Day Trading Information
Day trading involves the buying and selling of different financial assets, including stocks, commodity futures, currencies and options. The objective is to make a profit from the difference between the buying price of the asset and the selling price. Generally, day trading positions are liquidated by the end of the trading day when the market being traded is closed. Day trading must be treated as a business and typically requires a full-time commitment. There are many different trading styles. Some traders may scalp, which means they only hold positions for a few minutes; other traders may hold their positions until the end of the trading day.
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Function
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There was a time when day trading was only available to financial institutions that not only had access to stock or commodity exchanges, but also had the latest information and technology to trade on a daily basis. Lower commissions, advances in technology and the development of cutting-edge trading platforms have made exchanges and data more accessible to individual traders. To trade successfully on a daily basis, traders must have certain resources and characteristics, including knowledge and experience, a business plan, trading capital, the appropriate office set up and proper discipline. Entering the day trading arena without these elements could be a recipe for financial disaster.
Experience
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It is important for individuals to have adequate knowledge and understanding of the fundamentals of the market they are interested in trading. Generally, day traders have many years of practical experience investing and trading in a specific market, or even in a variety of markets. Many day traders gained the necessary knowledge working for large financial institutions. Others may elect to take day trading courses or read some of the many books available on the subject. The day trading profession requires constant market research; for full service accounts, data is typically made available through the trader's brokerage house.
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Business Plan
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Most day traders do not have a written plan before commencing day trading activities. Having a trading plan does not guarantee that you will meet with success. However, trading without a plan is tantamount to opening a business without a business plan; it increases your likelihood of failure. Having a trading plan can help you identify flaws in your trading strategy and give you a road map to accomplishing your trading goals.
A good trading plan covers many of the following items: (1) short-term and long-term trading goals; (2) the markets you will be trading; (3) the days and hours you will be working; (4) the items required to set up your business; (5) capital requirements; (6) expenses; (6) tax planning and (7) the maximum dollar amount you will risk on any one trade.
Trading Capital
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Like any business, day trading requires traders to have adequate funds in order to trade the markets. Most brokerage houses have a minimum requirement for opening a trading account. Some future brokerages require a minimum of $5,000 to open a commodity trading account. Equity day traders may need to have as much as $25,000 to open an account. Many professional traders advise day traders to have at least a minimum of $50,000, but closer to $100,000 in order to trade for a living.
Office Setup
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Having the appropriate office setting is essential for successful day trading. Besides a desk and comfortable chair, traders may also need a file cabinet, desk lamp and basic office supplies. In addition, the basic technological setup may include two monitors connected to a personal computer, a back-up clone PC and a laptop. A high-speed Internet connection is required along with back-up access to the Web. A separate phone line is also required.
Many traders invest in various software programs designed to enhance their trading experience, including analytical software. This type of trading software is used for identifying possible trades, receiving data, testing and executing trades and managing trading accounts.
Discipline
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One of the key characteristics required to day trade is a high level of discipline. Successful day traders develop the ability to control their emotions and any urge to act impulsively. Another trait of many day traders is the fortitude to follow their trading plan and never risk money that they cannot afford to lose. Discipline includes utilizing stop losses, limit orders and closing out all open positions at the end of the trading day.
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