A day trader is an individual who has taken on the financial risk associated with trading stocks within the same trading session. Since all transactions must be closed by the end of each trading session, a day trader cannot use any open positions to cover any losses they might have from another position later in the trading session. This puts them at higher risk than an investor who buys securities and holds them for several months or even years before selling them.
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Open an Account
First, an aspiring day trader must obtain a brokerage account. Several brokerage firms offer this service, with BATS Trading being one of them. To open up an account, individuals need to provide their social security number, driver’s license ID card or passport for identification purposes, along with enough capital to cover all transaction fees associated with opening and closing positions on the stock market. You should also note that while opening an account with BATS Trading, traders will be provided with a virtual trading environment to practice their investing strategies.
Research and Select Stocks to Day Trade
Once the account is open, the next step is familiarizing yourself with your desired stock or index you want to day trade. Most individuals tend to make decisions based on recent news regarding the company, such as what company earnings reports are scheduled and if there have been any significant changes within executive management. Once you have decided, you should note that day traders typically lack patience and prefer not waiting for long periods before selling their holdings and re-investing into another position. You should also note that while one may have a few positions going at a time, day traders do not typically hold open positions overnight as the risks associated with doing so are too high.
Determine Entry and Exit Points
Once a stock has been selected, next up is determining entry and exit points and stop-loss limits. Since individual investors tend to perform better in trending or choppy market conditions where prices move up and down with little volatility, it would also be helpful to research how a particular market is expected to perform. Some online resources available at your disposal include CNBC for news about the economy and investing strategies from other traders who have had success using certain trading styles. This includes Warren Buffet’s value investing strategy, which involves finding companies whose stocks trade below their intrinsic value. Another strategy would be to rely on technical analysis. One anticipates that a stock will break its resistance level if it has not already done so recently and is expected to move higher in the coming days or weeks.
Execute Your Trades
It’s trade execution time! Before placing an order, it should also be noted that day traders typically experience more than five per cent of their trades getting filled at the desired price they initially intended. This is why stop-loss limits are essential, as day traders need some way to protect all of their previous gains if prices do not follow through. For example, if you purchase shares for $10/share with a stop-loss limit of $8/share, then this means your position will automatically close if shares fall to $8/share instead of the $10 you initially paid for.
Record and Analyze Your Results
After a trader has finished executing all of their trades, it’s time to check out how much profit was made or what kind of drawdown occurred while day trading. This information will be valuable when making future decisions regarding which stocks to trade next. Traders also have access to a platform called Wealth-Lab, where they can monitor their performance over time and compare themselves with aggregated data from other traders who have similar financial goals in mind, such as generating annual returns more significant than 10% per year.