The Rising Popularity of Day Trading: How to be a Financial Cowboy
The chaotic image of the stock market is a popular one in movies, television and even on cartoons. Close your eyes and you can probably picture the scene really well: the clanging bells, the urgent shouts of buy, buy, buy or sell, sell, sell, and people milling around on the crowded floor, waving sheets of paper and motioning to people on the level above them. Monitors flash information and every new bit of data sends the crowd into a new flurry of frenzied motion. A bell rings and everybody files out, trading is now done for the day, but they will all be trudging back in to do the same thing the next day.
Those days are changing now, thanks largely to the advent of the Internet and the popularity of computers in general. Many markets have moved all of their action to the computer screen, so now you can trade from the comfort of your own home, simply click a button you are a trader. But, is it really as simple as all that? Does it really pay to trade a few stocks here and there, or does it take a huge portfolio to show any glimpse at all of profit?
Day trading has become more and more popular in recent years, with some day traders going from trading in their spare time to augment their regular pay to becoming full time traders who may even advise others in the fine art of day trading. But what exactly does a day trader do, and what denotes day trading? Are there more risks involved in this activity or is it the same as any investment venture? Do day traders face the same hurdles that other traders do, or do they have even more to consider? In the end, does day trading make enough profit to be worth the risk, or is it just a fruitless venture, claiming the financial lives of countless victims?
Computers and the Rise of the Day Traders
Day trading is the same basic concept as any other type of trading with one major difference: day traders rarely hold a position with a stock overnight. Stocks are bought and sold in the matter of hours- hopefully for the trader with quick profits. Because of the very speed that these transactions are made, day traders risk more than more traditional traders do, and the stocks that they deal in tend to be more volatile and far more unpredictable. Within the world of day trading, there are several sub-types and each has its own advantages and disadvantages and should be investigated thoroughly.
Although day traders do trade on many markets, with many types of financial products, they do the vast majority of their high speed trading online. In fact, the days of the Wall Street market scene are falling away, as more of the trading is being done on a huge computer network. NASDAQ is completely electronic now, while the NYSE only does a portion of its activities online. To remain competitive it will have to move more and more of its trading action to the computer networks and allow the brick and mortar of Wall Street fade away into historic glory. The world is moving far too fast for the traders to remain competitive if they are not able to move as fast as the slowest computer- the traders that can adapt will succeed, the ones who cannot will retire, hopefully with a nice nest egg.
Day traders have a reputation, even among other financial professionals of the rebel, the cowboy or the renegade. While it is true that many day traders do not do as much actual research before they buy a stock, they must still know enough about a stock’s performance or expected performance to make a profit or they will not last long in this unforgiving field. For every failed day trader, there are countless others ready to saddle up and take the chance to make their fortune and their names on the back of a few quick, but good trades.
Whether taking on day trading as a hobby or a career change, there are many things to be aware of, including what you think makes your personality suited for this change. The casual trader should know just as much as the professional about types of trades, trading and the markets themselves. No matter who you are or how many trades you make per day, you should know what the risks involved are and the easiest way to get started. And the one constant thing, across the board, for both the casual and the professional trader is the ease that you can make these trades now- with the computers and computer software, literally anyone can become a day trader with little problem and a minimal (cash) investment.
Before you get to the amount of cash that you need to have to invest in the trading market, you need to consider a few other facts as well. Will you be doing your trading on your home computer? Is your system up to the task at all? How well can you expect to do as a day trader if your system is hopelessly out of date and miserably slow? Will your computer crash just as you are ready to make a huge trade? By the time your computer comes back online, will you have missed out on a golden opportunity?
Updating your computer system makes sense, not only if you are going to be using it to make a living, but also to keep your software up to speed, as it would be of no use to download state of the art software on a computer that moves too slowly to make much use of it. Don’t waste time on the top of the line computer, with solidly recommended software if you are going to limp along with dial up. Your best bet? A well made laptop computer, good software and a Wi-Fi connection so that you can keep up with your trades anywhere that you want to go.
Computing did not breed the day trader, but it has made it not only more common, but far more lucrative. Because you can make countless, simultaneous trades from a single computer screen, you have increased your chance of making a profit in equal amounts. Of course, just having the equipment and the desire still does not make you ready to trade, nor are you even ready to start talking initial investment.
Knowing What you Want to Buy or Sell
Trading stocks is pure and simple: jargon. It is the language used by the stock market and it only means that you are either buying something, or selling something. Of course, in the world of the stock market that something is usually technically nothing. Confusing? Not really. When you walk into the local grocery store, you buy “something”, the cashier takes your money and you walk away with an actual item in a bag. In the stock market you buy – stocks, that are nothing more than an entry on a computer, or you buy commodities, which are again, nothing more than an entry. Or, you buy futures, which is nothing that even exists yet- you have bought things that may or may not come to be, and you will never actually lay your eyes on any of it! The stock market is not bagging up piles of stock certificates and giving you frequent trading coupons.
So, you have looked over the market and you are confused about what exactly is available for you to trade- there are so many choices, after all. There are, of course, the traditional stocks, which are the investments that you make into a company. Each stock certificate is like a miniature title of ownership to that company. The money they make from the sale of their stocks is then reinvested back into the company by the managing board, ultimately strengthening the company. The company will sell only so much of their stocks to the public, and the rest will be held in trust by the governing boards so that they can keep control over the decisions that are made for the company.
Commodities are the actual item when referring to things such as corn, soybean, wheat and crude oil. A commodity trader is usually a big timer, so this is not a good choice for the beginning trader or even the more experienced day trader either. Commodity traders usually are of three types: the commercials, the large speculators and the small speculators. If commodities are the golden goose in your opinion, then consider forming a group of other traders to buy into the market. (This is still fairly advanced, and may not be a good idea for those that are more amenable to day trading.)
Futures is like the commodities market for various of reasons, but instead of buying shares of the profits from crops that are ready for market now, the futures trader buys contracts for crops that are not even in the ground yet. Futures is a risky market for a lot of reasons, most notably because not everything can be forecasted or foreseen.
Day traders can move hundreds of thousands of dollars on the currency market, and never once visit any of the countries that they are trading with. While the Forex market has slightly less stringent restrictions and guidelines, they are not totally rule-less and you should know the ins and outs of this very fast moving market before even trying your hand at it.
At least until you have made enough trades to be comfortable with the process, you should stick to straightforward stocks. Just getting the hang of the speed of the day trading lifestyle can be tricky enough; so do not complicate things needlessly.
The Totals So Far
You have not even got to that first set of trades in your new life as a day trader and you should realize that by now you are down at least a couple thousand dollars. You have bought the new computer system, the stock trading software, and upgraded to Wi-Fi. So, are you still ready for that career change? (If this computer upgrade process has just bankrupted you, then you might need to rethink the idea.)
Day trader regulations are clear: you must have a minimum amount in a trading account to qualify as a day trader, if that amount is not met, a “minimum equity call” is issued- if the call is not met, you can lose the assets associated with the account, as well as a reduction of the amount of trading power that you have. The regulations are lengthy and must be thoroughly read before making that first trade or you will find yourself in over your head in a quick fashion. That minimum amount is $25,000 for a day trader account- if you fall below that amount then the “call” is issued. So far, you have invested at least $2500 in computer and software, and the $25,000 to open the trade account. That total is $27,500 just to get started. That is a high amount of money, especially with the current economic situation, so make sure that can really afford to lose that amount of money if something should fail. (Day trading is very risky, remember.)
Sit down and figure out a budget, including a loss cap that will show you clearly what you could afford to lose if you make bad investment choices or if you are really not cut out for the trading lifestyle. If that figure does not come any where close to the minimum trade account amount, then skip day trading. Remember, these amounts are subject to, and very likely to change at any time. Keep up to date with the market and the requirements so that you do not find yourself in the middle of any nasty surprises.
The Risks of Day Trading
Trading can become as addictive as any narcotic in the world. The hardcore trader lives for that next mouse click, thinking he can reverse his fortunes in the blink of an eye. He is unable to see poor trades as losses; rather he sees them as detours. He does not see profit as a financial reward; he sees profit as the chance to make even more money. He will siphon every bit of his profits back into the market and risk it all on the next set of trades that he chooses to make. At the end of the day, he will have used all of his available trading power and no matter what the actual cash balance is, he will call it a good day. The adrenaline rush is almost enough for him to count it as a win.
Undisciplined or uneducated trading is not only dangerous; it can undermine the entire market system. As more traders fail in larger and more public ways, the public becomes more nervous and less likely to invest any money at all into the market at large. The more money that stays in banks or at home in empty peanut butter jars means that much less flowing into the stock market and into new and growing businesses. If those businesses cannot manage to show a profit fairly soon into their operation, they will fold. If yet another business folds, then public confidence will fade even further, and the cycle is repeated. While the entire economic downturn cannot be blamed on reckless day traders, they certainly are not helping in the long run.
If a day trader is working as part of a group, that group will lose confidence in him if he makes several bad trades- the more money that he loses for them, the less likely they will be to give him more money to invest.
The day trader also puts himself at risk by not watching the movement of his stocks closely enough. If he buys a failing stock at noon, but does not manage to unload it by the end of the business day, he will have to suffer that loss. Once he tallies the cost of that bad transaction, he has to hope that he has enough to make his minimum or face an equity call. If he cannot make the call, he either has to come up with enough money to make the call, or he will face the sanctions and restricted trading.
Finally, the day trader risks the loss of a graceful exit if things get truly bad for him. The lure of high money, and fast living can become too much to walk away from for some people. Remember the keys to successful trading: education, preparation, careful monitoring of all of your stock’s activities, a set loss cap and an exit plan. Because there is such a high amount of money needed to keep a day trade account open, it can be hard to back out of.
Not having any risk capital can be bad as well. You want to keep enough money to avoid dipping into your profit earnings. Having an adequate amount of risk capital will eliminate the need to do either. Set up the account with money ahead, to cover those riskier trades and you will not have to worry about how to cover your account at the end of the day, regardless of how the day’s trading went for you.
Finally, not stopping when you are close to, or at your loss cap is probably the most serious of the risks that the day trader faces. The deeper you allow yourself to go once you have neared that limit, the more that you will stand to lose if you cannot reverse the downward trend.
Day Trading Does Have its Rewards
Before you walk away with the idea that day trading is all risk with no profit, think again. The truly savvy and careful trader can stand to make tremendous gains in a minimum amount of time. Because day traders tend to be a little more aggressive than others, they will buy the unproven stock, or buy more of a stock that might seem a little shaky to the more traditional stock trader. Once a stock takes off and becomes huge, it is usually the day trader that makes the money first.
Of course, the right stock is the stock that is performing well at that moment, so careful monitoring is of the utmost importance, especially with day trading accounts. While trading one set of stocks, the savvy trader will be watching for trends leading them to the next hot ticket. Forecasting what might possibly be the biggest moving stock can protect the trader from possible financial risks or may make incredible profits.
Day trading is also rewarding on a more visceral level. Imagine the thrill of making a trade that nets you a huge return in one day’s time. That gut level thrill has to be one of the best parts of being a day trader. Unfortunately, that sense of thrill and danger can lead to even more undisciplined behavior on the part of day trader, so be careful. It cannot be repeated too often, do not forget about your loss cap and do not exceed it.
Beyond Day Trading
Among the short-term traders, there are more than just the typical day traders. There are swing traders who are traders who do not just hold a stock for a day (day traders), but shorter than a few weeks, (trend traders). Does that make the trader more sensible, and more responsible than the typical day trader? Not necessarily, but it does make them the less extreme of the trading types.
Among swing traders, there are other types as well. There is the scalper, who makes literally dozens (or more) trades each day, hoping to glean a bit of profit from each as they go. There is the momentum trader, who watches a stock’s volume trend and hope to catch onto the one that is moving in the right direction. Technical traders are those that base their every move by a chart, a graph or a combination of the two. Tech traders are obsessed with every move on the stock market, and will be the trader who monitors the action most closely. Fundamental traders get back to the basics of the stock market and stock trading, and read the trade papers for news of earnings, or loss reports, mergers or corporate buyouts and other such important information. These traders are the ones most closely aligned with traditional trading.
Swing trading can only work with the right ingredients. Just like baking the perfect triple chocolate cake needs the best flour, sugar and of course, chocolate, swing traders need to closely monitor the market to choose their own key “ingredients” to “bake” their success.
It should go without saying that the first tip to swing trading with any kind of success would be picking the right stock, but sometimes the simplest concepts are the hardest to understand. Look for “large cap” stocks that trade actively on the major markets. Computer companies and other huge corporations are good examples, the mid level food producer is not. Because these companies are so big, their activities tend to swing between extremes rather than slow growth or decline, so the swing trader can catch the market at the right time and clean up.
Swing traders also must choose the right market. Not only does this mean the right, literal market, but the right activity of the market at the time. If one market is in complete downswing, then moving on to another makes solid business sense. For this reason, the swing trader is in the best place for market success when the markets are not moving at all. The only problem here would be accurately predicting what movement the market will make and when.
The bottom line for swing traders, as well as any other type, is careful consideration of the market before making any movements. Monitoring a stock’s performance is of the utmost importance. Know the regulations that are involved with the trading type that you plan to do. Know your loss cap and do not allow yourself to get too near it.
Bad Money Management, The Quick Way to Lose a Buck
There are bad investments, and then there are bad investors. A bad investment can be made by even the savviest financial mind, and it can happen at any time. Market trends are not set in stone, and the stocks do not always follow the trends perfectly. Predictions may say that a stock is about to behave in one way only to have that same stock go in the complete opposite direction.
A bad investor, on the other hand, will throw good money after bad and refuse to read the signs that are clearly written on the stock charts. If the stock is about to head south by all indications, and you choose to reinvest anyway, that is a bad financial decision on your part, and you should reconsider whether or not this is a viable option for you to pursue. Day traders cannot, by the very essence of their lifestyle and career requirements, afford to make very many poor choices. The smart day -trader will trade within their limits, allowing themselves the ability to make a graceful exit if that becomes necessary. Being aggressive should never equal being stupid.
One bad investment can be written off as a loss, but a string of them can cause serious problems. Remember that a day trading account is one that has a minimum equity amount that must be met- so bad trades that continually eat up this amount without seeing any returns will put you at risk for an equity call. Remember the simple equation= money in + money in= profit, but money in- money out= loss. If you cannot recoup initial investment in a relatively short period of time, you must move on and find other stocks that will realize reward.
Bad money management can also mean overextending yourself unduly. If it was all that you could do to raise the initial minimum equity amount, then buying into a huge block of stocks beyond that amount will put you at risk, especially if those stocks do not perform as expected. This is one area that will require not only close monitoring of the stock charts, but discipline as well.
Stock trading software that helps track stock performance as well as your account balances can be helpful, but you will not need it if you heed warning signs. If you constantly disregard trends, then you might as well not look at the computer screen at all. That would be the same as opening your window and casting your cash to the wind.
Pay attention to the signs and the trends, and know when it is time to sell before it gets to be too late. Once a stock has gone below a sellable level, it is worthless and has just cost you the amount of that investment. Day traders do make fast trades, but there are times where those trades are just not fast enough.
Incompetence is not Bliss
One of the most important things to consider is that making a bad investment or two is, or at least should not be, the end of the world. Making dozens of bad investments is not only bad, it is a sure sign of incompetence and it should be taken as a serious warning that you are not cut out to be a day trader. It could be the speed at which trades are made that is tripping you up, or it might be the many regulations that keep catching you flatfooted. No matter what the exact issue is, incompetence can cost you more than just money (although that is serious enough); it can cost you the confidence of your peers and colleagues and put you at serious risk for trade violations. In the general scheme of things, dealing with the SEC is not a goal to aspire to.
The saying that ignorance is bliss, does not apply here. Stating that you did not know the regulations will not let you off the hook. You cannot invest $25,000 in a day trader account, begin making trades and then expect to use the “I did know that.” as a defense for any violations. It is your responsibility to know and understand each and every day trader regulation before making the first trade. If you do not, it is imperative that you educate yourself thoroughly. And, because these rules and regulations can change keep abreast of any developments involving them. Learning the rules and then not paying attention from then on makes about as much sense as not learning them in the first place.
Finally, remember that the day trader rules apply industry wide, not just for one firm or another, or in only one market. Despite what impression you are given by some other traders, the rules do apply. Do not allow yourself to become lazy- keep up with your education as well as the monitoring that will make you a profitable trader.
Penny Stocks Can Equal Big Dollars for the Day Trader
Day trading is risky, that point cannot be made often enough. There is the possibility of not only doubling up your risk but your profitability as well. Trading penny stocks can be satisfying, and because the price per share is lower than more traditional or established stocks, there can be a bigger buys in. Penny stocks are those stocks that have a price per share that is less than a SEC or market defined amount, usually a small market cap and traded only on certain markets. Penny stocks are very unpredictable, but can be highly profitable if you choose the right one. Day traders that seem to have that inherent sixth sense of what stocks are moving in what direction can make huge profits from trading penny stocks. Blocks of these shares can be profitable enough to fund other, bigger buy ins for more established company stocks, but not always. In fact, with penny stocks, the loss cap has to be adhered to more strictly because they are so volatile.
Penny stocks are good for the day-trader, as the more traditional traders often overlook them. In fact, many financial professionals will refuse to trade a penny stock because of the work entailed in tracking them, and because they feel they may be beneath them. Because of the floating definition of what a penny stock is, some smaller, but still very solvent company’s stocks will go largely untouched. Some pros will define a penny stock by market cap alone, which makes some of the strongest performing, but still growing companies prime for investment. This is one place where careful monitoring of a stock or a company’s progress or lack thereof will put you at a huge advantage over other traders. Think about it, a small company that is growing in leaps and bounds is probably flying under the radar of most financial firms as they watch the action involving the larger corporations.
That small company offers its stocks at a bargain basement price, and you, the savvy day trader buys as much as possible in one trading day. The next day, that same company becomes famous because of a news report, and suddenly your so-called penny stock trade has made you a huge profit. On the down side, that scenario could go in the direct other direction. You buy up a large block of stock from this small company and then the next day you wake up to find that the entire company has closed because of some bad luck or simply because of the economy. You have now lost every cent you put into those shares of that company.
When dealing with these penny stocks, the day trader must be aware that the smaller the market cap usually equals a small company. Unfortunately, it also means the smaller the company, the larger the risk of total business failure, however being able to buy blocks of an unproven company and watch it grow and thrive can be more than profitable, it can be very rewarding. In some small part, you can walk away feeling that you helped that company to survive, and from an investment standpoint, you might have.
Even Shorter Than Short Term: Intraday Trading
Day trading is fast action, of that there should be no doubt, but sometimes that action gets to be even faster. Intraday trading is even faster. These trades are done within the same day frame- often several times before the end of the business day. Intraday trading can see the same stocks being bought, sold and re-bought by a single day trader all within the day’s open trading. There are many reasons that intraday trading occurs, but it comes down to the market itself. If the market is not moving well, there might be a need to buy and sell the same block of stocks to possibly get things going again, or to keep from holding onto bad trades.
Intraday trading can lead to issues however, because it changes the trade account- and can lead to SEC regulation violations if the trader is not careful. This type of trading can keep a trader from being caught on the bad side of a trade, and still allow him to meet his trade equity account minimum. Because of the risks that are involved, intraday trading requires vigilant stock monitoring, regulation education, and a well planned, and strictly adhered to, stop loss plan. Knowing how to exit gracefully is almost as important as knowing how to get into the market in the first place.
Using Cash to Buy Currency to Make Cash
The day trader may also want to dabble in the currency trading market, known as Forex. Unfamiliar with the term? Don’t be embarrassed, this largest of the financial markets has remained largely un-traded by the smaller, “retail” traders, including the day traders. Currency trading has gained popularity in recent years, largely because the Internet has not only opened the market up, but made it faster to trade on as well.
The Forex market is no different from any other market in that you absolutely need to educate yourself before you begin. Know the terms and the jargon. Know what rules or obligations exist that you must follow. And, as always, know your own limits.
The day trader may like the currency trading market for one relaxed rule: inside information is not against the rules in this market. If you know something about a country’s economy, whether it has become common knowledge or not, you can use it to make the most beneficial trade for yourself. Of course, not only does this mean that you can use this information, so can all the other traders.
The Forex market is huge- to the tune of two trillion, US dollars per day. That size alone makes this a fast moving, and potentially hugely profitable enterprise. But, what exactly does a trader buy or sell when dealing on the Forex market? Basically, contracts are what are bought or sold- everything comes down to some computer entries and nothing more.
One last thing to keep in mind with the Forex market: the currencies that are traded are always traded in pairs. You must know the meaning of long and short when relating to these pairs and how to buy and sell your pairs at the maximum profit.
Day Trading as a Career, The Amount You Could Make (If you are Good)
So far, this guide has covered the basics of day trading and the risks that are involved. While it was mentioned that great profits could be made, there is even more potential money for the savvy and careful trader. A sample trade could look like this:
At the start of business, Danny Daytrade selects 100 shares of Youbetcha Inc. He knows from watching the trends that Youbetcha is about to make a big move upward, and he is right, the stock gains at least a 1/2 point by noon of that day. As a day trader, Danny wants to walk away with profit by close of business, so he sells off this upward moving stock and splits up the profits from the sale. Part of his profits goes into his day trader account to make sure that he will meet his minimum equity; the other part goes back into investing. He has had his eye on another stock that is set to make a nice upswing as well. Danny is successful, because he is careful and because he knows how to read the stock signs.
If the amount of profit that Danny Daytrade makes for this trade is $100 (obviously an amount simply for illustration) he would most likely use half as account cover capital, and half as re investment. Of course, no one in the day trading game is doing any investing with $50; again, this figure is simply for illustration. If he makes five similar trades for the business days, with equally similar results, he will have made $500 of profit. Keeping with that theme, trading five days a week would net Danny $2500 of profit per week. (Commissions, overhead costs and other business expenses, realistically bringing the amount down to $2000 or less would reduce this figure.) This is still a nice bit of profit, considering that this is only one stock’s trade performance. Danny Daytrader probably handles quite a few more trades than that in a day’s time.
Considering that not every trade will make a profit, let’s say that Danny handles ten stock trades per day, with the same profit margin as above. ($100) On the safe side, we will give Danny a win percentage of say, 30%, which means that for his ten trades, he sees that profitability factor on three of them ($300). Which will bring him to $1500 for the week, less the commissions and other expenses as mentioned above. Realistically, Danny can see a profit of slightly less than $1000. But, Danny is aggressive, so that amount will not satisfy him. He will hit the charts and study until he finds the right stocks that are about to trend upward. He will work until he gets his win percentage up near fifty percent or even higher.
The Wind-up, The Pitch, the Conclusion
First off, there is no pitch. There is only the winding up of this guide, trust me, there is nothing being sold here.
This guide covered the rise of the popularity of day trading, largely in part because of the computer and the Internet. With the click of a mouse, the entire world can come speeding down a wire (or without a wire) into your home. At the blink of an eye, you can buy a pair of shoes, Google a date, map out directions to your Aunt Susie’s, or you can buy or trade a block of stocks. No matter what time of day or night, no matter what you are wearing- you can choose a stock, check it’s action and put in an order to buy it. Trading was once the realm of the ultra connected, and the very wealthy, but those days and the Market have changed. Thankfully.
Of course, if you are looking to buy a pair of shoes, or even Googling a date, you really have to have some basic information to start with. The stock market is no different in that aspect. You know that if you are looking for athletic shoes, you have to go to the right company’s website to look at them. It is the same when buying stocks or other financial products and services. You have to know what kind of trading you want to be involved with. Do you want to buy traditional stocks in a certain type of market? Do you want to be more aggressive and trade blocks of penny stocks? There are many choices that must be made before you begin investing.
We covered the amounts that could be expected as investment and other expenses that need to be covered before you can begin a career as a day trader. These expenses can include a computer upgrade, computer software and then the initial investment amount. According to the day trading regulations, there is a minimum equity amount ($25,000) that you must meet and continue to meet to keep your day trader account open.
Day trading can be hugely risky for a number of reasons. First off, the movement of the day trader is rapid-which does not leave a lot of time for market research and does not allow time to monitor for trends that might be forming. Careless trading can lead to a fall below the minimum account trade equity, which in turn will lead to a day trading call. Losing too much money will lead to the loss of confidence and may cause a day trader’s career to be at risk as well. Not knowing or going over their loss cap can put a day trader at huge risk for financial ruin.
Along with the risks, there are many rewards to be had as well. Because they are so risky, day trades can net quicker returns than more traditional trading activity that have to be allowed to have time to develop. Day traders may also take a bigger chance on a stock, also with the potential to make large profits.
Day trading and long term trading are not the only option. There is a middle ground between the two extremes, the swing trader. The swing trader may hold a stock’s position for several days, possibly a week before making a move on it, or may ditch it within hours. Swing trading is becoming more popular because it allows the flexibility to let a stock develop if it looks like it is going to, or to sell quickly if it becomes necessary.
Bad money management is just that: bad. If you cannot figure out how to handle the account that you are dealing with, you should not be in this line of work. Day trading is not the most forgiving career choice, and it can realistically only take a few bad trades to completely destroy a financial career. Incompetence and ignorance are no excuse for a failure to understand trading regulations, especially those that have the potential to lead to a SEC violation.
Penny stocks may become the darlings of the day trader. They are perfectly suited for the day trader’s personality, are bargain priced and therefore potentially more profitable. If you can buy a large block of a bargain basement stock, then you could see a large return in the matter of days when that company goes public. Or you lose your entire investment when the unproven company fails. Knowing and weighing the risks involved, penny stocks can still be fairly attractive to the day trader simply because of the relative ease of moving them. What constitutes a penny stock will vary depending on whom you are asking, but it will usually be based on price per share, the market it is traded on and the market cap of the company being traded. Some markets will consider market cap as the main determining factor for whether or not a stock is a penny stock or not, but that is not always reliable.
Along with day trading, there is the even faster moving, intraday trading. Simply put, this is trading that occurs within the same day for the same stock. Intraday trading can be used to stimulate sales of one stock if it has stopped moving at all, or it can pour life into an equally stagnant market.
Finally, there is the Forex market, where the day trader can use his account to move currency contracts between countries. This market has some interesting lingo, as well as some slightly more relaxed rules about certain aspects of trading. There is not an insider trading rule for instance, making it possible to use information that you have learned before anyone else to your own best advantage. The Forex market was once the mainstay for the big players, but has opened up dramatically in recent years, mainly because of the computer.
This guide said it early, and said it often: Know your risks. Know what you can afford to lose before you invest. Count every investment as a potential loss right from the start- and do not invest more than you can bear. Know how to use your profits to reinvest in the trading account as well as other more secure investments. Do not pump all of your money back into the market, especially if all indicators say that it is a bad idea.
Day trading can be rewarding, not only financially, but in other ways as well. Knowing how a stock is going to perform and being right about it can be quite a high. Seeing the signs that a stock is about to take a header and selling that stock, even at a small loss is better than sticking with it and going down with the ship. Educate yourself about the market, and what to expect. Know all of the regulations and keep in the know if new ones are in the works. Monitor your stocks, or watch for alerts if you have stock trading software that does your monitoring for you. And lastly, always, have an exit plan that you can turn to if things get really bad for you. Best of luck, and happy trading.
