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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Comments

  1. says

    It’s amazing how many people want to daytrade on “feel”. So one will find the candidate and hope to make $0.50 out of a trade. He will then watch a chart until he feels comfortable and put the trade on. It is usually a hit or miss coin toss probability scenario.

    The way to be truly successful from what I have seen is to have a robust, tested, explicit formula that over the long-term makes money. However, most people aren’t able to hold on for the long-term becuase when they take their first week of losses they begin to tinker with the strategy and essentially foul it up.

    There are a few out there that can do it well, but most daytrader careers are short lived and end in disappointment. Make no mistake, daytrading takes just as much time and effort as long term fundamental investing so if an investor is looking for a shortcut, daytrading really doesn’t fit that scenario.

    Good post – i enjoyed it!

  2. says

    Day trading rule #1:
    Be properly capitalized or you WILL FAIL.
    $10,000 is chump change. Traders must aim for approx. $100,000 minimum before they can ever consider doing this full time. Even at that figure, you’ll be very lucky to take down $50k for living expenes after all commissions, slippage, wins, losses, etc…

    Plus, you’ll want to grow that stake so the percentages start to work in your favor to actually make it work for a living.

    No one should be day tradign a $10,000 account, that is just silly.

  3. says

    Great article!

    I agree, $10,000 isn’t enough money to make it worth the ‘time’. The only part missing from the article was the opportunity cost of the extra time spent day trading instead of running a business or working. Day trading isn’t just investing, it’s also a job and so you need your investment to make profit (as any investment should) plus pay your living expenses.

    I don’t know if you would be interested, but I think you at one time day traded (I think I read that in a profile somewhere) and I was wondering how you did and what real world lessons you’ve learned.

  4. says

    Less than $10,000 won’t get you anywhere? Well maybe that is the case for most of the people trying to daytrade. However there are guys out there, like the danish guy Flemming Kozok. He started out with $4,000 and turned it into more than $500,000 in one year…Nothing is impossible guys :)

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