Want To Become A Day Trader? Here Are The Pros And Cons

Financial Advise

Day trading has grown in popularity particularly in the past year as more and more individuals sought financial freedom and the ability to live life in a way that is meaningful and fulfilling to them amid the global coronavirus crisis.

The surge in amateur day traders has helped to create a record number of new accounts at brokerages like Robinhood, TD Ameritrade, and Charles Schwab (NYSE: SCHW).

Such small-scale traders now account for a fifth of overall stock-market trading activity, according to some estimates.

In this article, we will dig deeper into the main benefits and downsides of day trading to help decide whether day trading is the right thing for you.

What Is Day Trading?Day trading is one of the most common trading styles that is used by traders around the world.

This speculative trading style involves opening single or multiple trades during a day and exiting them by the end of the current trading day.

Simply put, day trading is the act of buying and selling stocks on the same day, based on price fluctuations.

Example

If you open a new position at 8:45 a.m. and close it by 2:00 p.m. on the same day, you have completed a day trade.

If you were to open the position and fail to close it later that same day, it would not be considered a day trade.

Unlike in position trading or swing trading where trades are held for weeks or days, day traders can immediately analyze their trading performance by the end of the day.

Day traders generally spend over 2 hours every day to watch short term price movements and trade setups. They use advanced charting systems that are plotted by 1, 5, 15 or 30 minute intervals.

Pros Of Day Trading

Under the right circumstances, day trading can be an amazing career option with plenty of benefits. Let’s take a look at a few of them.

However, this line of work isn’t for everyone. Successful day traders need to be self-motivated, disciplined, levelheaded and financially independent.

If you’re thinking about pursuing a career in day trading, compare your own personality profile against this list of key characteristics and personality traits.

  • You are your own boss

To begin with, most day traders work from home and don’t have hard-nosed bosses telling them what to do at all times. Even better, successful traders may earn enough money to live life comfortably.

They simply stay on task during trading sessions and commit to intensive preparation and research sessions. After settling upon a profitable strategy, they stick with it until it no longer works.

  • Day trading provides you an opportunity to earn a comfortable living

There are not many things that can equal the emotional high that comes with a sweet profit achieved solely by the effort of a single individual.

As a day trader, you have the opportunity to make a great living, provided that you have a well thought out strategy, understand the inner workings of the financial markets, and can afford to take the risk.

For example, on March 7, 2015, an options trader raked over $2.4 million based on a single news wire in just 28 minutes.

According to CNBC, the trader executed the trade after a respected Wall Street Journal reporter tweeted at 3:32 pm that Intel (NASDAQ: INTC) was holding talks to acquire Altera.

Shares in Altera began to shoot up, so much so that the stock was halted after only three minutes at 3:35 pm. But within that short time period, the trader was able to place a bid for 300,000 Altera options at $36 a share.

At the closing bell, Altera shares were up $44.39 helping the trader to make more than $2.4 million.

Granted these types of gains are not normal and shouldn’t be expected especially if you’re just starting out. But it is possible.

You can also make or lose more money by utilizing leverage i.e., money that you borrow from your broker to in order to trade more, which most day traders use.

  • A variety of trading strategies

Day traders has several trading strategies they can use to trade across all major markets. Some of the most popular day trading strategies include trend-following, breakout trading, and counter-trend trading.

  • Overreaction to news

Markets consist mostly of humans, and they tend to overreact to news.

This is why you will see big price moves when certain news is released. Day traders often take advantage of that behavior and squeeze out extra profits.

Volatility is what day traders look for.

Cons Of Day Trading

Day trading can be rewarding, but it also carries a high risk. First, there is never a guarantee that you will earn money.

As a matter of fact, the U.S. Securities and Exchange Commission (SEC) says that “day traders typically suffer severe financial losses in their first few months of trading.”

A good example is what happened in late January during the Gamestop Reddit mania that puzzled Wall Street and triggered federal scrutiny.

Shares of some heavily-shorted stocks including Gamestop (NYSE: GME) rocketed to record highs before plunging back to earth.

While some traders made a fortune by trading these stocks, those who failed to time the trade perfectly lost money.

Here are two other top risks in day trading:

  • It requires capital

Day traders need to have the right computers and software to access the necessary financial information and spot the price variations.

The U.S. law also requires that day traders maintain a minimum of $25,000 in their trading accounts at the end of the trading day if they want to make at least four round-trip trades over a period of five days.

In addition, taxation can become a nightmare because you may acquire capital gains and losses when day trading various instruments available in financial markets.

  • Success tends to be closely tied to the state of the current market environment

When the market is in a period where there is no huge upward or downward moves, day traders often lose their cash by churning their accounts and holding onto losers too long.

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How Many Day Trades Can You Make In A Week?

Financial Advise

As with kicking off any career, there are plenty of things you should learn if you have dubbed yourself a brand-new day trader.

Not only will you need to decide what to trade, when to trade, how to manage your risk, but you’ll have to get the right software and equipment, and of course, determine how many day trades you can make in your brokerage account.

In this detailed guide, we will go over how many day trades you can make in a week depending on what type of account you have. 

What is a Day Trade?

A day trade is when you buy or short a financial instrument and then sell or cover the same instrument in the same day with the goal of making a profit.

For example, if you buy 100 shares of XYZ stock at 9 am and sell all the shares at 1 pm on the same day, you have completed a day trade. Just opening, without closing that position that same day, would not be considered a day trade.

Another day trade example is when you open a position to purchase 200 shares of XYZ stock at 9:30 am, followed by a purchase of another 200 XYZ shares at 2:30 pm, followed by a sale of 400 XYZ shares at 4 pm.

In addition, if you short sell 150 shares of XYZ stock at 9:30 am and then open a buy position to cover 150 shares of XYZ stock at 10:30 pm, you will have made another day trade.

Individuals who indulge in this style of speculative trading are known as day traders. The most common day traded financial instruments are stocks, futures, and forex.

Day traders typically make use of technical analysis tools and a trading strategy to try and profit off within a short period of time and will often take advantage of portfolio margin to boost their buying power.

Successful day traders don’t just trade any stock they come across. They have to be fully prepared with a well-planned strategy and employ a wide variety of techniques.

Cash Accounts and Margin Accounts

If you are looking to day trade securities, you can do so using an online brokerage account. Generally, there are two main types of brokerage accounts: cash account and margin account.

The difference between a margin account and cash account is that the margin account lets you borrow from your broker while the cash account does not.

In other words, when you open a cash account with a broker, you will be required to pay in full for the securities you buy for your account. If you have $200, you can only buy $200 worth of securities, and can’t use the securities in your account as collateral to borrow more money.

On the other hand, if you open a margin account, you can borrow money from the broker to buy securities, using those securities as collateral for the loan. Generally, when applying for this type of account, the process has to be approved by the broker to make sure you are qualified for the account.

Margin accounts also come with special features for active traders, like short selling.

Now that your understand the difference between the two accounts, let’s dig deeper to find out how many day trades you can take in a week in a cash account and how many you can take in a margin account if you are under $25,000 and if you are over.

How many day trades you can take in a week in a cash account?

One of the main benefits of day trading using a cash account is you can place as many day trades as you would like until you cash is used and won’t be held to the pattern day trading rules in a margin account.

But you will have to wait for your trades to settle before you can proceed to use that cash again. Typically, it takes one day from the trade date for options and two days from the trade date for stocks.

Example: If you have $10,000 in your cash account and you buy and sell $2,000 worth of stock, then you have $8,000 left to day trade until the $2,000 you used settles in two business days.

Cash accounts don’t follow the dreaded Pattern Day Trader Rule (PDT) rule that may prevent traders with less than $25,000 equity in their accounts from executing 4 day trades or more in a 5 day period. This is a huge benefit for traders who don’t have the extra $25,000 lying around.

The PDT rule was implemented back in 2001 by Financial Industry Regulatory Authority (FINRA) as a safety measure to help minimize the risks associated with day trading.

How many day trades can take in a margin account if you are over $25k?

When trading on a margin account, you will be subject to the pattern day trading rule, meaning you will be required to maintain a minimum of $25,000 in equity in your account if you place more than 4 intraday roundtrip trades in any rolling five-day period.

If your account is labeled as a pattern day trader, you will have to maintain that account minimum and if you don’t, you will not be able to day trade.

If you do have the minimum equity requirement in your margin account, you will be given day trading buying power which is 4x more than normal amount.

So, if you have $26,000 in your margin account, for example, you can trade up to $104,000 per day as long as you maintain the $25,000 minimum margin amount.

Keep in mind that day trading buying power can not be held overnight.

How many day trades can take in a margin account if you are under $25k?

If you have less than $25,000 in your margin account to day trade, you can get around the PDT rule by making only three day trades in a five-day period. But this means you’ll need to pick a stock from several valid trade signals, so you are not going to receive the full benefit of a proven strategy.

Essentially, if you have a $5,000 account, you can execute three-day trades in any 5 consecutive trading days. Once the account value surpasses $25,000, you will not be affected by the PDT restriction.

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Why You’re Not Making Money Consistently With Your Trading

Financial Advise

The stats are pretty clear – over 90% of people who day trade are not able to generate consistent profits.

This pretty shocking statistic means only a handful of traders actually have anything to show from their day trading activity and some have sadly lost money.

And still millions of people around the world still engage in day trading, many of them on a regular basis.

Once primarily practiced by professional investors, day trading is increasingly becoming popular thanks to superior online trading platforms and free-stock trading apps such as Robinhood.

But what is going on? Why do so many people lose money while trying to profit from market fluctuations and how can you join the 10% of traders who are consistently profitable enough that they have made it their full time living.

Why Most Traders Lose MoneyLike Ross Cameron says, day trading is the hardest yet easiest job in the world. What he means by that is that you can trade on your laptop from home or a hotel room from almost anywhere in the world, as long as you are connected to the internet.

It is an easy and amazing job.

You are not hammering roofs in August or going out on the highway in 10 degree below weather in the middle of January. But while day trading is a pretty nice job in a lot of ways, it is very hard in some aspects since 9 out of 10 traders fail.

So, what are some of the reasons for those failures and why do most traders struggle to turn a profit.

  • They lack of a trading edge/strategy

One of the reasons why most traders fail to bring their trading to its full potential is because they trade without an edge or strategy that works. Most traders don’t even have a clue what a trading edge is, let alone how to develop one.

A trading edge is when you can identify something in the market that gives you an advantage or insight into how well a trade will do.

Whether you are a beginner trader or have been trading for some time, a trading edge is necessary as it can greatly keep you on track to achieve profitable and steady trading results.

  • They fail to review their trade results

The second reason is because they don’t keep a record of their past trading activities that they can go later study to sharpen their skills.

Chess masters keep journals to record down their thought process of the game and their plays. Scientists have journals to track their latest findings and the results of their experiments.

This should be the same for traders! Unfortunately, only a few traders have a trading journal that they use to review their trades.

  • They trade with emotion rather than systematically

Thirdly, many traders fail to control their emotions when trading and end up ruining their hard-earned cash. For instance, after having multiple losses in a trading session, a trader is afraid of having a losing day.

This worry triggers the trader to over-leverage and blow up their trading accounts.

It can also cause FOMO. One of the most common trading emotions you will come across, which stands for fear of missing out.

This happens all the time when you see a hot stock that is ripping higher and all you want to do is buy some shares but can’t get a good entry so you end up chasing it. This usually results in a bad entry and increases the likelihood of taking losses.

  • Lack of discipline

Discipline is the most important trait of successful trading.

Lack of discipline is often the cause of the most common trading mistakes like executing trades prematurely, over-trading, revenge-trading, breaking trading rules, violating risk management rules, making impulsive trading decisions, and more.

All of these things mostly result in losing much more cash than what a trader had initially projected and what would be necessary.

What You Can Do To Realize More Success In Your TradingTo avoid both of these mistakes and become more successful, traders ought to a few important things that we’re going to discuss in the following section:

Define your trading edge

Focus on a strategy that makes sense to you and master it as opposed to trading all types of strategies.

For example, Ross focuses on small cap momentum. Basically, a small cap is a company with a market capitalization of between $300 million and $2 billion.

Ross has mastered several small-cap trading strategies and knows how to find support and resistance on charts. His trades are mostly based on small cap stocks that rise 20-30% or more in a single day. These stocks are typically priced between $2 to $10.

So, instead of trading Apple (NASDAQ: AAPL) and many of the other large cap stocks, Ross prefers to trade small cap stocks which are generally more volatile.

Review your trading process with an open mind

 As mentioned earlier, most traders never look at their trades again once they have closed them. They just jump to the next trade, forget everything they did previously, and completely avoid learning effects.

Make sure to review your trading process on a regular basis. Keep an open mind while doing so and it will show you everything you need to know.

You also have to be wary that if you are too stuck in your ways, you will end up imposing your ideas on what the market ought to do, instead of reacting to what is really happening.

Make revisions where you see weakness in your trading

Most traders do not understand why they need to revise their strategy. You need to take your trading strategy through a process of trial and error for it to be complete. While this will take time, it is effective and works perfectly with the market and increases the chance of success.

One easy way you can do this is by writing down the mistakes you make frequently and putting those physical notes next to your trading screen where they can see them at all time, so they can help you become more aware of your actions.

Always work on improving and adapting to market conditions

Having a trading strategy is not enough.

You constantly have to change your trading behavior from trade to trade in order to adapt to changing market conditions. If you don’t adapt to constantly changing market conditions, you will never be able to make decent profits in trading.

Volatility is the factor that keeps on changing and when it changes, you have to change your trading strategy too. By adjusting your trading approach and analyzing volatility accordingly, you can provide a whole new level of help to your trading strategy.

Traders have to know what to change, why to change it and when. While no trading strategy works 100% of the time, it is your responsibility to find ways to make your trading strategy work in every market condition.

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Stock Broker Essential Guide

Finance

When you want to day trade stocks, options, currencies, futures, or other financial instruments, you need a broker who will execute the trades in the market on your behalf.

The broker you choose is a very important decision. They will play a key role in helping you to trade in the market day in and day out.

We have prepared this stock broker guide to help both beginner and experienced traders to understand the role of brokers, what they are, how to choose them, what to look for, and the importance of choosing the right one for your trading.

We are also going to provide a list of the best brokers that you can rely on in your trading journey.

All About Brokers

A broker is an intermediary between buyers and sellers of financial instruments. Their role of is to facilitate the buying or selling of these instruments for a commission or fee.

There are many well-known brokerage firms in the U.S. through which you can use to trade in financial markets.

In addition to facilitating the purchase and sale of various instruments, some brokers also offer an array of services to their clients such as financial advisory services, portfolio management, retirement planning, depository services, and mutual funds services.

You have probably seen brokers showcased in movies as guys wearing suits, picking up their telephone and calling their clients to inform them about hot stock tips.

While these on-screen portrayals of brokers are accurate, the financial industry is transforming rapidly, and the traditional brokers as we know them are slowly becoming extinct.

With the advancement of technology, it is now easier for traders and investors alike to transact online, thanks to the emergence of online brokers.

Online brokers are convenient, as traders can place orders, make changes and check quotes from anywhere. These brokers also facilitate faster execution of trades, enabling traders to take advantage of market volatility in a better manner.

Importance Of Choosing The Right Broker For Your Trading

Choosing a day trading brokerage firm is the imperfect storm of science and art.

The art, of course, is the cosmic connection that has to be there between you and the broker you are counting on to execute your trades. The science is all the research that you put into it. You require both.

Your decision on whether to stick with the broker, though, should not be based on science or art — but on your individual priorities.

How To Choose Brokers

The basic things to remember when picking a broker are simple and few. Undoubtedly, your first priority should be to make sure that your funds are in safe hands.

The best way to take care of this by ensuring that you only use a brokerage firm based in and regulated by a financial regulator in a respected financial center.

Once you have taken this precaution, look at what the broker offers in terms of:

  • Commissions, ECN fees, data fees, margin fees and fees for phone order executions.
  • Speed of trade execution and platform stability.
  • Range of available financial instruments to trade (stocks, options, commodities, OTC, forex, futures, and eve access to international markets).
  • Customer service.
  • Customer incentives for new traders.

It doesn’t really matter which broker you choose, so long as you feel like your hard earned money is safe and the broker provides the necessary tools for you trading style.

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