While day trading has been around for decades, its popularity has surged recently due to better brokerages for retail investors and the stock market’s historic Bull Run. With so many new traders investing, there are great opportunities to profit on a daily basis — but they don’t come without risk.
While there are a lot of resources, free guides, and tips, remember that this cannot compete with actual education and applicable knowledge that you can gain from courses and classes. With that in mind, here are some basic tools to help you get to know the strategies that help traders get ahead in the competitive space of day trading.
Day Trading Tips and Strategies
Typically, there are two terms that describe price action in stocks: bearish and bullish. Bearish means the price is going down, and so someone who is a bearish trader will typically sell stocks short or look for entries after negative price action.
Conversely, a bullish trader will look to enter into stocks that have upward momentum, or are trending towards a positive catalyst. Either strategy is viable, the research and implementations for each are just slightly different.
On top of the direction you want to trade stocks, it is important to have a goal in mind with each trade. You can be looking to trade very short term (minute-to-minute, hour-to-hour) intraday, or swing trade over a few days or a week.
We highly recommend creating a full map of outcomes when entering a trade and sticking to it, even as your emotions might be dictating something differently. For beginning traders, learning to take small profits at first can be a valuable lesson.
It is also important to begin trading with a business-like mindset. Each trade you make can be the building block for future success, and avoiding bad habits early will prevent you from digging a hole. When developing your skills, there are an abundance of resources available for free on the internet. Some will be worthwhile, but many will be opinion-based or not congruent with a beginning trading style. We recommend professional education as early as possible, as the traders running these courses have a focus on consistent growth and building versatile tools for the long run.
Who Trades in the Stock Market?
When getting into day trading, it is important to know who exists in the market and how these players affect stock prices.
There are individual traders doing it for their own investment purposes, often referred to as retail traders. These can be pro traders, but recently the influx in part-time or casual traders has been massive. As you develop your trading philosophy, you will notice moves in stock prices specifically designed to scare retail investors out of good positions. Learning how to avoid these pitfalls is a crucial point in your trading education.
Beyond that, there are groups of investors who leverage other peoples’ money for profits known as hedge funds, or institutional investors. Working in think-tank style arrangements whose sole job is to invest for profit, they often have access to different levels of risk than individuals.
Often, these investment groups will provide some sort of support or products, and recently there has been a movement towards hedge funds directing exchange-traded-funds (ETFs). ETFs are large baskets of securities within one exchange that allow investors to diversify their risk, and are commonly found in retirement accounts as they are easier to manage over long periods of time.
Finally, in order to keep the trading fluid, there are market makers. Market makers can either be individuals or parts of firms, but their role is to keep bid/ask spreads moving. Typically brokerage houses, these players are compensating for their role in holding risky assets, and also can influence the direction a stock trades.
There are other participants as well, but for the most part, these types of traders will make up the stock market ecosystem. It is important to understand the motive of other traders, because for every share you want to buy or sell, there has to be a trader offering reciprocal action for it. The greater your edge is over your peers, the more profit there is to be had.
Types of Stock Exchanges
While most people understand that stocks are reflective of companies that are publicly traded, there are actually many categories of stock and indexes they can be traded. To begin with, you should have an idea of which stock exchanges are traded on most often and why:
- Nasdaq: This composite of over 3,000 stocks is supposed to represent the most forward-facing securities on the market. Tech stocks and emerging speculative stocks join household names to create a fast-growing index. In order to be listed on the Nasdaq, a stock must have at least two market makers assigned to it and a minimum bid price of $3 at the time of their listing.
- NYSE: The New York Stock Exchange is the classic symbol of Wall Street; an institution that combines American securities with foreign exchange, and holds most companies in the country. In order to get listed here, there is $4 minimum per share, and there must be at least 400 qualified shareholders.
- Over the Counter: The OTC market is a less-formal exchange of securities. These are traded via dealer networks, and due to this lack of centralization and market makers, are much more volatile. Often, when people refer to penny stocks (even as cheap as fractions of cents), they will be found on the OTC markets. We recommend being very careful with these exchanges early.
- Foreign Stock Exchanges: These are similar to the OTC markets in that they are less regulated and have significant volatility. They include the Tokyo, Hong Kong, London, and Euronext stock exchange. These are difficult exchanges to learn early, so perhaps look into them after getting settled into day trading for a while.
As you develop a feel for what stocks reside on certain exchanges, you will understand what moves and shapes these markets on a daily basis. Trading stocks has thousands of variables, and the host market is a critical one to know the rules of.
Day Trading Terms and Rules to Know
When day trading, there are certain literal rules that brokerages have traders follow. Like any other complex endeavor, there are also key terms and lingo that you will hear repeatedly and should acclimate yourself to:
- Pattern Day Trader
Also known as PDT, this rule and limitation is only in play if you have under $25,000 on most brokerages (which is a likely scenario for new traders). A pattern day trader is someone who buys and sells the same stock multiple times within a 24 hour period. Most brokerages allow you a warning for your first couple violations, but can ultimately have your ability to day trade suspended for up to 90 days should you repeatedly break this rule.
As we said, you can avoid it by having over $25,000 in a brokerage or having a cash account vs a margin account. We recommend setting this account balance as a goal for serious traders.
- Cash Account and Margin Account
These are the two distinctions a brokerage will usually have you choose from. For a cash account, the implication of the name is that you can only operate using the cash on hand. Additionally, you must wait for funds to clear (which takes a couple of days) to use it after selling an exchange. This is where PDT violations most often occur.
A margin account allows you to borrow money against the value of your cash and securities- this means you can leverage your assets and your broker will collect interest on your proceeds. However, this can be extremely risky should a trade go wrong. Margin calls have been known to damage new traders’ accounts quickly, so as always, exercise caution. Conversely, once you have built up your education base and are willing to trade as a means of income, having the extra leverage can be extremely profitable. As always, trading it about balance and risk assessment.
- Stop Loss
A stop loss can be implemented in a brokerage by setting a limit sell where you want to exit a position should it reach that price. For example, if you bought a stock worth $110 at the time of purchase, and were only willing to lose $10 per share, you would set a stop loss at $100.
There are multiple types of stop losses, including stop-limit (which is what we described), a stop-loss/market sale, trailing stop losses, and many day traders adhere to ‘mental stop losses’. These all take some getting used to, so study up before worrying too much about how to implement them.
- Position Sizing
This refers to how much of a certain security you are holding- whether it is defined by shares, dollars, or percentage relative to your portfolio value. Investors and day traders will use different position sizes to enter trades of varying risk. This is usually dependent on the individual risk profile of a trader combined with their confidence in the stock they are buying.
Characteristics of Successful Day Traders
Learning the fundamentals of the stock market is a key first step to day trading. However, this alone will not guarantee you success. A great deal of doing well in day trading is contingent on emotional control, planning out your trades, and sticking to them. This is why we emphasize a balance between information gathering and experiential education on your trading journey. You can have a great plan on paper, but not know how to execute it in real time when the stakes cause indecision.
With that in mind, no matter what level of trader you are, you should never be working with money you can’t afford to lose. Similarly, even if you have planned a great strategy and are sticking to it, there are things outside your control (or a company’s) that can create volatility or negative results in a trade. If and when this happens, you should never overextend yourself to try and get it back.
A famous adage from legendary investor Warren Buffet says, “The stock market is a device for transferring money from the impatient to the patient.” Even though day trading may seem like the opposite of this, the best moves in day trading are thought out well in advance- it’s just the execution that is brief.
Get Started with Day Trading
Venturing into day trading is like any other highly-skilled field. Very few people will be dominant and understand it in full, so we recommend a slow and steady approach to investing your hard-earned money.
Conversely, if you are looking to day trade, we recommend allocating as much time as possible studying and getting a feel for your style as a trader. StockAbility™ has decades of experience in showing traders how to unlock their true potential, with courses for every style and level of proficiency.
If you are interested in taking your game to the next level, register for an education in investing for your future today.