It belongs to the main tasks of investors to operate with their client's money while some of them also invest their own money. With the help of technical analysis and some other tools to optimize the results, these traders execute day trading with the aim to gain the best possible profits by taking advantage of the small differences in the slightly changing prices of solvent stocks.
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How does day trading work?
One of the most important tasks in day trading is to count your trades completely and correctly on every day for you will never lose the overview. You always have to keep the minimal equity level of $25,000 and the exact number of your trades on your mind.
As a day trader you buy and sell a security on every day, e.g. in foreign-exchange market (Forex), in the stock market or in other marketplaces. For this you need excellent skills and knowledge and sufficient funds. An adequate inflow and well-informed, fast trading strategies are just as important if you want to gain profits from the little differences in the changing prices of solvent currencies or stocks.
On Wall Street there is an ongoing discussion about the potential of making profits with day trading and far too often this is misunderstood. In the media you will hear that day trading is the perfect way to get rich quickly and all easily, but this is nothing else but promotion. Yes, there are successful day traders who make a lot of money in spite or even because of the risk. But there are more day traders who lose more and more because they are not well educated and because they don't have enough skills and knowledge to benefit from the right online platforms and tools.
What is a day trade?
Two off-setting transactions in the same kind of underlying are part of every day trade on every day. First, these transactions have to be opened and then they have to be closed – and both of these two steps at the perfect time. These two transactions define every day trade. It doesn't matter in which trading session they are done and there is no difference when it comes to pre- or post-market trades. Here, the universal rule is only the fact that the trades are executed on one day and that no positions are held overnight.
How many day trades can you execute in one week? The pattern day trading rule!
Every brokerage firm has to mark the account of a trader as a so-called Pattern Day Trader (PDT) when it oversteps a certain number of day trades in a short time.
This marking is even done all at once if a trader executes four or even more day trades in a so-called rolling five business day period. The equity on the account is considered for certain limitations.
The request to provide a minimum account equity of $25,000 is not very popular, but only if this request will be fulfilled, the trader will be allowed to go on day trading as often as he wants. If a trader doesn't keep this minimum balance and if he executes four trades or more in this period of time his account will be restricted from day trading.
But if the trader provides the minimum account equity of $25,000, this account may benefit from several advantages, like e.g. a higher leverage due to a better access to the margin. The margin and the leverage belong to the essential trading tools that have to be used in a smart way.
If a day trader uses a loan (margin/day trading buying power), he may end up losing more money than he invested in the beginning.
Which online broker is the best possible choice for beginners?
The most important trade you will ever make is the choice of your broker. There you will deposit all your money. So, it is hard to believe that many traders still don't gather all possible information about their broker before a problem will occur.
For example, problems may occur when a trader has chosen a scam broker. Many of these scam brokers operate from third-world countries, but of course they may be found everywhere. If a trader has sent money to one of these scam brokers, it will be more than difficult or even impossible for him to get his money back – his profits and even his deposit to start with.
Usually, all of these scam brokers are not in the business for too long, and luckily, they are mentioned in forum complaints. That's why it is a good advice first to search for all kinds of information about the broker online before you will sign in.
Slow quotes or a broker trading against you are a more tricky problem. It is highly important that you choose a direct access broker that will send your order directly to the exchange. Every smallest part of one single second may be essential in day trading. That's why your order has to get to the exchange in the very moment when you have placed it. If you won't be satisfied with the service of your broker in this, another one may probably be a better alternative.
The best possible software is just as important. All the same how great your broker may ever be, if the software they provide doesn't meet the highest standards, this broker will be the wrong choice.
Before you will make your final decision, collect all possible information that you can get about a broker before you will send money there. One of the best ways to check a broker out is to use their demo account to find out if it really meets your needs and to test their customer service. This will help you for sure to get a useful personal impression. On this website you will find some additional advice about how to check up your potential broker before you may make the wrong choice and some top broker reviews.
When you have signed up, your broker will execute your trades and you will have to pay a certain fee or commission for this. Every day trader is looking for the lowest possible fees for too high costs won't ruin his profits and make all his efforts useless. However, please, keep in mind that the broker with the lowest charges is not automatically the very best.
A high quality support being there for you whenever you need it is also highly important. If a broker's service is great enough to help you to save a lot of money when you deal with a computer meltdown and when you can't close your trades at the right time will surely be worth it to pay a few cents more for this service.
How do you start with day trading?
How do you learn how to day trade?
It is not necessary to invest a lot in an expensive kind of education. Only for job interviews in finance it is often useful to have the right degree from a university with a good reputation, but you don't need any certificate from an Ivy League school when you want to start with day trading. In fact, there are no formal requirements at all, but of course it may be useful to take courses in technical analysis and to improve your skills in computerized trading before you start seriously. Just like in everything, it helps a lot if you know exactly what you are doing.
At least, you should study all information that you can find online before you step seriously into this business.
The importance of knowing your order types
All day traders' profits and losses depend on the orders they make. Without paying attention to the prices, it is essential that you know your order types for you will be able to get in and out at a set price (for limit orders) and to handle in and out in a hurry (for market orders). For going long and short, you also need an at least basic knowledge of how to execute stop loss orders and profit targets while you should be well familiar with placing orders automatically.
Without the best possible knowledge about your order types you will lose a lot of money due to slow and stupid decisions. You should also be sure that it will never happen that by mistake you will send out the wrong order. If you may ever do this by accident, it will be in the market and you will start paying for this immediately. In this case you will get angry with yourself and you will be stressed while you try to get out of the wrong trade and to place the right one.
Watching your loss with the trade you placed by mistake will even lead to panic and in the worst scenario, you may end up placing the wrong order once again instead of getting out of it. This way you will lose more and more. If you act under stress or even in panic, things may get out of your control all at once. So, you see, you should better know your order types exactly.
Money Management is the key
It is also a common mistake that beginners in the business use to make when they start with an incomplete risk management strategy or even with no risk management at all. Far too often, new traders tend to being too self-assured regarding their personal skills and too optimistic while they forget taking the most important risk management steps. For an, at least, basic risk management strategy, two essential steps are needed.
You have to be sure to control your risk with every single trade you make. This is only possible if you place a stop loss on every trade. It is a useful rule for beginners to make sure that your risk on every trade should never be higher than one percent of your account balance. You better pay attention to the difference between your entry price and the stop loss price. When you multiply this number by your position size, like e.g. the number of Forex lots, shares or futures contracts, the result will show you the risk we are talking about.
In any case, it helps a lot to control your risk on every trade, but it is just as important that you know exactly what you are doing. If not, also a perfect risk of only one percent for every trade will not save you from big losses. If you execute many trades on every day and if you lose the biggest part of them, all suddenly you may be down ten percent or even more. That's why it is highly important to define your personal stop loss limit for every single day. If you trade this way, you will be able to compensate a day of losses with a day of good profits.
What is a trading strategy?
Professional day traders use to test every trading strategy under different conditions on the market to find the strategy's advantages and disadvantages before they may use it in their real trades. For this they use historical price charts and demo trading while the historical charts may even be the better way to see how this strategy worked under different conditions.
So, before using a certain strategy, you have to find out in which cases it may be helpful to use it and in which cases you better avoid using it before you will risk your real money. Watch the market more than well by using chart patterns for you will be able to tell how your strategy may perform under certain conditions. Before using a strategy for a first real trade, you have to be sure if it will really be helpful for this certain trade.
So, you better don't rush. The market will not disappear. It will surely be worth it to do some research, to test all possibilities and to improve your knowledge and skills before you will risk your money. All kinds of experiments will lead to serious losses. Whatever you want to do, get well informed first!
Which one is the best indicator for technical analysis?
To become a successful trader, it is not enough to be familiar with all kinds of stocks and to have a good basic knowledge. In addition to this, you have to know all helpful tools to understand price movements and chart patterns and you have to learn all about technical analysis. Some examples for essential indicators are volatility, resistance and support levels, price oscillators, the moving average convergence/divergence (MACD), CCI, daily volume and the Bollinger Bands®.
And you will still only have gained the minimum of the essential knowledge you need to be able to find your own trading style when you will have learned well how to use these indicators. There are countless numbers of books about this business and just as many online or real classes. Make the most out of all these offers!
Which kinds of day trading tools and services should you focus on first?
On our website you will find many test reports of high quality that investigate all important details of the products and services being checked. There, we will not only mention the advantages, but we will also talk about the significant disadvantages. In our opinion, it is absolutely essential to choose one of the leaders in the market when you are searching for the best possible trading tools, trading educators or online broker.
Compared with the smaller competitors, these well-known and experienced providers may offer you the most extensive support. In addition to this, they know all about the legal regulations of large and sometimes even of listed companies to protect their customers' money much better than offshore providers ever could. In 2017, the following providers really impressed us when we checked them out and so, now they are on top of our list:
My personal summary about day trading
There are estimates claiming that only about 10% of all day traders are truly successful while the remaining 90% have to deal with losses. If you consider this, you may ask yourself how somebody may still expect to make money in this business. But professional education, advanced skills, a permanent discipline and self-control, a detailed, well informed research and the ability to learn from mistakes of the past to lose less in the future may really make a big difference.
In day trading you have to be able to ignore your emotions and to make your decisions even faster than in seconds. And all of your decisions have to be based on all kinds of information that you could get while all this information is never complete and while it may always change just as fast as you have to act. Well, of course it is easy to tell you this and it is much harder really to get all this done.
It is just as important and not easy at all not to place too many trades on every day to be successful and not to over-trade ending up paying far too much commissions. But if you use all possible efforts to get the most important knowledge and if you are realistic regarding your goals, day trading may bring you profits and it may even be fun.
It is a good start to choose a market that you are interested in and that doesn't exceed your budget. At the same time you need the essential software and equipment. Limit your time of trading to a certain, chosen time of the day during the openings and closings of the market and never trade at another time! Check and manage your risk for every trade on every day!
Exercise with different kinds of strategies as much and as often as you ever can before you start investing for real! It isn't necessary to know absolutely everything about day trading to be successful, but you have to find the one strategy that fits you best and that helps you to gain profits. Hold on to this strategy and make money with it before you start trying to learn others!
Be fully concentrated when you trade and reflect every week! It may be helpful to take screenshots of the trades you made as they will be your personal historic record. This will show you the results of your decisions under realistic conditions and this will help you much better to review your activities in a critical way than even the best written trading journal ever could.
Find the best possible online broker and the best possible tools and educators! Take things slowly, be careful and start with a demo account! For as long as you will lose money with your demo account, you would surely not gain any profits by using real money. So, do your homework first! The market will always be there and you should only enter it at the right time when you will have started to place successful trades with virtual money.
However, even at this time it will still be better to start with small amounts to risk. There is a balance between the chances to gain money and the risk to lose money with day trading. Every way of trading is connected with risks. Make always sure only to risk the money you can afford to lose!
And never forget that day trading is no gambling! As soon as you start viewing and handling it like a casino game, you will lose much and fast. Day trading is hard work and a serious job. Only a few private investors are able to earn their living with day trading and it will take a lot of time until you may ever reach this.
It is also important to focus on your personal attitude. A positive mental attitude is needed for being successful in this business. It is all up to you! Never blame others if you won't be successful! Day traders are self-employed and fully responsible for everything they do. Be happy and celebrate when you gain profits and learn from your mistakes and go on studying if you fail! Take always one step at a time and be patient if some day you really want to belong to the 10% of day traders who are making money!
Day Trading - Advantages and Disadvantages
- There is a realistic chance to gain considerable profits: In any case, the opportunity to reach great profits belongs to the temptations of day trading. However, only a few outstanding traders have the complete personal competence to be as successful as everybody in this business wishes to be. For example, this requires a high potential of discipline, determination and thoroughness.
- Many people prefer being self-employed: Most of the day traders work completely on their own terms and without any need to deal with the atmosphere of big companies and their hierarchies. They are free to decide when they want to work and when they need some time off. They only have to ask themselves when it comes to decisions and they don't have to ask any boss before taking the steps they want to take.
- They will never be bored: Many of the professional day traders enjoy the excitement of challenging their own intellect and intuition in the competition with other traders in the market on every day. Most of the traders will never confess this, but if they are completely honest, deep inside they are addicted to the speed that successful trading requires and to the daily dose of adrenaline in this job. They surely prefer this and they are tired of selling products they don't even like or of doing a monotone office job on every single day.
- Being their own boss brings a lot of financial benefits: For example, self-employed people have the possibility to apply many more expenses in their tax report than employees may ever dream of.
- There is a permanent risk of losing money: The U.S. Securities and Exchange Commission has published a report called "Day Trading: Your Dollars at Risk". In this, every trader can find the statement that most of the professional traders have to face serious losses in the beginning while many of them never reach the point to gain significant profits. In addition to this, the SEC warns day traders, giving them the advice only to risk the amount of money that won't hurt them too bad in the case of a possible loss. In spite of all this, unfortunately, there are still too many day traders who take a loan from their family or others or who execute margined trades and who end up losing money they never really had. These cases lead to a sudden end of their career as professional day traders or they even puts them in significant personal debts.
- The costs to start in this business and the continual costs are high: Especially in the beginning, day traders have to try to survive in the hard competition with professional traders or hedge funds with much more experience who are often able to invest millions to their advantage. To gain the urgently needed knowledge and experience to compete, beginners have to pay a lot for highly advanced and fast computers, for a subscription to the best possible trading platform, for helpful software and tools and for many other essential things. Afterwards the costs for commissions, live price quotes and other indispensable tools will have to be paid continuously – and they will even rise with the number of executed trades.
- Being self-employed: Yes, the advantages of this have been mentioned above, but it would be a big mistake to ignore the disadvantages that go along with them. Every day trader who decides becoming his own boss has to give up the safety of a permanent job and a reliable paycheck in every month. When he starts being self-employed, every day trader only depends on himself and he is fully responsible for making the money he needs for paying his bills and for being able to finance the lifestyle he is used to or he wants to reach. And this is never secured.
- A lot of stress and a possible burnout: Day trading is a hectic and tiring business as the traders have to watch several screens at the same time and to act more than fast on every day if they want to be successful in this business. People who have to deal with so much stress and who need to be completely concentrated all the time often tend to ending up with a burnout.
Buying and selling of stocks and other kinds of investments
It is the daily business of day traders to buy and to sell stocks and other kinds of investments. The result of the daily efforts will only be clear in the end of each day. Only in the case of swing trades certain positions may be held overnight or even for a few days.
Every day trader depends on a fast internet connection and a professional trading platform supplying him with the necessary software. Of course there is also the opportunity to create a trading platform on your own, but this needs a lot of advanced skills and efforts and so, the majority of traders prefer using the offers of specialized companies or brokerages. Beside this, a competitive, fast computer with a minimum of two screens or even better with more screens than just two is essential in this business. Day trading is impossible when you are not able to watch all necessary technical indicators and charts at the same time to make well-informed decisions about buying or selling.
It is also highly important to make the best possible choice regarding the trading platform you will use. Make sure that it provides you with all kinds of real-time data and news that you need to create helpful charts and time frames to elaborate the optimal trading strategies for yourself.