Day Trading: What to Know and How to Get Started
Ever since S&P 500 (SPY) has been allowed to be traded every day, retail day trading for the zero-day expiration contracts has increased by 40%.
Key Takeaways
- Day trading can provide high returns with small amounts of cash.
- Day trading can avoid overnight risk such as news or world events.
- Day trading is very volatile due to theta decay, and can make you lose significants amount of money if the trader doesn’t have proper risk management skills.
What is Day Trading, Exactly?
Day trading, also known as “intra trading,” is a type of trading where a trader buys stocks or options, and closes them the same day.
For example, you may buy Apple (AAPL) Monday morning, and you sell your Apple shares that same day.
How Does Day Trading Work?
There are a number of different strategies to day trading, from the basic to the very advanced.
Ultimately, day trading requires the trader to prepare themselves before the next market session–the trader will need to prepare their charts, do market research, and manage their discipline and risk management.
The goal of day trading to extract money on short-term market movements, and close your position on the same day.
For example, let’s say you think that price of Tesla (TSLA) will go down in price today. You short the stock early in the morning when it’s at it’s high of the day, hoping to sell your short later in the day when it’s reached new lows in price.
As a day trader, it’s important to use charts to scout levels of supply and demand zones for the stock you want to trade.
What Type of Accounts allow unlimited day trades?
It’s important to note that different brokerage accounts have 2 different accounts types. These different accounts types will limit how much day trading you can perform.
- Cash account: You have unlimited day trades until your settle funds runs out. You’ll have to wait the next day to re-settle your funds if you’re trading options, and 2 days if you’re trading stocks.
- Margin account: You have unlimited day trades, settle funds or not, as long as your account value is above $25,000.
What Timeframes should Be Used for Day Trading?
The best timeframes for day trading, really depends on the traders preference and trading strategy.
As a day trader, you should do your research on all the big time frames such as monthly, and weekly timeframe to make sure your trade doesn’t go against you.
During the market session, it’s important to focus on the daily, 4 hour, 1 hour, 15 minute, and 5 minute timeframe.
Pros and Cons
Pros
- Avoid overnight risk: During volatile markets, news and events can make stocks flip on you, making your trade go red. As a day trader, you avoid that risk.
- Opportunity for high returns: day trading allows the trader to turn small money into big money.
Cons
- High risk: Day trading is very volatile, and can provide huge losses if you have poor risk management skills.
- Very stressful: Day trading is a very stressful job due to seeing your contracts fluctuate from red to green, or green to red.
- Requires time and effort: Day trading requires traders to study and focus on a screen for hours.
- Significant losses: Due to the volatility of day trading and theta decay, with lack of discipline and poor risk management, it can destroy your portfolio.
All in all, day trading can be a very lucrative type of trading–but it requires the trader to be very discipline, and recognize the risk that it involves.
How Much Money can you Make Day Trading?
The annual salary range is very broad, as their are traders who lose money for the year to traders who make 7-figures a year.
Here’s an idea how much you can per year day trading.
Is Day Trading Right for You?
If you’re not discipline, are too emotional, and cannot sit down watching a stock, then day trading may not be the right choice for you. However if you’re the type of trader who enjoys being active in the trading market day-to-day, is willing to put the time and effort to develop their day trading skills – with that being said, day trading may right for you.
By the way: If you want to do trading but can’t do day trading, you may want to read monthly options vs weekly.
How to Make Money Day Trading
Here’s a simple guide how to make money with intraday trading:
Step 1. Choose a Stock with High Liquidity
Choose a stock that has high liquidity. Stocks with low liquidity can provide difficulty to buy or sell.
Here’s a quick list of stocks that have high liquidity:
- Apple (AAPL)
- Tesla (TSLA)
- S&P 500 (SPY)
- Invesco QQQ (QQQ)
Step 3. Identify Support and Resistance and Chart Patterns
When you pick your stock for day trading, it’s your responsibility to do technical analysis to identify the trend of the stock, and potential opportunities to short or go long on a stock. This includes recognizing reversal chart patterns, identifying support and resistance levels, and seeing any new catalyst for the stock.
Step 4. Execute Trade
Once the stock you chose, presents itself an opportunity based on your technical analysis, it’s time to make the trade.
Make sure to monitor the stock price, and be disciplined with your trading plan. Remember to close your position the same day.
Step 5. Review your Trade
After the trading session is over, journal your trade, and review your trade and evaluate your performance. See if you can find areas where you can improve on your trading strategy.
The Risks of Day Trading
The biggest risk to day trading, especially in the option world, is theta decay. The premium of your contracts can quickly loose value if the stock is moving sideways for a long period of time or if the stock is not moving to your favor.
Also if you have a larger position then what your portfolio can handle, it can really hurt you mentally and financially–especially as the expiration reaches closer and closer.
To Sum It Up
Day trading is a great trading style to make money in the stock market in minutes, and go on with your day. But, intraday price movements are unpredictable and sometimes it can keep you in a position all day, or lose money. It’s important for the trader to be well informed, develop excellent risk management skills to become a profitable day trader.
Other Asked Questions
Why is Day Trading so Hard?
Day trading is difficult because it requires the trader to be aware of the market conditions, news and events, excellent discipline and risk management. It’s also difficult because losses can be a emotionally harmful to traders, thus causing to trade with their emotions.
Is Day Trading Stressful?
Yes, day trading is a very stressful career.
Can you Learn Day Trading in 1 Month?
Some people can learn to become great at day trading in weeks to a month–but this really depends on the trader. The average for people to be good at day trading is two to three years.
Why do Majority of Traders Lose Money?
It can be a number of reasons, but here some quick examples:
- Lack of knowledge
- Emotions
- Lack of discipline
- Poor risk management skills
- News and events
What’s the difference between Intraday Trading and Day Trading?
Intraday trading, and day trading are the same thing. They both require the trader to open a position, and close the position the same day.
When traders refer to a “day trade,” it’s because the trader believes the trade will take time to develop throughout the day.
Which is Better Scalping or Day Trading?
Day trading, and scalping trading are the same thing. They both require the trader to open a position, and close the position the same day.
When traders refer to a “scalp trade,” it’s because the trader believes the trade will take minutes to develop.
How to Day TradeS&P 500 (SPY)?
Here is a quick step-by-step guide to day trading the S&P 500 (SPY):
- Technical analysis: Identify support and resistance levels on all major timeframes (weekly, daily, 1 hour, and 30 minutes).
- Market research: See if any of the top tech companies have earnings, or if economic events are going to appear. It may determine the trend of the day.
- Execute & monitor the trade: Once the opportunity presents itself, take action to execute the trade, and monitor the trade.
- Review your trade: Make sure to journal your trade, and review past trades to analyze for trading mistakes so that you may avoid them the next time.
