Definition, Risks, Rules to Follow

  • Day trading is the practice of making multiple trades on a security in a single day.
  • Day traders hope to use market volatility to cash in on small gains by trading stocks.
  • While there is significant money to be made from day trading, there is also significant risk.

There is more than one way to make money from bonds – and day trading is one of those ways. With greater access to investment tools and apps, reduced fees for trades, and bond-related data, many people are becoming more interested in how small moves in the market can generate profits.

But day trading is not for the inexperienced investor. To succeed, you need the right mix of education, experience, and capital – not to mention the discipline to execute a cultivated strategy. Here’s a closer look at what day trading is and what you need to know before you make the leap into these often dangerous waters.

What is daytrading?

Day trading is when you buy and sell the same security multiple times in the same day. The hope is that by making these trades, you will be able to capitalize on any increases the bonds may have gained during the day. Technically anyone can day trade, although you will find this type of investment made by financial services companies as well as individuals.

There is a lot of risk with day trading, which is why it is not for everyone. Profit margins are often very small and you can lose a significant amount of money in a short period of time. You can also expect to spend a significant amount of time researching, planning and doing business.

“Day trading is a full-time job,” says Vinny Yu, co-founder of JAVLIN Invest. “So if you’re thinking it’s quick and easy money, think again. Day trading requires discipline, patience and emotional stability.”

Like most types of investment, day trading is subject to regulatory oversight by the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission. This is because day trading involves buying and selling securities. More specific rules apply to day trading when investors buy on margin and make at least four day trades within the five-day period. Those who engage in this type of activity are known as standard day traders.

How does day trading work?

Much of a day trader’s day is spent researching and watching the markets. The goal is to find opportunities to buy bonds at a low price and then sell them for a profit – and repeat this to make a profit in a single day. This is where a solid background in finance and investments – as well as market work experience – is an asset.

“Investors can access equity markets cheaper and easier than ever before,” says David Keller, chief market strategist at “But this easier access also carries greater risk. Investors should educate themselves on the concepts of risk versus reward, particularly how to manage risk in individual stocks as well as at the portfolio level through asset allocation. market history using charts and technical analysis, day traders can better appreciate how repeatable patterns in price action can be identified and quantified.”

Because day trading can be so risky, day trading investors have a lot to consider. “In addition to reading charts and monitoring news, a good day trader can also recognize opportunities by reading the tape,” says Yu. “The goal of a day trader is obviously to make money, but equally important is to keep that money and not lose it.”

day trading strategies

Day traders employ a variety of strategies to fulfill their mission:

  • Breakout Trading: Many traders believe that stocks trade within a range of values. When a value goes above or below this range, a day trader can decide to buy or sell.
  • Withdrawal Negotiation: This strategy looks for opportunities within a long-term trend to capitalize on price drops. As most stocks tend to rise in value, market drops can provide the opportunity to buy stocks at a lower price and then sell when the value rises again.
  • Scalping: Scalping is when you make multiple trades in a day that result in small profits. Day traders hold these securities for seconds to minutes as trading happens very quickly with this strategy. Trading in large volumes is the key to success with this method.
  • Interval trading: This strategy is very similar to breakout trading. Rather than waiting for stocks to go above or below the estimated range, day traders will buy and sell when prices approach the limits of the range.
  • News based trading: Day traders follow the news to look for conditions that could affect the stock price. They need to continually monitor the media for information they can use to make predictions about how stocks will fare, and then base buy and sell actions on that information.
  • High Frequency Trading: This strategy uses automated algorithms to trade bonds in large quantities as quickly as possible. Special computer systems are needed for this type of day trading, which is why it is usually done by institutional investors.

What are the day trading rules?

Many of the rules day traders work with have to do with discipline and commitment to trading, as well as having the emotional resources to deal with constant market volatility. It takes time to learn what works and what doesn’t with day trading and develop a methodology that results in the kind of profit you want to achieve.

“In my experience, the most successful traders exercise good discipline in their decision making, focusing on the weight of evidence,” says Keller. “It’s good to consider different perspectives, but at the end of the day, the decision process is up to you. Develop a well-articulated checklist for moving in and out of positions, apply that checklist consistently, and find success.”

If you are a standard day trader using a margin account, you will have additional FINRA rules to follow. These include:

  • You must maintain a minimum of $25,000 of equity in each account used for daily trading at all times.
  • If the balance falls below this amount on a day when you want to trade, you will not be able to make the transaction.
  • You can also only trade up to four times the amount above the $25,000 minimum in your account from the previous trading day.
  • Cross guarantees do not count towards the $25,000 minimum.
  • Any funds used to reach the $25,000 minimum must remain in the account for two business days after any day they are needed for trading.

Pros and cons of day trading

There are many risks in day trading, and many who enter this area of ​​investing are not successful. Since you are relying on market volatility to increase the value of day trading stock purchases, you always run the risk of losing money. The best you can do is make educated guesses about what is going to happen in the market, and that can always lead to losses rather than gains.

Robert Johnson, professor of finance at Creighton University’s Heider College of Business, describes day trading as the practice of placing “various bets on short-term price movements in securities. [Day traders] are properly classified as speculators and not investors.”

“The deck is stacked against the day trader and it is stacked in favor of the long-term investor,” says Johnson. “In the long term, investing in the stock market is a positive sum game. That is, in the long term the value of shares, both individually and collectively, generally goes up. On the other hand, in the short term, investing in any asset class It’s a zero-sum game.”

Yu says loss management is important to day trading success. He says that preserving capital is essential to not let small losses turn into big ones.

“If successful, day traders can make a lot of money in a relatively quick period of time,” adds Yu. “You can also work as much as you want. Some traders can make money just by trading the opening and then [taking] the rest of the day off.”

Is day trading right for me?

Only you can determine if day trading is right for you. Of course, you will want to gather as much information and tools as possible that can help you succeed. These may include:

  • A complete education in finance, investments and world markets
  • Access to real-time market news and data and the Electronic Communications Network (ECN), which provides the best stock quotes available at any given time
  • Bond price charts, analysis and other technical data that can help you make informed decisions
  • A brokerage account that will allow you to make the volume of trades you need to achieve your goals
  • Sufficient capital to do the kind of business needed to make a profit

You can start trading with a few hundred dollars, but the returns on trades of that size would be small. Making bigger trades can result in bigger earnings and more profit.

Some other considerations include:

  • How much time can you dedicate to day trading? As Yu stated, researching, monitoring and negotiating activities can be a full-time job. But you can get to a position where you can achieve your goals within hours. It all depends on your situation and the market.
  • What kind of risk are you comfortable taking? If you are a conservative investor, day trading is definitely not for you. A long-term strategy would work best for your goals. If you are comfortable with possible losses and feel that the risk is worth what you could earn in profits, then day trading might be something to look into. Again, it’s all up to you.

the bottom line

Day trading is all about taking advantage of rapid market movements and profiting from buying and selling securities. It can take a lot of time and money to succeed in this endeavor, and anyone considering getting into day trading should do so with caution. This is an area of ​​investment that is subject to extreme gains and losses.

If you want to try day trading, make sure you fully understand the risks you may be taking and the markets you will be navigating, as well as having a plan to manage your capital through good times and bad. Seeking as much information as possible about day trading is also always a good idea.

Leave a Reply

Your email address will not be published.