Become a Successful Day Trader
Despite the ominous admonitions by the Securities and Exchange Commission cautioning investors against the controversial yet potentially well-paying business of day trading, people continue to try and acquire day trading skills, and a day trading stock tip is literally worth it’s weight in either gold, or dross! Below is some information on learning trading techniques, the risk involved, and strategies for becoming a proficient trader.
Just what is day trading and how do people acquire day trading skill? Day trading is the system of rapidly buying and selling stock throughout the day to profit from the tiny changes in the market for that particular day. If possible, day trading strategies allow investors to reap profits from the fractional increases in the market.
Day traders watch a particular set of indicators when determining whether a stock is suitable for day trading. First, the stock must have high liquidity. This means that the stock in question has lots of buyers and sellers. The liquidity allows day traders to quickly purchase and then sell stock. Liquidity is based on the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Many stocks on the NYSE and NASDAQ have a high degree of liquidity.
A day trader also studies volume individually, in addition to using it as measure for liquidity. To be a candidate for day trading, a stock must trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more enable the day trader to buy or sell a large amount of stock without greatly changing the price of the stock. Volatility is another issue in appraising a stock for day trading. The word refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders study the pattern and volatility of stocks over an individual day. Stocks that change price frequently over one trading day are perfect contenders for day trading. A fluctuation of at least $2.00 per day is recommended.
Finally, a day trader looks at the price transparency of stock. This term pertains to the ability to gather information on the order flow of a stock. Also called market depth, price transparency helps the day trader determine just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who arrange to access the NASDAQ level II quote screens can evaluate the performance of a stock and determine its swing in price.
While these trading practices are completely legal and totally ethical, they are very risky. Day traders generally buy on borrowed money with the hope that they will obtain higher profits through their acquisitions and sales. People who are deemed “pattern day traders” by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops a great deal, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the corresponding risks.
The first few months, a large majority of day traders endure massive financial losses and only a few make it through to become profit-making day traders. For this reason, day traders should only invest funds that they can afford to lose. They should never invest money set aside for necessities like living expenses or education funds.
Keep in mind that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme dangers of prices changing to the detriment of the trader. Day traders do not invest, rather, they theorize on the movement in price of a stock throughout the day.
There are numerous websites whose sole purpose is to make their living from those who are trying to find a day trading stock tip. These websites offer speedy results and offer hot tips to their members for a fee. The sources are most often paid to make these recommendations and should be avoided. Get the advice of a proven professional, and take plenty of time to learn trading strategies for longer term success. Remember, there is no quick money, and day trading skill is often paid for with enormous stress and cataclysmic losses.