Day traders utilise the regular hours of a trading day to make short-term trades, buying and selling positions on the same day. To register sizable returns, traders need to have extensive knowledge of the market and a structured plan when pursuing such day trading activities. Failing to cognise certain market nuances while day trading may hurt their profit margins. Thus, in-depth understanding of the market and its trading norms is a prerequisite when engaging in such trading activities.
Things to Know Before You Try Day Trading
Before you open a trading account for your day trading operations, you should keep the following 10 things in mind:
1. Education
Without comprehensive knowledge about the market, no day trader can be successful. Reading the free educational material available online can help budding day traders gain valuable insights into the lay of the market as well as the way it operates. Thus, while online trading account opening may take you only a few minutes, investing hours in learning such educational insights may help arm you for the battlefield you’re about to enter.
2. Technological Tools
Today, trading technologies have evolved by leaps and bounds, ensuring that adequate day trading facilities are available to investors. Access to real-time stock prices is one of the most essential prerequisites for a successful day trading session. With advanced trading tools, a day trader has access to such real-time prices as well as charts and other relevant data that may be needed to streamline such trading activities.
3. Automated Trading Systems
Unlike popular belief, you don’t have to constantly look at the trading screen to ace day trading. Automated trading systems monitor and execute sales automatically as per the trader’s investment plan. By opting for such a trading system, day traders can diversify their portfolios as well as maintain desired consistency in their trading activities.
4. Trading Times
Aspiring day traders have to be aware of the global trading times. To seize fleeting opportunities, knowing the pre, regular and after-market hours of indexes like NASDAQ and NYSE is essential for day traders. To exploit lucrative opportunities, day traders have to be aware of a market’s most volatile time slots.
5. Commission Free Trading
There are brokerage firms that offer day traders zero commission trading benefits. Thus, they can trade stocks and ETFs without paying commission charges to the broker.
6. The Pattern Day Trading Rule
This rule essentially acts as a limit to the trading activities of a day trader. Your broker may flag you as a pattern day trader if you use a margin account to execute 4 or more day trades during a 5-day window and if the value of those trades is more than 6% of your account activity during the same period. You can continue as a pattern day trader by meeting the minimum equity level requirement posted by the Financial Industry Regulatory Authority.
7. Brokers with Direct Market Access
As mentioned earlier, day traders may want to optimise their gains by trading during the extended market hours. However, not all brokers endow this benefit to their clients. Thus, opting for an online broking account from a specialised day trading broker that allows trades at any given time of the day may be a prudent choice for aspiring day traders.
8. Different Types of Orders
Your trade execution price will play a seminal role in determining the profitability of your day trading activities. Here, cognising the difference between market and limit orders may be extremely crucial. While the former allows you to trade the stock for whatever the ongoing market price is, with the latter you can name your price. Limit orders may be preferred by most day traders as they get to exercise price control on their stocks.
9. Routing of Orders
If you opt for a zero commission broker, your order will be routed directly to 3rd party venues. Venues trying to match buy and sell orders for the best available price can be a time-consuming process. Alternatively, if you opt for direct market access brokers, you can control the order route by choosing particular stock exchanges, however, you’ll have to forego commission-free trade benefits.
10. Rate of Success
Studies suggest that the success rate for day traders is quite low. While high returns may be possible through day trading, it does require a well-defined strategy and unmatched agility to be successful in this type of trading activity.
Conclusion
Day trading can be a fruitful undertaking for those who are willing to dedicate a sizable proportion of their day to studying the ebbs and flows of the stock market. It is prudent to start small by opening a broking account online only after acknowledging the myriad aspects of the day trading process.
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