How to Day-Trade (or Not)

For a while, it seemed that everyone was day-trading. And even though it sounds simple--buy a fast-moving stock and ride out its short-term price movement--it's a strategy that's fraught with risks. Not even professional money managers do it that often. But if skydiving is your style, at least be prepared before you take this leap.

Instructions

Difficulty: Challenging

Things You’ll Need:

• Online order execution service
• High speed internet connection

1. Put day-trading in context with your entire financial picture. Individual equities are an asset class like any others. Construct an asset allocation for your entire investment portfolio, and decide how much of it should be allocated to day-traded stocks. Talk to a financial adviser; most will recommend allocating only a small portion of your assets to day-trading.
2. Learn what to look for. Some traders monitor price movement in the hopes of catching an uptick; others keep an eye out for quarterly or annual reports that may impact short-term prices.
3. Do your homework on stocks. Trade in a small number of securities and understand the fundamentals of their business. Stock prices are affected by many factors, so understand what drives the price for your specific stock. Get to know the companies well, and watch them like a hawk.
4. Know the pace and the risks. Day-trading goes against the very core values of long-term investing. Rather than holding them for the long run, day-traders opt for a hit-and-run approach, often buying and selling stocks the same day.
5. Sign up for online order execution, which is critical for speedy buys and sells. Most firms that offer this service charge a monthly fee for access, plus a per-trade charge.
6. Get a DSL line or other high-speed connection for your computer. Since day-trading truly trades on speed, you must have real-time access to data, which can cost anywhere from $75 to $300 a month for the service. Although you don't have to have a special software package, buying one can help you spot trends. Ask if you can operate from your broker's office, if access to the right equipment is something you currently lack. Some firms may be willing to set you up in return for a commitment to make a certain number of trades per week.
7. Set aside enough time. Successful day-trading requires constant attention. If you have a job or some other time-consuming responsibility, that sort of focus may be hard to come by. If you are serious, treat day-trading as a job.
8. Choose one to three trading techniques you'll use and stick to them, such as watching for a three- to five-day pullback on a particular stock's price after an event or trading technique. Don't go beyond your comfort zone or knowledge base.
9. Start slow. Try day-trading just one or two stocks using only a modest investment. Watch them closely, and see what drives their price movements. You'll gain experience, and it's a cheap education if things go badly.
10. Keep a journal detailing the trades you've made, what cycles you see in the market, when you were successful and when you failed. Review your journal every few weeks to spot trends and to learn from your mistakes.

What to Look For:

• Online order execution
• High-speed Internet connection

Tips & Warnings

• Use stop-loss orders--where you specify a price for a stock to be sold automatically-- to limit the downside risks of day-trading.
• Be sure you are familiar with the new rules of day-trading, instituted in September 2001. Pattern Day Traders (PDTs) must now have more money to start ($25,000 instead of just $2,000) but can buy on margin to a greater degree (4:1, up from 2:1). However, there are also rules for closing out trades and fund availability that you need to be up on before you get started as a day-trader.