Day Trading

Some of the more commonly day-traded financial instruments are stocks, stock options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures.

Day trading used to be the preserve of financial firms and professional investors and speculators. Many day traders are bank or investment firms employees working as specialists in equity investment and fund management. However, day trading has become increasingly popular among casual traders due to advances in technology, changes in legislation, and the popularity of the Internet.

Trade Frequency

Although collectively called day trading, there are many sub-trading styles within day trading. A day trader is not necessarily very active. Depending on one's trading strategy, the number of trades made in a day may vary from a few to hundreds.

Some day traders focus on very short or short-term trading, in which a trade may last seconds to a few minutes. They buy and sell many times in a day, trading very high volumes daily and therefore receiving big discounts from the brokerage.

Some day traders focus only on momentum or trends. They are more patient and wait for a ride on the strong move which may occur on that day. They make far fewer trades than the aforementioned traders.

Overnight Position

Traditionally it is suggested day traders should always settle their positions before the market close of the trading day to avoid the risk of price gaps (differences between the previous day's close and the next day's open price) at the open. Some day traders consider this to be a golden rule to be obeyed at all times. Some day traders, however, believe they should let the profits run, so it is acceptable to stay with a position after the market closes.

Day traders often borrow money to trade. Since margin interests are typically only charged on overnight balances, the extra costs discourage them from holding positions overnight.

Profit and Risks

Because of the nature of financial leverage and the rapid returns that are possible, day trading can be extremely profitable, and high-risk profile traders can generate huge percentage returns. Some day traders manage to earn millions per year solely by day trading.

Because of the high profits (and losses) that day trading makes possible, these traders are sometimes portrayed as "bandits" or "gamblers" by other investors. Some individuals, however, make a consistent living day trading.

Nevertheless day trading can become very risky, especially if one has poor discipline, risk or money management. The common use of buying on margin (using borrowed funds) amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, brokers usually allow bigger margins for daytraders. Where overnight margins required to hold a stock position are normally 50% of the stock's value, many brokers allow pattern day trader accounts to use levels as low as 25% for intraday purchases. This means a day trader with the legal minimum $25,000 in his account can buy $100,000 worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his original investment, or even larger than his total assets.

Even when a position has made a profit, the trader has to offset the transaction costs and the interest on the margin. It is commonly stated that 80-90% of day traders lose money. An analysis of the Taiwanese stock market suggests that "less than 20% of day traders earn profits net of transaction costs".

Day trading is considered a risky trading style, and regulations require brokerage firms to ask whether the clients understand the risks of day trading and whether they have prior trading experience before entering the market.

Some strategies you can research are:

Trend Following
Scalping
Momentum Trading
Range Trading
News Trading (buying/selling on news or anticipation thereof)

All but news trading involve some form of Technical Analysis which I would advise you to read about as well.

I would also recommend you start looking into an ECN (electronic communication network) to use as your primary trading platform.

Wiki has a lot of information you can use, but I would always recommend reading independently and doing research online. Some authors you can look up are Alexander Elder, Michael Covel, Curtis Faith and John Murphy to name a few.

My recommendation… get a full-time job… save some money in diversified mutual funds and retire early.

Good luck!

The books recommended by others here are great. It's hard to advise you further not knowing how much you do/don't know about the market. The paper trading practice sites are an essential. Try those out in earnest and you'll save yourself from unnecessary mistakes later when errors cost real money.

I find that it's important to do a few things:

1. Chart the S&P for uptrends and downtrends - when you see an established trend the market will tend to move that way, and stay within the down slope and up slope "channel" in its daily activity for multiple days. This gives you added confidence as to when to "buy", when to "add to" your position, and when to cash out. When a stock busts out up or down that can be the opportunity to get in or out (depending on direction) of a given index, ETF, or stock. This will also help you stabilize your stock monitoring because you will focus on the stocks at present which are near "support (floor)" or ceiling (resistance)" positions. To help me do this, I've found it is incredibly valuable to have a second computer screen (I use two PCs because I'm mobile when I want to be) with several key screens of data/chart references.

One screen has no more than 6 stocks I'm watching that day, with charts on each screen.

One screen has all major sectors' charts on it - by sector fund (USO, OIH, etc.)

One screen has 52 week uptrending stocks I'm monitoring for pullbacks

Other screens are categoric (e.g., AG companies)

2. Using other resources such as the 52 week high stocks (WSJ, YahooFinance, Google Finance, etc.), and Top 100 (IBD.com) are also opportunities to check for trends, and determine whether to jump on this momentum during a given day, or to wait for a pullback and get in before a multi-day upswing for a multi-day "swing" trade. If you put in the time, you will identify pending breakouts.

3. Listen to Fast Money to pick up on hot trends and expert interviews that can indicate stocks to watch since they have such a wide audience.

4. Keep track of volume levels and beware of low volume days.

5. Track sector movement and rotations. Institutional buyers will dictate what will move, whether it "makes sense" to you or not.

6. Listen to Art Cashen (sp?) - every morning about 9:15 AM EST before the market opens. His insights are usually good indicators to align with or watch for. Good pulse on the market.

7. Know that a margin account can be traded every day with no interest if you don't carry it over night. Non-margin accounts will have a 3 day carry cycle until you can reinvest the funds.

Best wishes for success. Cramer can be a goof on some topics, but knowing what he's tracking can also give you one or two key stocks to watch for the next day if conditions align to support those stocks. His trading rules lists are very good.

The damage they do is to their own accounts, plus they add a small amount of noise to the market pricing structure, but they don't do any significant harm that I can think of.

Just because I think long term is years, and daytraders think long term is overnight, doesn't mean they don't have a right to trade that way. Their brokerage fees subsidize mine, for one thing, and lemming-like momentum moves by daytraders sometimes provide opportunities for long-term value investors to step in.