Table of Contents Show
This article gives you everything you need to know about day trading: from basics to how to get started.
What is day trading?
Day trading is a strategy that attempts to take advantage of price changes in a single day. Traders will open and close their positions before the market closes, hoping to make a profit from the fluctuations in the day. This prevents them from having to pay interest on the margin used, as well as the risk of holding market positions overnight.
Other trading techniques that may be mentioned include scalping, swing trading, and long-term investing. Scalping is a kind of trading where trades are undertaken in a matter of seconds or minutes. Swing trading is a style that holds market positions for days, weeks, or even months. Investments that are kept for more than a year are usually referred to as long-term investing.
Day trading strategies
Mean reversion strategies
This type of trading strategy seeks to exploit the concept that after an abnormal price move, costs have a tendency to come back to their normal levels. Bollinger Bands is an indicator that is used in a mean reversion trading approach to help identify these points of reversion.
Trend trading
This type of trading strategy seeks to capitalize on an asset’s momentum in the direction of a persistent trend. A popular example of a trend trading strategy is a breakout approach, wherein a trader seeks out price points at which the asset breaches a technical level either higher or lower, and then follows the trend in that direction.
Gap trading
A gap is a sudden jump in the price of a financial asset without any trades in between. It usually happens outside regular trading hours. A common strategy for trading gaps is to take note of a stock that has gapped up or down, observe the range of prices in the first hour of trading, and then buy when the price is above the top of the range or sell when the price is below the bottom of the range.
News trading
An example of a news trading strategy is evaluating the results of economic data and comparing it to what analysts predicted, then utilizing that analysis to make a trading decision.
Rules of day trading
In the United States, a Pattern Day Trader (PDT) is a trader who carries out four or more day trades over five business days in a margin account. According to FINRA rules, these traders must maintain a minimum balance of $25,000 in their accounts.
This regulation applies to trades in stocks and equity options. However, day traders in the futures market are not bound by the same requirement and do not need to meet the $25,000 margin account balance.
Tools of day trading
News feed
Day traders keep abreast of the latest market developments by subscribing to news outlets such as Bloomberg, Reuters, and CNBC. These sources provide them with crucial information, including earnings reports, economic data, and significant international events.
Hot keys
Hot keys are an essential resource for day traders as it gives them the ability to trade quickly using a single keystroke. Preconfigured order attributes such as size, type, and direct access routing can be set up. Additionally, hot keys can be programmed to do handy functions like ‘cancel all open orders’, which is particularly useful in the event of a sudden market surprise due to a breaking news story.
Charting
Day traders generally rely on technical indicators, including moving averages and oscillators, as well as drawing tools such as trendlines and Fibonacci retracement levels. Usually, charts of lower time frames, such as the 5-minute or 15-minute chart, are employed. Japanese Candlestick charts, which communicate a great deal of market sentiment, are widely used by experienced traders.
Level II quotes
Level II quotes are a critical resource for day traders of stocks. The order book for Nasdaq stocks, known as Level II, gives a more comprehensive view than the bid and ask prices alone. It exposes the number of shares that various market makers, ECNs (electronic communication networks), and other players are looking to purchase or sell at each price level.
This provides a ‘market depth’ that helps traders understand the amount of demand or supply at different prices and gain insight into the activities of big institutional traders.
Direct market access
Traders who utilize direct market access can send their orders directly to certain trading exchanges, such as Nasdaq, ARCA, and BATS, leading to faster order execution. This is ideal for day traders, though it typically involves commissions, which can be offset by rebates.
In the United States, there are a few brokers catering specifically to day traders, such as Lightspeed Trading and Cobra Trading, who provide direct market access. Additionally, some of the more prominent retail trading platforms, such as Interactive Brokers, offer direct market access as well.
Hardware
Speed is essential in the high-paced financial markets, so it’s crucial for day traders to operate with minimal interruptions. To achieve this, there are some core elements of a day trader’s computer rig:
- Processor Speed: The Central Processing Unit (CPU) is the core of a computer’s speed. Trading software is highly resource-intensive so it’s important to have a processor that is up to the task. A 2.8 GHz quad-core processor is recommended as the minimum.
- Memory: RAM (Random Access Memory) is used by applications to store and access data on a short-term basis and has a significant effect on performance. 16 GB of RAM is a good starting point for day traders.
- Multiple Monitors: To get the most out of their computer, traders should have multiple monitors. This allows them to take in the most data at a glance and rely on minimal clicks and keystrokes.
- Multi-monitor graphics cards: help traders create an optimal screen setup.
- Extra Security: In addition to antivirus software, having a battery backup and surge protector is recommended for serious day traders.
