Day Trading
What is day trading?
Day trading is a form of trading that holds an asset for a single trading day, in an attempt to profit from price fluctuations in the markets. In theory, by closing all positions (or “position squaring” as it’s also known) on the same day, day traders avoid the risks involved with holding a security for the long-term.
Stocks are the most common securities involved in day trading. However, other day-traded securities include currency, futures, options, and commodities.
Day Trading Strategies
There is no guaranteed fail-safe strategy when it comes to day trading. Ultimately, any day trading strategy must involve four main components:
- Choosing the securities you will buy and sell
- Recognizing the optimum trade entry point
- Price target, which is the projected price an analyst estimates a specific security will be in the future.
- Implementing a stop-loss, which is an order to purchase or sell a security at a specific price to help manage losses.
Additionally, adherence to money management rules is critical for any individual who is interested in day trading. Never trade with capital that you cannot afford to lose – meaning never use money set aside for monthly living expenses, bills, etc.
Risks of Day Trading
It is crucial to understand that day trading is considered highly speculative and riskier than some other forms of trading. Some even regard day trading as controversial because more often than not, the risks greatly outweigh the profits.
The U.S. Securities and Exchange Commission (SEC) went so far as to release a set of facts and warnings regarding day trading:
“
- Be prepared to suffer severe financial losses
- Day traders do not “invest”
- Day trading is an extremely stressful and expensive full-time job
- Day traders depend heavily on borrowing money or buying stocks on margin
- Don’t believe claims of easy profits
- Watch out for “hot tips” and “expert advice” from newsletters and websites catering to day traders
- Remember that “educational” seminars, classes, and books about day trading may not be objective
- Check out day trading firms with your state securities regulator”
Day trading has the potential for significant financial loss and is NOT appropriate for everyone (especially novice traders).
Best Day Trading Platforms
The simplest way for a trader to day trade is via a broker. Because there are numerous brokerages, the choices can be a bit overwhelming, especially for beginners. Here are some of the most popular and respected online brokers for day trading.
Fidelity Day Trading
Fidelity is a popular choice for active traders who want access to equity trading, international trading, and IPOs. In addition, Fidelity offers comprehensive research tools and no commission for online US stock trades.
Charles Schwab Day Trading
Charles Schwab is another popular choice for active traders. The company has no minimum account requirements, $0 commission for online stock trades, and provides access to comprehensive research and trading tools.
E*Trade Day Trading
E*Trade is a good choice for active traders who want professional guidance, in addition to access to comprehensive research tools and market data that is intuitive and user-friendly.
Robinhood Day Trading
For those active traders who are searching for a broker with $0 stock trading commissions, then Robinhood may be your best bet. Founded in 2013, this trading app has exploded in popularity, mainly because of its free trades of stocks, options, and ETFs. The mobile app is highly regarded for being intuitive. It also has a no minimum balance requirement.
Stock Trading Simulator
If investing in stocks is something that you are interested in, give this free stock trading simulator a try before leaping into the real-world stock market. It’s fun and informative and will help you hone valuable skills and techniques to become an effective trader.
Additionally, this free day trading simulator will give you the opportunity to better understand the nature of speculation.
Comparison Table On The Different Types Of Trading
Here is a comparison table examining the different types of trading.
Type of Trading Best Suitable For Risk vs. Potential Return Control Over Investments Research and Legwork Needed
Options Active Traders Lower-level Risk
(When Done Correctly)The investor has complete control over which companies are selected, and what options contracts are chosen. All research and trading is done by the investor.
Stocks Beginners and Long-term Investors High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
ETFs Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Bonds Beginners and Long-term Investors Lower-level Risk If investing in individual bonds (rather than bond ETFs) the investor has direct control over all invest decisions. All research and trading is done by the investor, if investing in individual bonds.
Mutual Funds Beginners and Long-term Investors Lower-level Risk Professionally managed investment vehicle. All research and trading is done by a financial professional. Investors are charged a fee called an "expense ratio".
Futures Active Traders Medium-level risk (when done correctly) The investor has complete control over which futures contracts are chosen. All research and trading is done by the investor.
Swing Trading Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Day Trading Active Traders High risk, yet has the potential for larger gains if done correctly. The investor has direct control over all invest decisions. All research and trading is done by the investor.
Commodity Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Trend Trading Beginners and Active Traders High risk, yet has the potential for larger gains The investor has direct control over all invest decisions. All research and trading is done by the investor.
Day Trading FAQs
Is day trading risky?
YES!
In theory, day trading seems like an easy way to capitalize on price fluctuations in the markets. However, it is imperative to understand that day trading is considered highly speculative and riskier than some other forms of trading. More often than not, the risks greatly outweigh the profits. Day trading has the potential for significant financial loss and is NOT appropriate for everyone (especially rookie traders).
Day trading rules?
There are no fail-safe rules or strategies when it comes to day trading. Ultimately, any day trading strategy must involve four main components:
- Choosing the securities you will buy and sell
- Recognizing the optimum trade entry point
- Price target, which is the projected price an analyst estimates a specific security will be in the future.
- Implementing a stop-loss, which is an order to purchase or sell a security at a specific price to help manage losses.
Additionally, adherence to money management rules is critical for any individual who is interested in day trading. Never trade with capital that you cannot afford to lose - meaning, never use money set aside for monthly living expenses, bills, etc.
Best Day Trading Platforms
Here are some of the most popular and respected trading platforms for day trading:
Fidelity - This is considered one of the best trading platforms for active traders who want access to equity trading, international trading, and IPOs. In addition, Fidelity offers comprehensive research tools and no commission for online US stock trades.
Charles Schwab - This is another popular trading platform for active traders. The company has no minimum account requirements, $0 commission for online stock trades, and provides access to comprehensive research and trading tools.
E*Trade - This trading platform is a good choice for active traders who want professional guidance, in addition to access to comprehensive research tools and market data that is intuitive and user-friendly.
Where to day trade stocks?
The simplest way for a trader to day trade stocks is via a broker. Some of the most popular and respected online brokers for day trading (and stock trading in general) include Fidelity, Charles Schwab, E*Trade, and TD Ameritrade.
Research individual online brokerage firms to decide whether a “full-service” or “discount” company is the best fit for you. Full-service brokers typically have a hefty minimum account requirement, yet provide professional trading advice when requested. Conversely, discount brokers often have no minimum account requirement, but investors could face additional fees. All online brokers offer research and educational trading tools which is an added incentive for investors.
Day Trading Options?
It is imperative to understand that both day trading and options trading is speculative, have the potential for significant financial loss, and are NOT appropriate for everyone. Before you begin trading, it is critical that you do extensive research on the topic and utilize reputable educational resources with proven long-term results.
Day trading options has both pros and cons, as with any investment vehicle. Always do your due diligence before investing your hard-earned money!
Day trading cryptocurrency?
Cryptocurrency and currency in general, are frequently day-traded securities. In addition, stocks, futures, options, and commodities are also day-traded.
Day trading on Robinhood?
Founded in 2013, the Robinhood trading app has exploded in popularity, mainly because of its free trades of stocks, options, and ETFs. For those investors who are searching for a broker with $0 stock trading commissions, then this may be your best bet. The mobile app is highly regarded for being intuitive. It also has a no minimum balance requirement.
Day trading vs. swing trading
Day trading is a type of trading that involves being in and out of the market, closing all positions (or “position squaring”) on a single trading day.
Swing trading is a form of trading that holds a financial instrument (such as stocks) for several days or even months in an attempt to profit from price fluctuations, or “market swings”. Swing traders utilize technical analysis to determine market swings. The essence of swing trading is buying or short selling stocks to capitalize on these small market swings.