How To Learn Day Trading

If you want to learn day trading, it will take time and an investment in yourself to master the skills necessary in order to have the greatest chance at becoming successful as a day trader.

Day trading is one of the most active forms of trading compared to other trading styles like swing trading, trend trading and position trading.

Typically, day traders are sitting in front of their computer screens during the trading day watching the price action of a financial instrument (like stocks or etfs) being traded on a chart. They primarily rely on the current day’s business and stock news as well as using technical analysis to analyze price action during the trading day.

Day traders buy and sell positions (or “short” and “cover” their short positions) which may last for only a few seconds to minutes or for several hours during the trading day. However, by the end of the trading day, all positions will be liquidated and completely closed out (being “flat”) in their trading brokerage account.

Because day traders do not hold positions overnight they are not subject to overnight trading risk. Such risk might arise from world or economic events, or industry wide or company specific events which may have a substantial impact on the stock’s price when the markets open up for the following trading session.

How To Get Started In Day Trading

Day traders generally get started in several different ways:

• They may have received a trading education by going to a trading school. Such education can provide learning about many things including how the financial markets work, types of financial instruments to trade, price action behavior, trading strategies, order execution, risk management, trading plans, and how to operate real-time level II trading platforms using direct market access brokers.

• They may have been self-taught and already have in-depth real trading experience and are comfortable and knowledgeable in trading the financial markets on a daily basis.

• They may have worked for a financial institution or a hedge fund and were given training as being a trader conducting day to day trading activities.

Day Trading Styles

• Scalping – extracting profits from very small price movements. Since it’s easier for a stock to move say 5 cents to 10 cents rather than $1 dollar during the trading day, scalpers seek to profit from such smaller price movements by executing this technique over and over again during the trading day. Scalping requires a high level of concentration and discipline – especially to risk management.

• Day Swing Trading – the principals of “regular” swing trading apply here except that price action and charts are analyzed and monitored on shorter time frames. As an example, you may be seeking to profit from a day swing trade with a price movement of say 15 cents to 35 cents with using charts displayed on shorter time frames (such as 30 min, 15 min, 10 min or 5 min).

• Day Trend Trading & Position Trading – the principals of “regular” trend trading and position trading apply here as well. The goal here is to adhere to strong risk management rules while riding trading positions to their fullest extent possible and not worrying about minor pullbacks on strong uptrends or on bullish position outlooks. Because trading positions may be held longer during the trading day, charts may be displayed on somewhat longer time frames (such as daily, 1 hour or 30 min) to get a better sense of the bigger picture as to price action and the direction of trends.

Day Trading Strategies

There are many types of strategies that day traders can use including:

• Breakouts from a trading range or from different types of chart patterns
• Waiting for a pullback on a strong uptrend and entering the trade when the trend resumes again after the pullback
• Trading or fading morning price “Gaps”
• Using technical analysis methods such as moving averages, stochastics, bollinger bands and candlesticks
• Trading on the news of the day (either favorable or unfavorable) that may have a big impact on the price of a stock (or other financial instrument)

Charting Time Frames

Depending on the type of day trading style or strategy that you will be doing, charts can be displayed on many different time frames including – daily, 2 hours, 1 hour, 30 min or 5 min (or something entirely different that works best for you). When switching to different time frames on a chart it will reshape the “landscape” of the price action for a particular financial instrument that you are viewing.

Direct Market Access (DMA) Online Brokers

Day traders generally use specialized online brokers providing direct market access (DMA). Two such popular DMA online brokers in the trading industry are Lightspeed and Sterling Trader Tech. These brokers offer state-of-the-art trading platforms that are powered with real-time level II quotes and offer advanced trading features like:

Day Trading Buying Power

Pattern Day Trader – (Get Up To 4:1 Day Trading Buying Power)

If you are classified as a “Pattern Day Trader” by your online broker, your day trading buying power may go up to 4:1.

For example – if you have a brokerage account with a $35,000 cash balance only, your day trading buying power may go up to $140,000 if you are classified as a “Pattern Day Trader” by your online broker. Again, this is only for day trading buying power.

Note: The “Pattern Day Trader” rule applies only to margin accounts (cash accounts are not bound by the “Pattern Day Trader” rule).

Please check with your broker about their own margin account rules and pattern day trader rules as there can be additional details surrounding these complex topics.

The Financial Industry Regulatory Authority, Inc. (FINRA) has day trading rules in place for being classified as a “Pattern Day Trader.”

According to FINRA –

The term “pattern day trader,” which includes any MARGIN CUSTOMER that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.

Moreover, the weight of the FINRA rule for a “Pattern Day Trader” also states that they “must maintain minimum equity of $25,000 on any day that the customer day trades.”

The minimum equity of $25,000 must be in the “Pattern Day Trader’s” brokerage account before day trading can occur.

If the account balance goes below the $25,000 minimum equity requirement, the “Pattern Day Trader” will not be allowed to day trade until the balance is brought back up to the required minimum amount.

– as an option to overcome the pattern day trading rule, you could join a “prop” trading firm (see below) to day trade and not have to worry about maintaining the required minimum equity of $25,000 in your brokerage account –

Prop Trading – (Get Substantial Day Trading Buying Power)

Day traders can also join a “prop” trading firm (proprietary trading firm) and receive substantial day trading buying power which can range anywhere from approximately $100k to Million’s.

However, to be entitled to trade with the prop firms trading capital, you will usually be required to put up a risk deposit starting from around $2,500 and up. The risk deposit serves to protect the prop trading firm against any losses that may be incurred by the prop trader.

Many prop trading firms offer remote trading so that you can trade on your own time from the comforts of your home or virtually anywhere else in the world.

You will have to share any of your trading profits with the prop trading firm. The profit sharing agreement can vary among prop trading firms but can be as high as 90/10 or 95/05 with the largest portion going to the prop trader.

Prop trading firms can also offer very low trading commissions to the prop trader due to the volume of shares that are being collectively traded.

(To learn more about prop trading from your home click on Remote Prop Trading).