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Introduction to Day Trading

Day trading is the practice of buying and then selling a stock all within a single day of market activity. Day traders dabble in a number of different financial instruments, such as stocks, currencies, stock options, and futures contracts such as interest rate futures, equity index futures, and commodities futures.

It is not uncommon for a day trader to execute hundreds of trades in a single day, whereas others might only make a few trades. Some look for swings in prices that may last a few seconds or a few minutes. Such a trader literally will buy a stock and then sell it within a few minutes, or sometimes within 30 seconds or less. Others look for changes in momentum and will hop in at the beginning of an upswing and then ride it out until the upswing is over. This is known as momentum trading. Another strategy that day traders often employ is called position trading, where they look for a stock that is likely to experience a significant increase in price over a period of a few days or even a few months. They hold their position until the price plateaus, and then they dump it.

Most average day traders look at the resistance and support levels for the price of a given stock. When a stock has reached its historical maximum, it is said to have reached its normal resistance level, meaning it probably will not go up much more. When the stock has reached its historical minimum, it is said to have reached its support level, meaning it will probably not go down much further. However, new resistance and support levels are established all the time, so it is not always smart to rely on historical price levels to gauge future price movements.

Most traders look at websites like MarketWire for the latest breaking news developments to make their investment decisions. If a company has just put out a favorable press release, the price of the stock will likely go up in the short-term, so it is smart to buy some stock as soon as the story is released, and then sell it when the buying frenzy starts to lose its momentum.

One of the most common practices utilized by day traders is known as buying on margin. When you buy a stock on margin, you are basically borrowing money in order to buy stock, and of course the money that you borrow has to be paid back at a certain time. Most brokerages usually require that you have a certain minimum amount in your account in order to borrow. Some financial institutions require that you have an account balance equal to 25% of the amount you are going to trade on margin, and some require 50% of the amount borrowed. And usually, the trader is required to exit a certain percentage of the positions they have in various stocks by the close of business on the day when the trades were initially executed. Buying on margin is extremely risky, because the money you lose on trades is still owed the lender. Margin orders are not recommended for inexperienced investors.

Another popular trading strategy is called short selling. This is where the trader borrows a stock from a financial institution and then sells it, hoping that the price will go down in the near future so that the trader can buy the stock back at a lower price when it comes time to return the stock to the lender. The difference between the price it was initially sold at and the cost to buy it back in order to return it to the lender represents the profit for that trader. Short selling requires advanced knowledge of market trends.

After a stock is bought and subsequently sold, there is a settlement period that must elapse before the money earned from the sale can be used again to place another trade. The settlement period is usually 3 full business days. This can be especially frustrating for neophyte day traders who have opened up their first brokerage account and then put all of their money into one stock, and then sell it the same day when it goes up, only to discover that they have to wait until the transaction is settled in 3 business days before they can place another order. So, if you are new to trading, do not use all of your money to place a single trade; set aside some money so that you always have some money in your account that is not tied up in settlement, so that you can continuously trade without interruption.

I hope this information has helped you to become familiar with day trading. Try to set aside some money for investing and start while you are still young. The earlier you begin, the more money you can potentially make down the road. Some day traders make millions, others lose everything, so you should carefully research the companies you are going to invest in beforehand and you will do fine.

Jim Pretin
11 Dec 2006

Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers make email forms.

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