business decisions.
Large amounts of capital are often required to effectively capitalize on intraday price movements, be it on a dime or a cent.
Day traders intending to use leverage in margin accounts need sufficient funds. Volatile market swings can lead to large margin calls on short notice.
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A marketer must have an edge over the rest of the market. Day traders use any number of strategies, including swing trading, arbitrage, and trading news. They refine these strategies until they generate consistent profits and limit their losses.
There are also some basic day trading rules that are wise to follow: Choose your trading options wisely. Plan your entry and exit points in advance and stick to the plan. Identify patterns in your options trading activity early.
Many day traders lose money because they fail to make a trade that meets their own criteria. There is a saying “plan the trade and trade the plan”. Success cannot be achieved without discipline.
In order to make a profit, day traders depend heavily on market volatility. If a stock moves a lot during the day, it can be attractive to a day trader. This can happen for a number of different reasons, including an earnings report, investor sentiment, or general economic or company news.
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Day traders also like stocks with high liquidity because this gives them the opportunity to change their position without changing the stock price. If the stock price rises, traders can take a buy position. If the price falls, a trader may decide to short sell for a profit as it falls.
Regardless of the technique a day trader uses, they are usually looking to trade (mostly) moving stocks.
There are two primary categories of professional day traders: those who work alone, and/or those who work for a large firm.
Most day traders who trade for live work work for big players like hedge funds and proprietary trading desks at banks and financial institutions. These traders have an advantage because they have access to resources such as direct lines to colleagues, a trading desk, large amounts of capital and leverage, and expensive analytical software.
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These traders usually look for easy profits from arbitrage opportunities and news events. Their resources allow them to take advantage of these low-risk day trades before individual traders react.
Individual traders often manage other people’s money or trade with them. Few have access to a trading desk, but often have strong ties to brokerages because of the large sums they spend on commissions and access to other resources.
However, the limited scope of these resources prevents them from competing directly with institutional day traders. Instead, they are forced to take more risks. Individual traders typically day trade using technical analysis and swing trades — combined with some leverage — to generate sufficient profits on small price movements in highly liquid stocks.
Day trading requires access to the most sophisticated financial instruments and services available in the market. Day traders usually need all of the following:
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This is usually reserved for traders who work in large organizations or handle large sums of money.
The trading or trading desk provides instant order execution to these traders, which is critical. For example, when a takeover is announced, day traders looking at consolidated arbitrage can place their orders before other markets are able to take advantage of the price difference.
News offers many opportunities. It is imperative to be the first to know when something important happens.
The typical trading room has access to all major news, regular coverage by news organizations and software that constantly scans news sources for important stories.
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Trading software is an expensive necessity for most day traders. Those who rely on technical indicators or swing trades rely on software rather than news. This software can be characterized by the following features:
For the average investor, day trading can be a scary proposition because of the number of risks involved. The US Securities and Exchange Commission (SEC) highlights some of the risks of day trading summarized below:
A day trade is exactly the same as any stock trade, except that both the buying and selling of shares takes place on the same day and sometimes within seconds.
For example, let’s say a day trader has completed a technical analysis of a company called Intuitive Sciences Inc. (ISI). Analysis shows that the stock, which is listed on the Nasdaq 100, has been trending higher in price by at least 0.6% on most days, with the NASDAQ up 0.4%. The merchant has reason to believe this will be one of those days.
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The trader buys 1,000 shares of the ISI when the market opens, then waits for the ISI to reach a certain price, often up to 0.6%. The trader then immediately sells the entire ownership of the ISI.
This is a day trade. Obviously, ISI’s merits as an investment have nothing to do with the day trader’s actions. Exploiting a trend.
What if the ISI bucked the trend and lost 0.8%? The merchant sells anyway and takes the loss.
A successful day trader understands the discipline of technical analysis. This is identifying trading opportunities by observing and plotting the price movement and volume patterns of a stock (or other investment). The long-term trend shows how the stock has behaved in the past and suggests how it should behave in the near future.
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Technical analysis isn’t usually done with paper and pencil these days. There are software packages that help create charts and graphs for the purpose.
A day trader must also have a plan before placing a single trade. What are the stocks to trade and what are their price points?
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