Introduction
Over the years, there have been several assumptions made about day trading. Many believe day trading brokers lose a whole lot of money. Others assume that only a few get quite impressive profits from their trading. While there might be justification for the stances on what is obtainable from day trading, it is also important to explain that many of these presumptions are probably hinged on incomplete information. This article carefully explains what day trading is all about, the brokers, the benefits, the risks associated with it, along with other areas of discourse that are highlighted below.
What is Day Trading?
Day trading involves the buying and selling of securities within a specified period of time, which normally falls within a day. This trading usually takes place within a foreign exchange and stock markets. The sole aim of day trading is to raise profits from the financial markets. Day traders could make several trades or probably just enter a single position and exit within a trading day. These traders are also known as speculators as profits remain their drive for trading.
It is important that day traders exit positions when they are through trading so as to avoid detrimental risks and negative gaps that might arise between the opening price in a day and the closing price of the previous trading day. The margin (which is the pledge that the holder of the money has to deposit with either a broker or an exchange) leverage is commonly used in the United States by the day traders. The Federal Reserve Board Regulation T, which is also known as Reg T, allows a starting leverage of 2:1. Although, many brokers allow a leverage of 4:1, so far it is reduced by the end of a trading day to 2:1 or below.
Investing in Day Trading
Traders who get involve in more than 3 day trades within a week are referred to as pattern day traders and are expected to run their trades with $25,000, in form of equities in their accounts. Initially, day trading use to be restricted to selected individuals and firms, who are considered professionals. However, several retail investors are also getting involved in trading. As a day trader broker, it is advantageous to broker for financial institutions as you would not be investing your own money but that of the institution.
Again, you will gain access to a lot of information and tools that would aid the smooth operation of your trading. Although, there are some institutions that make available their platforms and software to be used for day trading but day traders are responsible for the capital to be used in investing. Financial instruments that are commonly day-traded include but not limited to currencies, stocks, equity investment and options. The financial instruments that you trade determine to a large extent the potential of your earnings.
Becoming a Day Trader
If you want to become a day trader who is knowledgeable about the different brokers and trade styles, it is important that you have the requirements that are explained below:
Have Financial Knowledge
Do you think you have the technical abilities to actually cope in the financial market? There is a level of commitment that is required for you to succeed in day trading. This is because you have to commit a lot of time and attention to it. Also, you must possess the mathematical abilities and be ready to learn.
Possess Market Understanding
Day trading is not a journey you start without knowing what the financial market is all about. There are basic operational terms you must know. Your knowledge horizon must cover the simplest to the most complex detail in day trading.
Be Financial Buoyant
To be successful in day trading, it is important that you have enough capital to sustain your day trading activities. There is no way you can effectively trade if your capital is small. Again, the frequency of your trading also influences how much is spent in your day trading.
Have A Trading Strategy
There are established trading strategies that a day trader can adopt and adapt in their day trading. However, you have to know that these strategies are prone to unexpected changes. Hence, you must be at alert and ensure you know when to tweak or probably replace your strategy with another.
Do Your Research
It is important that you constantly research on how you can effectively execute your trades. For instance, a proper research would equip you with the knowledge needed to plan and structure your trades based on the profits that could be generated from your trades. Also, you have to have a proper knowledge of which brokerage plan you want to adopt. Furthermore, if you do your research well, you can also learn to offer those brokerage services which would definitely bring you more profits.
Strategies for Day Trading
Every trade has its own mode of operation. However, it is important to note that these strategies do not automatically guarantee huge profits while using the day trader brokers but they will rather position you to maximize profits and control losses as well. There are several strategies that could be employed during day trading and they include:
Fading
This is a strategy that sees a trader buys when a price is falling and sells when the price is rising. The rationale behind this is that it is assumed that the market price will return to the average price. And it therefore becomes important for traders to go against the flow. Day traders that adopt this particular strategy are known as contrarian investors.
Scalping
This strategy is used in making profits from slight changes in prices, especially after a trade is completed with profits generated. Day traders who adopt this strategy believe that most stocks would definitely go through the first round of trade before uncertainty sets in. Although, it is also very important to have an exit strategy in place as a single loss could be far more than the profits generated by the trader. For this strategy to be effective, the investor must possess the right requirements to make it work. These tools include live feeds and a broker that is focused on speed and successive trading.
Momentum
This strategy is a bit crazy as it requires the day trader to buy stocks when the prices are high and then re-sell at higher price. This implies that the day trader has to be conscious about the upward movement of prices of the stocks. A foremost momentum investor always used this strategy as he did not buy the idea of purchasing under-priced stocks, and then re-sell, depending on the market prices. For the effectiveness of this strategy, it is important for the trader or investor to be well versed in risk management.
Pivot Points
This strategy is used by day traders to set entry and exit points in the market. For instance, a day trader might decide to set a limit order to purchase an amount of shares if the resistance level is broken by a price. The day trader might as well decide to place a stop loss around a particular support level. Though, it is important to note that the effectiveness of the pivot point strategy is hinged on the ability of the day trader to study the direction of trends using technical indicators such as candlestick patterns or make proper use of the moving average to help determine the market trend.
What is a Trading Platform?
Every day trader uses a trading platform. And these platforms are software used to open or close market positions via an intermediary known as the online broker. These online platforms have a lot of features such as news feed, charting tools as well as real-time quotes. There are also platforms that are aligned with specific markets such as futures or options markets.
There are basically two types of trading platforms and they include; Prop platforms, which are usually customized and developed to fit the requirements of big brokerages; and the Commercial platforms which are specifically meant for day traders.
Selecting a Platform
There are basic things to watch out for when selecting a trading platform and they include the features and the fees. Depending on the expertise of the trader, there are different levels with specific features on trading platforms. This goes a long way in influencing the choice of a trading platform by the day trader. Again, the finances to be expended also play a dominant role. For instance, some trading platforms have a benchmark for initial capital that brokers can use to run day trading. Depending on the trader’s financial capability, trading platforms are selected.
Furthermore, many traders also consider the credibility of the broker they intend to get involved with before selecting a trading platform. This is necessary because several brokers might not have what it takes to day trade on some trading platforms. It is therefore important to ensure that the selected broker is trustworthy enough to be saddled with the task of managing your accounts. You also have to note that you might not have access to some trading platforms if you are not ready to work with some specific brokers.
Top Day Trading Brokers
Ally Invest
This is one of the best trading brokers for traders. At the moment, they allow day trading brokers to trade stocks at $0 per trade. There are a whole lot of benefits to enjoy from this trading app from the investment side. Also, their requirements are quite simple and attractive to new investors.
TradeStation
If this broker is known for anything, then it has to be the great customer service support that they offer to their traders. The app has very little downtime and great technical and charting tools for trading. Its usability has also improved a lot recently as you can create an account and start trading immediately.
WeBull
This is a commission-free trading broker. The creative design of the app is appealing to those traders that are really passionate about using tools and data while trading in the stock market. At the moment, it does not offer options trading but it allows for trading of known mutual funds.
Merill Edge
This trading broker is acclaimed to be one of the best brokers. It allows for deep analysis of your assets. Though, it does not allow for trading of futures or crypto currency. One good thing about the app is that it has a great customer support service.
TD Ameritrade
This trading broker makes an average new investor comfortable while using. It gives you access to a wide range of features. Sometimes, it gets so difficult to use due to its complex design, as it is rich with a lot of valuables. It has also been rated high by several reviewers.
Charles Schwab
Do you day trade once in a while? Then, this day trading broker is probably the best you could use. It is also quite easy to use on a mobile device. It does not impose any minimum deposit and brokers are also free to trade stocks on the app commission-free.
E*TRADE
Their mobile apps are very easy to use. This is probably because of their layout. For those day traders who have a lot of cash to invest, these broker’s portfolios guarantee you a quick access to the markets. Although, it is widely suggested that investors who would love to trade foreign currencies will probably not enjoy it much.
Interactive Brokers
This trading broker has the highest wide range of offerings. It is also highly recommended for day traders that are heavy investors. You also have the opportunity to trade options, trade forex as well as futures. Onboarding on this day trading app is now less technical following recent changes.
Benefits of Day Trading
There are a whole lot of benefits associated with day trading and they include:
Increase in Status
In the society, day traders are well respected and influential. This is because they are perceived by people to be wealthy. It is mostly assumed that only the rich could successfully become a broker. And more so, it is not a task that the poor would want to engage in.
Independence
Since decisions are made unilaterally by the day trader which is of course influenced by market trends, they are considered independent. This is because they only get profits based on the decisions made by them. And they are also self-employed as they do not have to give reports to anyone.
Financial Gains
The biggest benefit of day trading is that you have the enabling environment to gather huge profits within a short period of time. This is because day trading is not a long-term investment that would take a long period of time to yield benefits. Although, it is important to note that it also comes with a lot of risk but with huge financial gains therein, if you can actually navigate your way round it well.
Risks of Day Trading
There are a whole lot of risks associated with day trading. It is important that new traders are well aware of these potential setbacks and well prepared to address them, if encountered in the course of their trading activities. Some of these risks are detailed below:
Technology Failure
It might be disastrous if your gadgets develop fault while you are busy trading. Things could even get worse if you have no alternative to keep trading going smoothly. This implies that you have to ensure that your computers, power supply as well as your internet are all catered for. In the case of emergency, ensure you have other options you can fall back on. Though, it is also important for you to place a stop-loss order on every trade, in case of technology failure.
Order-Related Mistakes
Not having a sound knowledge of your order types is limiting. For instance, it is expected that you are aware of your limit order, which demands knowing when to get in and out at a set price. Again, not setting profit-targets and stop-loss orders could make you lose a lot of money. It is therefore important that you have a good knowledge of your order types.
Challenges with your Brokers
It is important that you do a proper research about your broker. This is because of the several risks associated with a broker. For instance, you might find your broker trading against you or probably encounter difficulties using a broker’s software. This will hinder the smooth execution of your trades. To be sure of your chances with any of the brokers, try out day trading using a demo account with them for a period of time and observe their mode of operations. This will guide you in making an informed choice.
Conclusion
From the foregoing, it can be observed that being a broker requires careful planning and studying of the market trends. And of course, profits might not be generated everyday as there are huge chances of losses. Big losses could actually be curtailed by adhering to some of the basic principles and using of day trading strategies that have been explained in this article.