Day traders buy and sell stocks during the same trading day with the goal of turning a profit on each transaction. To become a day trader, you need trading capital and access to real-time stock market updates. However, whether you are able to profit from your trades depends largely on the types of stocks you choose.
1. Examine each potential stock’s volatility. A stock’s volatility represents its probable degree of daily price changes. For example, stocks with high volatility have the potential for the greatest profits; however, they also carry the greatest risks. On the other hand, stocks with low volatility typically require less risk, as their prices remain steadier than more volatile stocks. Choose a stock that represents a volatility risk level you are comfortable with.
2. Select stocks with high volume to ensure liquidity. Volume represents the number of times investors buy and sell a stock’s shares during a trading session. Because successful day trading relies on your ability to sell your stock quickly, choosing a low volume stock could hinder your ability to flip a stock.
3. Analyze each stock’s trading patterns for possible daily entry and exit points. Choose stocks that hold to price patterns, in which they reach their highs or lows surrounding particular events, such as time of day or upon release of quarterly earnings report.
- You can long trade or short trade your stocks, or use any combination of both. Long trades represent stock trades in which you make a purchase with an intent to sell for a profit. Short trading a stock, on the other hand, involves profiting from a decline in the stock's performance. Traders with the greatest amount of capital have the potential of profiting most from day trading, as even the smallest stock price fluctuations can mean significant gains for stock holders with large share quantities.
- The Securities and Exchange Commission regulates day trading for investors with less than $25,000 in an active trade account. If you have less than this amount in your trade account, the SEC prevents you from participating in pattern trading, which it defines as more than four day stock trades in any five-day period. If you violate these rules, the SEC may freeze your trade account for 90 days unless you deposit the required $25,000 in your trade account.
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