How Day Traders Make Money
The Ins and Outs of Day Trading Stocks
Successful day trading is a difficult, but rewarding, financial career. If you can make it work for you, you’ll never have to punch a time clock again.
Day traders are different from investors. Investors buy and hold stocks in their portfolio for months or years at a time. Day traders make money when they buy and sell stocks and other financial instruments within the same day, and sometimes even within the same minute. Day trading is a relatively new financial opportunity. It became possible with the advent of discounted commission rates, online trading sites, and higher level online trading screens and tools. Many day traders work for banks, investment funds and hedge funds. Day traders can also be entrepreneurs working for themselves with their own money. It is the ideal work-at-home business.
There are lots of financial instruments for the day trader to use. Some of the more commonly day-traded financial instruments are stocks, stock options, exchange traded funds, currencies, and futures contracts such as equity index futures, interest rate futures, and commodity futures
Day traders are required to make money decisions quickly in the heat of battle. They study price charts to learn how stocks and, more importantly, stock buyers behave. They learn to manage risk, by never going “all-in” on a trade, so that they can stay in business. They learn to persevere after disappointment and failure. They control their emotions, work logically and stay cool under stress. With study and experience, day traders develop the savy and cool-headed confidence that brings home the bucks.
The Level II Day Trading Account
You’ll open an account with a direct-access broker and work with a NASDAQ Level II screen. Level II helps the day trader make money because it provides you with the prices to buy and sell all actively traded stocks on all exchanges. This information allows you to execute your own stock orders, rather than wait for a broker to fill your order. Your Level II order is confirmed instantly. For example, if you are interested in Microsoft, MSFT, the Level II screen displays all the prices available for buying and selling MSFT shares, in order by best available. You can also see the real time ticker of order executions, with volume and price. The Level II quote system is a moving screen that is constantly being updated. The advantages of Level II include streaming price quotes, customizable charts, scans, ticker tapes and up-to-the-minute news. As a Day Trader, you’ll want to access this information instantly.
How Much Money Does a Day Trader Need?
An active trader is someone who makes more than four round trips during the space of five trading days. The Securities Exchange Commission, SEC, requires active traders to maintain $25,000 minimum account balance at all times. A round trip is a buy trade and a sell trade of the same stock or other security.
How Day Traders Make Money with a Margin Account
Day traders make more money when they trade on margin.Trading on margin is trading with borrowed money. When you open a Margin Account at your broker, the account will be extended a credit limit equal to the amount of your cash deposit. This is called a 50% margin. No interest is charged until you actually use the money. Your own $25,000 cash, plus $25,000 margin, will allow you to make trades up to $50,000. Using borrowed money, the day trader leverages his own funds. Trading on margin accelerates the size of your trading gains and your losses. Since the interest on borrowed money is usually computed overnight, traders will save costs by closing out a margin position at the end of the day, instead of holding it overnight.
Who Are the Online Brokers?
A few of the popular online brokers are A.B. Watley Direct, Charles Schwb & Co., E*Trade Financial, Fidelity, Interactive Brokers, Scottrade, Terra Nova Trading and TD Ameritrade. If you use your standard online broker, you must subscribe for downloaded software to use as a technical and data analysis tool.
Who Are Direct-Access Brokers?
Direct-access brokers ofer high-quality trading software which allows you to open dozens of windows on one page, customizable charts and a menu of chart indicators. You are able to choose how to route your order, set alarms for price changes, ticker tapes, market minders, market internals and market news items. You simply click on a buy or sell button on the order entry screen to see your order displayed or filled in a split-second. The popular Level II trading software platforms are RealTick, TradeStation Securities, eSignal, CyberTrader and MetaStock. The most important feature for a day trader is instantaneous trade execution. Level I quotes are delayed by as much as 15 minutes, which will defeat the whole strategy of day trading.
Paper trading is a simulated trading process that lets you practice trading without using real money. With paper trading you can practice trading and test new strategies before you make a financial commitment. Your broker may offer a paper trading software. Some brokers offer demo accounts for a brief period of paper trading. Of course, paper trading can also be carried out simply by recording the value of your pretend trades on paper.
A Few Guidelines for Stock Day Traders
Trade only with money you can afford to lose
. Don’t trade with money that, if lost, will create hardships for your family. Novice traders lose money. Just as in any field of endeavor, it takes time to learn the ropes. Resolve never to lose more than 2% of your money on a single trade. This will give you a guideline for managing risk, and keep you trading while you get a firm foundation in the business.
Set realistic goals
. Do not expect to pull down $1000 a day on your $25000 account. A gain of 4% daily means that your money doubles every 5 weeks, and would result in a yearly gain of 1000%, clearly an unreachable target for even top-tier traders. A typical goal is to make precision entry and exit trades and raise your percentage of winning trades.
Set a mental stop loss for yourself
. Resolve that if you lose more than 5% of your money in one day, you will stop trading the rest of the day and re-examine your strategies.
Learn about the newer financial instruments
. ETFs represent a basket of stocks, similar to mutual funds. However, ETFs are traded on the markets as easily as shares of stock. Trading ETFs provides the opportunity to focus on industry groups like banks or semiconductors, on stock indexes like the Dow, NASDAQ or S&P 500, and on individual countries like Japan or Brazil.
Learn about the mini stock index futures, such as the mini-sized Dow, E-mini S&P 500, E-mini NASDAQ 100 and E-mini Russell 2000.
Day Trading Strategies to Make Money
There are many trading styles used by day traders to make money. A day trader is not necessarily very active. Depending on one's trading strategy, the number of trades made in a day may vary from one to dozens or more.
Whether you trade commodities, options, industry indexes or individual stocks, prices tend to move in cycles. Traders watch for an uptrend and buy when they find an established uptrend. As the cycle reaches its peak, new money is not moving into the security and its price pulls back. The alert trader will sell before the uptrend is finished. The movement of prices is determined by the supply of the security and the demand to own it. Price movement can be driven by news items, economic news, expectations of change, or the latest earnings report. The trend is your friend.
Trading charts often show areas of support and resistence. An area of support is a price floor, which is the lowest price before an uptrend. If a chart shows several cycles when prices remain above the support level, traders expect the support to remain in effect. An area of resistence is a price ceiling, which is the highest price before a downtrend. If a chart shows several cycles when prices remain below the resistence, traders expect the resistence to remain, and expect the price to approach the resistence and then decline.
Some day traders, called scalpers, focus on very short-term trading, in which a trade may last seconds to a few minutes. They make money when they buy and sell many times in a day, trading very high volumes. Other day traders focus only on momentum or trends. They are more patient and wait for a ride on the strong move which may occur on that day. They make far fewer trades than the scalpers and hold their trades for minutes or hours.
Many day traders sell their positions before the market close of the trading day to avoid the risk of price gaps, when the market opens the next day at a price different from previous close. They consider this to be a golden rule of day trading.
Traders conventionally believe that lunchtime is the worst time to trade. Between 11:30 and 1:30, stock prices may stay flat or become erratic and unpredictable.
Traders rely heavily on up-to-date information. CNBC television network, CNN, and Bloomberg television provide continuous stock market coverage. The website briefing.com is a source of breaking business and financial news.
Stock Charts for Day Trading
Day traders rely on bar charts and candlestick charts to keep track of the daily price range of a security. A daily bar chart shows the open price, closing price, the high price and the low price of the day. The candlestick chart is similar to a bar chart, but is shows the space between the open and close as a rectangle, colored green for a gain or red for a loss. The theory of candlestick charts is the technique of recognizing patterns that may predict the future price of the stock. Traders who rely on candlestick charts look for a variety of patterns, like the hammer, hanging man, the dark cloud cover, the bullish piercing, the doji, the morning star and the evening star.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam