Day trading is a style of investing that includes buying and selling stocks throughout the day with the goal of earning a profit on each trade. Day traders typically use technical analysis to determine when an asset’s value will increase or decrease, allowing them to buy and sell quickly.
With the rise of the internet and online trading anyone with access to their personal computer can now be involved in this exciting investment process.
Read on to discover the basics of day trading for beginners and how you can get started.
How does day trading work?
Day trading works in a variety of ways, but the most common is to buy and sell stocks throughout the day.
Day traders use what’s called technical analysis to determine when it would be best time for them to purchase shares or divest themselves from their current holdings in a company. Technical analysis involves examining data such as stock prices, volume of trading and market activity to predict the future movements in a company’s stock price.
What role do day traders play in the stock market?
Day traders provide a source of liquidity to the market. They buy and sell stocks throughout the day, which allows other investors – who may not be able or willing to do this themselves – to invest in stocks by providing them with an opportunity to take advantage of short-term fluctuations in prices without having to stay glued all day long at their computer screen waiting for a stock to meet their price point.
Day traders also provide the market with a stabilizing force. Without day trading, sudden news could cause an investor to sell their shares at any time of the day without regard for what other investors might be doing. This would destabilize prices and lead to volatility in stock values that are not warranted by changes in fundamentals or macroeconomic events.
Day trading is one way that investors can try to beat market averages and earn higher returns than they would otherwise do by investing in stocks passively over time, without taking risks. Day traders don’t need much capital, but because of the low margins and high risk involved with day trading strategies, it is often considered a good way for those who have already reached high levels of financial security to make profits on their investments without risking the safety of their existing assets.
What are some day trading strategies?
Day traders use a variety of strategies:
- Scalping: Frequently trading in and out of markets to take advantage of small market shifts by generating profits on short term time frames.
- Swing trading: holding positions for periods of up to a few days in order to profit from changes in fundamental, technical or macroeconomic events.
- Trending with the trend: Taking advantage of trends by following them as they develop.
- Divergence: When two or more securities move away from each other, they are said to be diverging. This is usually seen as an indication that the underlying security will soon make a reversal.
- Range trading: Seeking to profit from anticipated periods of low volatility (such as when an asset is in consolidation).
- Market making: Buying and selling financial instruments such as stocks, bonds or currencies with the goal of profiting from minute price movements.
- Spoofing : Feigning interest in a financial instrument in order to lure others into taking positions as well so that the spoofer can profit from the price movement.
- Spread trading: Buying one asset and selling another in anticipation of a change in their respective prices.
- Momentum day trading: Buying an asset when it is showing strength and selling the security when it shows weakness.
How did day trading evolve?
The first stock to be traded on a self operated, fully electronic automated system was IBM and it happened back in 1964. This makes it one of the most popular stocks that has ever been day traded due to its size and liquidity.
The first day trader to successfully take over a corporation with the help of day trading was Nicholas D’Olier, who bought Pacific Coal and Oil in 1972 for $750 million when it had only earned about $14 million from operations that year. By 1981, he sold his company for an astounding $54 billion.
A year after D’Olier, a man named Thomas Dorsey made \$14 million trading gold.
The 1980s saw day traders like Michael Marcus make up to $1 billion annually by only taking small positions in many different stocks at the same time. This was called scalping and he became the first person to ever earn over a billion dollars in one year.
In the 1990s, day trading went more mainstream and became an industry for people to get into with a little bit of money as well as large amounts of capital. In this decade, many Wall Street firms like Goldman Sachs started offering brokerage services that would allow individuals to trade stocks on their own without any help.
In the 2000s, day trading became a full-time occupation and many firms that only traded at night during the 1990s began to open up their shops in the morning as well. Trading volumes increased dramatically and so did profits on each trade. The bubble of 2008 was also felt by day traders which led some people to believe it’s a risky investment.
What makes day trading risky?
Day trading is risky because the brokerages and trading houses that offer it are not federally regulated. Many people believe that day traders have an unfair advantage over other investors in terms of speed to market, which means they can make or lose money more quickly than others. But there’s also a group of bloggers who say as long as you follow some simple rules, you can get the same information as a day trader.
Is day trading illegal?
Day trading is not illegal.
Tips for limiting losses when day trading
- Know your risk tolerance.
- Set a limit for the maximum amount that you are willing to lose per day and stick to it.
- Don’t invest more than you can afford or don’t have access to at other times if it would be lost completely.
- Make sure there’s an emergency fund set aside in case of a market downturn.
- Limit the number of shares you buy in order to limit your exposure on any one day.
- Trade with margin, but know that it’s only for high risk traders and has higher fees associated with it than other trading options.
- Don’t sell short if you’re not an expert trader because there are a lot of risks associated with it.
- Don’t day trade stocks that are volatile or high risk as an inexperienced trader because you may not be able to handle the volatility and risk. Pick low priced, stable companies instead.
- Only invest what you’re willing to lose in a single day’s trading activity.
Why do most day traders fail?
Most day traders fail because they don’t have the expertise to know when and where to buy shares. They also may not be able to handle all of the volatility that comes with trading stocks. Day traders should only invest what they’re willing to lose in a single day’s activity, and pick low priced stable companies as an inexperienced trader instead of high-risk stocks.
Can you live off day trading?
Day traders may not be able to live off day trading, but many people are turning a hobby into an income. Successful day traders can earn up to $200k per year based on the number of trades they make and their profit margins.
The average person who earns more than $500K annually is someone who has been doing it for more than 10 years.
The average person who earns between $250K to 500K annually is someone who has been doing it for one to three years.
It takes about a year or two of experience before day traders can start making enough profits regularly with low risk trades that even if they have a bad day, the losses will be minimal.
How to get started in day trading
Step One: Get a brokerage account. Most day traders use online trading houses such as E-Trade, Charles Schwab and TD Ameritrade. These are all reputable brokerages but they do charge different rates for their services depending on the type of trades you want to make (e.g., how often you trade). It is important to research the various brokerages before deciding on one. For example, E-Trade has an annual fee of $12.95 for non-retirement accounts and TD Ameritrade has no account fees if you trade at least 30 times in a quarter (i.e., they have a quarterly minimum).
Step Two: Understand the difference between day trading and short-term trading. Day traders typically trade more than four times a week, while many short-term traders only engage in one to three trades per month. Day traders are more active.
Step Three: Decide on the type of broker you want to use. There are brokers who charge a commission for each trade, and those that don’t. Research them thoroughly before deciding which one is best for your needs.
Step Four: Understand how day trading works by reading short articles about it or taking an online course such as Investopedia’s Day Trading for Beginners.
Step Five: Start small by investing your time and money into a day trading course before you invest any of your savings. You can then decide whether or not it is something that fits with your personality, goals and risk tolerance.
Step Six: Have an emergency fund set up in case things go south.
Step Seven: Determine what your goal is for day trading After reading this article and doing the research, you will be able to decide whether or not a career in day trading suits your needs.
Be sure to do your researchInvesting in the stock market has been around for decades and there is a lot of information out there about it, so start with some basic reading first before diving into day trading. There are also many online resources that provide helpful tools and advice specifically geared toward beginners.
I buy and review courses so you don’t have to. Sometimes, I even find courses that are legitimate and worthwhile; and that’s how I accidentally came across one that led me to building a 6-figure business in a little under 5 years. Now, I still review courses because it’s my favorite hobby. 🙂 Learn more about me here.