Day trading is the fast-paced buying and selling of stock throughout a one-day period of time. The rush of predicting the market can be exhilarating, and profits may be made over a short period of time. However, losses can be steep if you are not familiar with some of the formal and informal rules of the game.
Don't Use Borrowed Money
It's common to use margins to buy and sell a high volume of stock. A margin is the amount of money that you borrow from the brokerage house to perform your stock transactions. The U.S. Securities and Exchange Commission has rules that apply to regular day traders, who are defined as trading at least four times in five business days that represents a minimum of 6 percent of total stock activity. You must keep at least $25,000 in your trading account and can use up to four times that amount. If you fall short, then the brokerage lets you borrow the difference through a margin call. Unfortunately, if you do not make a profit day trading, you can lose your own money as well as that which you borrowed. This debt can be significant, so a good rule is to make sure you have enough personal funds to support your day trades.
Do Your Research
Being a day trader requires you to have knowledge about the stocks that you are buying and selling. Your profits depend on how well you predict if a stock will increase or decrease in value. Buying when security values rise can be profitable if the climb is significant by the end of the day. You also may be interested in falling stocks if the values have a potential of increasing that day. Therefore, researching the companies and knowing why the stocks are fluctuating is vital. Seek independent third-party analysis to make your choices. Also, research the track record of the brokerage house you intend to use.
Know Your Strategy
Having a strategy for how to approach the day market will help you realize profits. Don't buy as soon as the market opens. Wait during the first hour and analyze trades that occurred early where you may profit, such as the mass dumping of stock that may rise that day. Stick to your limits, such as not spending more than you have allotted. Also, know when to sell stock and exit a dying security. If the company fails completely, you will be left with nothing. In addition, if a stock has increased in value, sell it to make a profit, instead of waiting until the end of the day for higher increases, especially if you are a new trader.
Use Reliable Equipment
You may not think twice about the computer and Internet service you use to perform your day trading transactions. However, your trades are as good as the reliability of your equipment. If you are using an Internet-accessible cell phone or other electronic device, make sure that you have a strong signal before commencing a trade. Sometimes the time it takes to load a buy or sell order can make a difference if the stock price changes while you wait. If you want to capture the trade right away, your orders must post immediately.
- U.S. Securities and Exchange Commission: Day Trading: Your Dollars at Risk
- U.S. Securities and Exchange Commission: Margin Rules for Day Trading
- FINRA: Day Trading Margin Requirements -- Know the Rules
- MSN Money: 10 Rules For Rookie Traders
- U.S. Securities and Exchange Commission: Tips for Online Investing
- Comstock Images/Comstock/Getty Images