Day Trading Basics and Strategy

When it comes to investing online in the stock market there are many different types of strategies. Day Trading is a strategy that requires prior experience, dedication, and very disciplined trading to be successful.

What is Day Trading

Day trading is simply the act of buying and selling a security within the same trading day. So, if we wanted to daytrade Google, we would have to buy our shares then turn around and sell them before the market closed that day. Most people think a day trader is someone who just trades a lot, and while that is true, the dynamics of day trading are not for the faint of heart.

Day trading is difficult for several key reasons:

1. Commissions eat away at profits.
Even though free trades are now becoming more popular with top discount brokers, commissions are still a big factor to take into consideration. For sake of simplicity let’s say we are paying $10 per buy or sell, that means one trade to get in and then sell out will cost us $20 total. For an investor who only has $1,000 performing five trades will stack up to equate to $100 or 10% of the whole portfolio. This makes it nearly impossible to trade successfully.

2. Discipline is a requirement.
The aspect of discipline is so important with day trading because the process is very repetitive and one big loss can wipe out several successful trades. If we are turning over a .05% return on $5,000 every trade we make, we are making $25 per trade (before commissions). That’s all great and dandy, but what happens when our position is down 1%? Do we hold or sell? Holding a position and selling for even a 2% loss could spell huge trouble for our portfolio. Bottom line, discipline is critical.

3. Consistency is key.
There are multiple buyer and sellers competing for our same orders to buy and sell, and as any active investor knows even a 50% success rate is a huge feat in itself. Thus we have to be extremely consistent with how we go about finding opportunities and more importantly executing both the buying and selling of the actual trade.

Day Trading Steps

The process of making a day trade can be summed up in a few steps:

  1. Find a stock that intraday meets buying credentials
  2. Decide if the stock fits your profit vs loss ratio
  3. Take the position
  4. Sell the position as soon as target is reached, or sell out before losses accrue
  5. Rinse and repeat

Day traders are actively scanning 1 minute, 5 minute, 10 minute, 30 minute, and 60 minute charts to try and find prospective stocks to invest in or short. When buying and selling, stock limit orders are the most commonly used as this allows for the best possible price to be attained.

All in all day trading is a lot more complicated than meets the eye. It is a game for the well trained and disciplined investor, and when done correctly can be very profitable. Dedication and consistency are the keys to success.

Find more great articles on the investment education page.

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