How to Day Trade in the Stock Market
Look up "day trading" on the Internet and you'll find thousands of sites promising you big bucks in a hurry by following a set of easy guidelines. Look a little harder and you'll see the reality: day trading is hard work, and it's extremely difficult to make a profit. But if you're a risk-taker who loves crunching numbers, analyzing economic news and reading charts, day trading may be right up your alley. Adrenaline junkies need not apply, however; success in trading requires a cool head and strict discipline.
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Instructions
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Know yourself. Take a little time to be introspective before you even pick up a trading book or open a practice account. Day trading is high risk, fast moving and extremely analytical. You won't make millions overnight, and you'll likely lose a lot. If you're prone to following your emotions, hate math or can't stomach losing money, day trading is not for you. Even if you're excited by the idea of watching charts, planning trades and building profit over time, it's still good to think through how you will deal with stress and emotions in a volatile environment.
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Get educated. There are several ways to day trade, from scalping, where traders make lots of tiny profits and hold assets for a few minutes, to trend and breakout trading, where traders hold positions for several hours. There are dozens of strategies for trading under any of these conditions, and just as many different industry sectors to trade in. Study your options: books by Darrell Jobman, Peter Bernstein and Victor Neiderhoffer might be good places to start.
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Practice on paper. Like athletes, day traders hone their skills through practice. You can literally use a pen and paper to practice trading or your can sign up for a free practice account through an online brokerage firm. While there are some shortcomings to practice trading -- you don't get real trade results, for example -- this exercise helps you test trading theories and strategies and get a feel for the rhythm of stock price movement. Most experts, including Richard Dickson, technical analyst for Scott and Stringfellow, Inc., recommend six months to a year of practice before you begin using real money. Remember that this is also an opportunity to test various trading platforms and software packages to find a system that works for you.
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Develop a trading plan based on what you've learned through research and practice. Decide what conditions indicate a good buy, and what conditions make a good sell. Determine your loss limits and what you will do to cut your losses. Make a set of rules, test them on paper, and commit to them.
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Start small. When you're ready, begin trading with small amounts of money. Place one or two trades at a time until you get a feel for how the market works in real time. Ramp up your activity slowly, and stick to your trading plan, making sure you cut your losses quickly.
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Tips & Warnings
Patience is a virtue in trading, except when you're losing money. Don't wait for the market to bounce back -- get out of a losing position as quickly as possible.
Be very wary of newsletters, websites and books promising big returns overnight. Trading is highly individual and circumstantial -- create your own plan based on your education, abilities and experience and stick to it.
References
- Baby Pips: Day Trading
- U.S. Securities and Exchange Commission; Day Trading: Your Dollars at Risk; April 20, 2005
- Traders Log; The Technical Aspects of Trading Emotion; Martha Stokes, C.M.T.; 2007
- "Futures"; Developing a Trading Plan; Rick Thachuk; April 1, 2009
- "Futures"; Getting Your Wings; James T. Holter; April 1, 2009
- "Futures"; A Guide to Getting Started; James T. Holter; April 1, 2009
