- Day traders must already have experience making money in the market. Traders operate to extend their profitability through intensive trading of a few securities every day. Day trading begins with the development of a money management strategy, a trading strategy and a protective stop strategy. Traders must purchase software to find potential stocks to trade, develop strategy and determine how stops will be used to protect profits and limit losses. Lost cost brokers, usually online with automated services must be chosen for making trades. Subscription services to stay alert of news, download data, and provide fast, on-line prices must be purchased. These fees will be expensive. However, they are a necessary and a fixed cost of doing business.
- Trading begins with a list of securities that may be approaching a tradeable setup. The setup refers to the minimum requirements a trader needs to find in a stock. Such requirements may be a rise in price and volume, minimum number of shares outstanding, institutional sponsorship, a crossing of two moving averages, or a stochastic indicator that gives a sell signal. Because day traders look for quick strikes and do not carry positions overnight they trade using technical measures. Technical analysis uses price and volume or chart patterns, or stochastic measures to pick quick movements in stocks. Fundamental analysis, the use of balance sheets may be helpful in targeting stocks with good earnings but does not produce quantifiable entry and exit points.
- Immediately upon finding a stock for purchase the trader uses their money management strategy to compute how many shares of stock to trade. At the same time the trade is entered a protective stop is entered which represents the absolute maximum loss a trader will accept. Protective stops are also part of money management strategy. Good day traders accept many small losses in an attempt to find a few stocks that immediately move in the direction of the trader's expectations.
- Protective stops continue throughout the trade. They are continually adjusted as the stock moves in price. Protective stops are absolute. Day traders must have the discipline and psychological make-up to respect stops or they will soon be out of business. Exit strategies are immediately examined after a stock lifts above its purchase price. Exit strategies may include a profit objective, the reversal of a pattern or moving average crossover or a change in the price and volume chart. The best exit strategies seem to be when the stock is sold is increasingly volatile and trades lower in increasing volume. Day traders find strategies with which they are most comfortable. This means respecting the tight risk/reward ratios necessary for success.
