Definition of Day Traders

Day traders buy and sell stocks, options, futures and many other types of liquid securities throughout the day in hopes of achieving a quick profit from the price movement of the underlying security. Day trading has occurred throughout history whenever there was a market to speculate in but it was during the mid- to late 1990's that day trading was brought to the masses thanks to the technology-fueled bull market and access to cheap remote trading platforms.

SEC Definition

On February 27, 2001, the Securities and Exchange Commission (SEC) decided to rein in the activities of day traders. Under the new rules, anyone who buys and sells a particular security in the same trading day and does this four or more times in any five consecutive business day period is labeled a pattern day trader. To continue day trading a trader must maintain an equity balance of at least $25,000 in a margin account.

Tools of the Trade

Besides having a computer and access to real-time market data such as news and prices, a day trader also needs to have access to charting software that allows him to use technical analysis tools such as moving averages, Bollinger bands, moving average convergence-divergence indicators, and pivot point overlays. On a long-term basis, fundamentals drive stock prices but on an intraday basis technical indicators are useful to see what the market is doing.

Getting Started

As long as a person avoids being labeled a pattern day trader, it takes very little money to start day trading. If an aspiring day trader wants to play in the foreign exchange markets he can open up an account with Oanda, for example, with as little as five dollars. He will only be able to trade the foreign exchange markets and will not make a huge amount of money, but he can get some practical, hands-on experience without risking a whole lot of money. Some people suggest that a beginning day trader only use a fake money account when getting started. Such accounts are free and allow a person to get used to the trading platform. The psychological pressures of day trading are much more acute when real money is on the line. It is how a day trader deals with those psychological pressures that determines his success.

Risk Management

Stress and losing money often go together. Since the success of a day trader is heavily affected by how a trader deals with the stress, it must be minimized. The best way to do that is with proper risk management. Risk management is the practice of only risking a certain percentage of your portfolio on every trade. Most professional traders will only risk two percent or less on each trade. Proper risk management allows a day trader to survive a run of trades that go against him and continue trading so he can take advantage of the next series of trades that are profitable.

Systems Traders

Another way that day traders manage risk and minimize psychological pressure is by using a trading system where every trade is governed by a strict set of rules. These systems try to identify high-probability situations in the market. They identify situations where the odds of success are stacked in the trader's favor. It won't be profitable every time, but over the long run a good system will provide a profitable edge to the trader who has the discipline to follow it.