If you don’t approach day trading with great discipline, you might as well go to Las Vegas or Biloxi and try your luck there. Without strict discipline, you stand far better chances at the tables. You have the makings of a disciplined trader if:
Conversely, if your day trading strategies are constantly investing to the hilt, and if you jump from one trade to the other without so much as a breather, then you’re on your own.
You’re an “active trader” or a “day trader” if:
If you abide by those basics, the broker will grant you “buying power” of four times your “equity”. Your equity is your net balance at the start of a trading day. It is not advised to start with only $25,000, because the slightest negative fluctuation on your positions will take you below the minimum requirement of $25,000, which will prevent you from day trading stocks until such a time as you bring in more funds.
If you have $100,000 of equity (your own funds), and therefore $400,000 of buying power, you can buy 10,000 shares of a stock that sells at $40. If the stock goes up $1, you make a $10,000 profit, or a 10% return on investment (ROI). You can conversely lose 10% if the stock is down $1 by the end of trading that day, and you will have to liquidate.
Another not very successfully day trading scenario is when there is intraday news on your stock, or on a stock in the same field. For example, you’re in Las Vegas Sands (LAS), an active stock in the casino category, and Wynn Resorts (WYNN), another giant in the same field, announces something negative. What happens then is that all the stocks in that field will trend “off”, and instead of making or losing 10%, you’re now looking at your $40 stock selling at $37, for a loss of $30,000.
During a bad trading day, you can be whipsawed around several times like that, ending the day miserably lower.
The reverse is not necessarily true, because if your day starts on a bright note, you can get emotional or cocky, and you end up thinking you know it all, an emotional state of mind typical of amateurs. That is when you are most vulnerable and prone to making beginner’s day trading moves.
We already brought up the ability to be patient, without positions, until a good trade comes along. Let us reiterate that: if you cannot stay without positions for more than an hour or two -or, better yet, a day or two- then you might as well go hit the tables at the casino or invest in lottery tickets!
Most losses are incurred while waiting for the right opportunities to come along. Having a strategy is crucial, work on your day trading strategy and habits. Teach yourself this discipline. If your main trading stock has done well for you on a given day -but is now in “no man’s land”- go take a 2-mile run or do something that gets you away from CNBC and your computer.
Most traders use a handful of stocks as their vehicles for day trading; many use one or two only – for years on end. The idea is that you get to know a stock inside-out and enjoy trading it, frequently many times a day.
Facebook (FB) of late is proving to be one of the best day trading stocks for many. Your trading stocks should:
A high daily volume is a must, at least 5-10 million shares/day, otherwise you would have to move in and out at a widely divergent bid and ask price (Ideally, the stock you’re in moves in 1/8 fractions, with thousands of shares bid and more thousands asked. That way, you will find it easy to get in and out at good prices).
Being a widely held stock is important because you don’t want your stock to be held tightly by a few, for you would then be at the mercy of the manipulations of those few.
Imagine if you had been short First Solar. With First Solar, the writing had been on the wall for months on end, so much so that you could have traded it on the downside day after day.
Eventually you will learn end up day trading a very few number of stocks simply because you will feel you know what those stocks are capable of doing, whether in a strong or bad market day. You will be witnessing their action and attempting to anticipate it day in and day out.
What the market in general is doing is always relevant, no matter how strong or weak your particular stock is. What the other players in your stock’s field are doing will also influence your stock, frequently in a dramatic way. When people get good news -say about quarterly results- from a home development company, and the price of that one shoots up, they rush to buy other companies in home development, if only because the price of those stocks have not yet caught on the fact that the industry may be in for an upturn.
Whether the news is good or bad is the same as far as you’re concerned, for you are as often shorting the market -i.e. selling with the view to covering the sales at lower price and incurring profits- or buying in the hope of liquidating at higher price. A day trader moves in either direction with equal ease. This is something you will hardly learn by reading day trading for dummies.
The general market: traders sit all day long on their computer, with Bloomberg or CNBC’s coverage of the markets blazing away nearby. They are very susceptible to what the market wants to do on any given day, for that will influence most stocks. They follow pre-opening futures activities that give them indications at least as to how the market will open.
Getting to know your stocks: you should research your stocks of choice thoroughly: when they come out with earnings reports, when their main competitors come out with their reports, and anything else that is going on, such as merger talks, new product lines, or other possible developments in the air that any given day trading software won’t give you.
Your intimate familiarity with your stocks of choice is just about the only edge you may have. You ought not trade a stock actively until such a time as you have good mastery of its fundamentals, including its track record for the past five years. This is not to say that you should only trade good companies. Companies on their way downhill are just as interesting (could you have foreseen AOL’s collapse in the early 2000’s? Or Blockbuster’s more recently?)
Momentum trades: some people trade only on fundamentals, but people who day trade for a living use various techniques, one of which being “momentum plays”. Of late for example, Facebook (FB) came out of the box at 45 and started going down, from the 40’s to the mid 20’s. The big traders must have made a fortune there because it was a clear-cut momentum play. The lower it got, the more “shorts” it attracted, until it became a self-fulfilling profit-maker for all those who shorted it.
But then it sprang back all the way up to the 50’s, so that if you had come late into that game, you could easily have been caught short at say 26. With 10,000 shares, that would have meant a loss of wipe-out magnitude.
A contrarian play: that is one which goes against the grain. For example, if something falls too much, you buy a few, thinking that it’s bound to pick up. That strategy is too whimsical and might pay off once in a while, while incurring losses the rest of the time.
Chartists: chartists are also referred to as technicians, and some of these technical indicators for day trading are basic chart patterns, while others are extremely sophisticated. Also, there is a traditional rivalry between fundamentalists and technical traders, each group belittling the other.
A basic chart on the upside is, for example, if a stock climbs up to 40, then backs down to 37, then back up to 40, then backs down to 37 one more time. It has established a pattern of meeting selling pressure at 40 and buying enthusiasm at 37. A chartist would thus put a “stop buy” order at 40 ½ , the idea being that if it pierces that resistance level at 40, it will go up to at least 50% of its prior fluctuation between 40 and 37. Remember, when you’re day trading, a fluctuation of $1 is often what you’re happy with.
A “stop buy” at 40 ½ means that the order will become a market order if -and only if- it hits 40 ½.
The same with a short seller who, when the stock is close to 37, might put in an order to “stop sell’ at 36 ½, the idea being that if it pierces its previous lows of 37, it will go further down.