Wednesday, January 18, 2012

Day Trading Basics

Many times I have seen speculators turn small losses into catastrophic ones all because they lacked the discipline to exit a bad trade.  Discipline is what separates a good day trader from a bad day trader.  Most day traders only trade the Dow Jones of course some also trade the Nasdaq.  A day trader trades  stocks that have a minimum volume of 1-5 million shares and a stock that moves significantly from the day's low to the day's high.  There is no universal definition of what a day trader should follow but there are some basic rules all do adhere to.  A day trader must have at least $25,000 in his/her account at all times.  A day trader will keep a stock for a few seconds, minutes or hours but will not keep a stock overnight because of the lack of control on the stock's movement and their inability to exit overnight.

Some day traders will not speculate on risky securities such as pharmaceuticals moving through the clinical trial stages they prefer to watch from the side lines.  A day trader should set rules for himself and always follow them.  A day trader should not let his position move against him more than 5% -7%, for example if a trader purchases 1000 shares of security ABC at $20 (1000shares @ $20 = $20,000) and the stock begins to drop and move against him the trader should have pre set a price to which he will not let the stock move below.  Following the 7% rule he would exit before or at the stock price of $18.60 ($18,600) for a loss of $1,400 ($20,000 x 7% = $1,400) but no more than that. 

It is important to stick to your rules, it is better to take a small loss than a huge loss.  Most day traders let their losses become larger without exiting and they seem to have trouble letting their winning stocks rise often selling them too fast and taking very small profits.  I have seen day traders turn a $30,000 profit into a $40,000 loss because they did not stick to their rules or for lack of rules.  I have seen men in their mid life take $100,000 from their joint savings account to become day traders without studying the art and in a few weeks evaporate their day trading accounts to less than $20,000.  I have seen young men open accounts with brokerage firms that offer them high leverage, walk out with substantial losses that will not let them return to try again nor learn because the losses were too large and often too fast.

What they all had in common was the lack of training and discipline, most don't know if they want to be day traders or long term traders.  Some begin as day traders until the moment a stock turns against them then they all of a sudden become long term traders.  The problem is that day traders trade on margin which allows them to speculate with borrowed money and stock if they choose to use it.  Most traders choose to borrow funds but it is usually the inexperienced that decide to use all of their leverage even when they can not afford to repay or meet a margin call

A day trader should never hold on to losing stocks to such a point where his positions will make him vulnerable to a margin call.  During the summer with the U.S. downgrade and the European debt crisis brokerage houses added a little insult to injury by raising their margin requirements resulting in day traders being demanded to exit trades faster not giving them an opportunity to recover from losses.  Most day traders speculating with out adequate funds lost huge amounts of money and did not have the proper funds to feed their accounts to recover from the rollercoaster ride we experienced in the second half of 2011. 

Day trading without a plan is a recipe for disaster, not being able to exit trades profitably or with small losses is surely to end up in a short day trading career.  Investors who choose to buy stocks for the long term do buy stocks and hold them often for life and that is fine, a long term trader knows the market will fluctuate and will only change his positions a few times but will mostly sit back and watch his securities grow over the years.


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  2. Day trading has survived the market because it has proven itself to be lucrative and appealing to people who want to engage in another type of business. It is only for the people who can take risk and speculate the market on daily basis frequently and learn day trading nitty-gritty. Thanks a lot.