Getting Started with Day Trading

Despite the dire warnings by the Securities and Exchange Commission cautioning investors against the controversial yet potentially profitable business of day trading, people continue to try and acquire day trading skills, and a day trading stock tip is literally worth it’s weight in either gold, or dross! Below is some information on learning trading techniques, the risk you may incur, and strategies for becoming a skilled trader.

Just what is day trading and how do investors learn day trading skill? Day trading is the act of rapidly buying and selling stock throughout the day to profit from the minute fluctuations in the market for that specific day. Ideally, day trading strategies permit investors to reap profits from the fractional increases in the market.

Day traders watch a certain set of indicators when deciding whether a stock is suited for day trading. First, the stock should have high liquidity. This means that the stock in question has lots of buyers and sellers. The liquidity permits day traders to quickly purchase and then sell stock. Liquidity is determined by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Almost all stocks on the NYSE and NASDAQ have a high degree of liquidity.

A day trader also looks at volume individually, in addition to using it as standard for liquidity. To qualify for day trading, a stock must trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more enable the day trader to purchase or sell a large amount of stock without greatly changing the price of the stock. Volatility is another criteria in evaluating a stock for day trading. The word refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders watch the pattern and volatility of stocks over an individual day. Stocks that change price many times over one trading day are perfect candidates for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader evaluates the price transparency of stock. This term refers to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader determine just how much money there is to be made on a certain stock. The NASDAQ II quote system offers data on all bids. Day traders who arrange to access the NASDAQ level II quote screens can evaluate the performance of a stock and ascertain its swing in price.

While these trading strategies are entirely legal and entirely ethical, they are very risky. Day traders commonly buy on borrowed money with the hope that they will obtain higher profits through their acquisitions and sales. People who are deemed “pattern day traders” by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops dramatically, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC warns against day trading and acting on a day trading stock tip, and has taken many steps to inform people of the related risks.

The first few months, a large majority of day traders suffer huge financial losses and only a few make it through to become profit-making day traders. For this reason, day traders should only invest cash that they can afford to lose. They should never invest money earmarked for the essentials like living expenses or second mortgages.

Keep in mind that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme dangers of prices changing to the detriment of the trader. Day traders do not invest, rather, they speculate on the movement in price of a stock throughout the day.

There are lots of websites whose sole purpose is to profit off those who seek a day trading stock tip. These websites promise rapid results and sell hot tips to their members for a fee. The sources are most often paid to make these recommendations and must be avoided. Enlist the advice of a proven professional, and take plenty of time to use trading strategies for longer term success. Remember, there is no free money, and day trading skill is often paid for with intolerable stress and cataclysmic losses.