Day Trading

A trade of any financial instrument is considered a day trade if the trade is opened and closed within the same exchange trading period of one day. Profits and losses from these trades are considered short term and have no long-term investment type potential.

The reasons that a day trader opens and closes these day trades is usually technically oriented rather than from some business fundamental. This is a distinct difference between day trading and investment trading. Investment type trading can mean that the trade is open for weeks, months or years, before it is closed.

The SEC has very specific rules governing whether a trade is considered a day trade or just a regular trade. Ideal day trading is the ability to make significant profits quickly and keep the losses under control by closing losing trades as soon as possible and win or lose to close the trade before the end of the trading day.

A day trader must have a balance of $25,000 to start in his stock account to become a legal day trader. This is not the case in the commodities markets and the futures broker sets the rules basically. This is a useful advantage for traders of stock indexes. The futures brokers can extend courtesies to experienced clients, as they know these traders are quick to bail out of a losing position.

A single day trade does not a day trader make. It is the continuing use of this method of trading that makes a client become classified as a day trader. The margin rules are relaxed for a day trader as the exchanges know these traders will not overstay a losing position Therefore they are not held to the 50% margin rule and are allowed to day trade at a margin rate of 25%. This margin rule allows for taking larger positions in hopes of gaining quicker profits due to their greater trade size. Margin percentage is figured against the overall value of the opening trade. A $100,000 value would require only $25,000 margin.

Education of an investor or a day trader takes time and is a never-ending lifetime exercise of learned experiences. Reading about trading or investing can speed up the process, but it has to be coupled with real time experience to make it work. Another way and an excellent one is to get taken under the wing of a knowledgeable trader who is successful. If you are lucky enough to do this, then you are many steps in front of someone who has to learn all the moves by themselves.

In the old days, there were few books on the subject and no Internet to discover what was available to study. Today the Internet has numerous sites and aids for people who want to learn how to trade. There are brokerage sites that not only will help with the learning curve, but also offer software to draw charts and run technical studies. Some specialize in day trading of stocks or futures or the Forex exchange for currencies

There are numerous sites with chat rooms and discussion groups on all aspects of trading. These are excellent learning sites as some of the participants are leading the discussions as a way of paying back the stuff they had to learn the hard way. Checking out Internet sites for learning help, is worth the effort as some of these chat rooms are meeting places for some really good trading minds.

These free lessons not only will help with learning to trade better, but lead a new person to books and discussions people pay good money for to attend a seminar. Some traders will even show the genesis of a trade and how they managed if so they could protect them selves as well as turn a profit.

A day trader’s tools start with a sharp mind and the ability to quickly recognize small changes in the trading of a stock or other trading vehicle. They will notice quickly if the trading volume is rising or falling. They will notice what is happening with similar stocks or futures contracts. A new high or low is considered important and gives the potential direction of the trade.

Chart patterns and technical studies using mathematical models are used to ferret out the likely trade direction. Going short or long makes little difference to a professional day trader. Their only requirement is that they are on the correct side of the trade.

With the use of modern computers and the Internet all day traders can have access to real time quotes and charts. Instead of daily or weekly charts, a day trader can have charts that are by the minute or every five minutes. Each trader can set up their own chart parameters and technical indexes like stochastic, moving averages and trend lines. All of these indicators are used to help the trader stay with the current market direction and alert them to when a change is about to take place. Being with the curve and ahead of the curve make the trader successful. Accomplishing this feat takes experience and time to learn so as to be consistently with the correct side of the market.

Day trading now is best accomplished in person on the exchange floor or via computers with real time access and real time trade entry capability. Time is of the essence and delays can be costly when day trading. Real time trading equipment is rented, as are the real time quotes. A brokerage firm that wants your business may furnish this service for free if your trading volume is large enough.

Some brokers will offer charting software which uses the real time quotes so as to draw charts and other trading indexes as the market is trading. All of this information is for one purpose. This allows the trader to make instantaneous decisions on whether to open or close a position. It lets the trader know when to cut losses or let the profits ride a little longer. Solid fast information is a necessity for being a winning day trader. Without this real time data, the trader is much like a blind man looking for a lost object. Without this current data the trader has no idea of what is really going on and cannot protect himself or gain profits from a potential trading situation.

Being able to see the trading live, gives the trader both a mental and visceral feeling for what is happening in the market. Market sense can be developed although some people seem to have an inborn physic feeling for what will happen next. For those without this gift, solid-trading rules must be in force at all times. Losses must be controlled and trades should be attempted only when the edge is in the favor of the trader. This not a gambling exercise, but is supposed to be intelligent risk taking.

The answer is a definite no. Trading of this sort should only be attempted with a firm that is set up to handle this type of trading. They must have the speed capability that is necessary to enter and exit trades. You can find a firm that offers software, real time quotes and real time trade entry then that is the ticket.
They should also offer competitive commissions and information if you need it.

Some brokerage firms claim to do all of this, but the proof of their claim is how they actually perform the trade. There is no reason to accept less than quality service and trade execution. This is a competitive arena and the good firms are very good at doing what is expected of them.

Day trading losses and profits are considered short term for tax purposes so there is no way to convert this type of trading to long term. The holding periods of the trade are entirely too short. For some people this lack of tax incentive is enough to dissuade them that it is not worth the risk. For others with substantial business write offs this may work out from a tax perspective. In any event this trading type may not be for a person in the wrong tax situation.

The mind games of day trading are also a positive or negative depending on the trader. A person who has a strong aversion to admitting mistakes would not be a good candidate for day trading. Quick recognition of a bad trade is essential to surviving as a day trader. Closing a losing trade early is always the correct answer. If the situation changes, you can always reestablish your position. Small losses can be overcome. Large losses can take a trader out of the trading arena permanently.

The risk-reward of day trading is a function of the leverage the trader has at his disposal. Low margin requirements and low commissions make this kind of trading potentially profitable. Making many trades throughout the trading day that have a consistently positive outcome can be very lucrative for a day trader.

Being able to control losses and not trading on hope are also important to the risk-reward potential of day trading. Trading is not about being a hero or showing how much courage you have in the face of adversity, it is about being smart and living to fight another day. It is about protecting the one asset that you will need to continue day trading. You must protect your trading capital at all times and never let a trade that is not working eat you alive.

Understanding the difference between a good trade and one that just gives you action is another element of risk-reward. Being in action is what traders love, but doing it without a proper reason is a way to lose a great deal of money. There is a vast difference between action trades and winning trades. The secret is for you to be able to identify which kind of trade you are thinking of making.

The characteristics of successful day traders are somewhat similar although their physical appearance can be as different as night is from day. There does not seem be an advantage for men verses women. Both can be winners on a consistent basis. One obvious trait that successful day traders have in common is their quick ability to marshal facts and come to a decision fast. They are quick to enter trades and quick to close them if they feel they need to end the trade.

They all seem to have either a sixth sense of what is right or the ability to analyze what is going on with lightening speed. They do not hesitate when making a trade or closing it. Most day traders use charts with breakout numbers located so when the market is open they know where the important price points are for going either long or short. They do not care as a group whether they are long or short a position. They just want to be on the correct side of the move. When they realize they are on the wrong side they close the trade. Hope trades do not exist for this group of traders.