Despite the ominous warnings by the Securities and Exchange Commission cautioning investors against the controversial yet potentially lucrative business of day trading, people attempt to try and attain day trading skills, and a day trading stock tip is literally worth it’s weight in either gold, or dross! Below is some information on learning trading techniques, the risk you may incur, and techniques for becoming a successful trader.
Just what is day trading and how do individuals gain day trading skill? Day trading is the act of quickly buying and selling stock throughout the day in the hopes to profit from the marginal changes in the market for that specific day. Ideally, day trading strategies allow investors to garner profits from the fractional increases in the market.
Day traders observe a particular set of indicators when figuring out whether a stock is suitable for day trading. First, the stock must have high liquidity. This means that the stock in question has a large number of buyers and sellers. The liquidity allows day traders to rapidly buy and then sell stock. Liquidity is created by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Many stocks on the NYSE and NASDAQ have a high degree of liquidity.
A day trader also looks at volume individually, in addition to using it as criteria for liquidity. To qualify for day trading, a stock should trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more enable the day trader to buy or sell a large amount of stock without greatly affecting the price of the stock. Volatility is another factor in evaluating a stock for day trading. The phrase refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders look at the pattern and volatility of stocks over an individual day. Stocks that change price several times over one trading day are good candidates for day trading. A fluctuation of at least $2.00 per day is recommended.
Finally, a day trader looks at the price transparency of stock. This term refers to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader determine just how much money there is to be made on a certain stock. The NASDAQ II quote system offers data on all bids. Day traders who arrange to access the NASDAQ level II quote screens can assess the performance of a stock and determine its swing in price.
While these trading techniques are totally legal and totally ethical, they are highly risky. Day traders generally buy on borrowed money with the hope that they will realize higher profits through their acquisitions and sales. People who are called “pattern day traders” by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops dramatically, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC warns against day trading and acting on a day trading stock tip, and has taken many steps to inform people of the corresponding risks.
The first few months, a huge majority of day traders have massive financial losses and only a few make it through to become profit-making day traders. For this reason, day traders should only invest cash that they can afford to lose. They should never invest money reserved for necessities like living expenses or education funds.
Bear in mind that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme hazards of prices changing to the detriment of the trader. Day traders do not invest, rather, they hypothesize on the movement in price of a stock throughout the day.
There are numerous websites whose sole purpose is to make money from those who seek a day trading stock tip. These websites promise quick results and sell hot tips to their members for a fee. The sources are generally paid to make these recommendations and should be avoided. Seek the advice of a proven professional, and take plenty of time to discover trading strategies for longer term success. Remember, there is no quick money, and day trading skill is often paid for with debilitating stress and cataclysmic losses.
By: ron king
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For a wealth of free info on understanding stock trading, check out the articles at Stock Trading Information Resource, or make sure to read The Wall Street Journal – my #1 pick for stock information. Ron King is a web developer; visit his website Authoring Articles.
Copyright 2008 Ron King. This article may be reprinted if the resource box is left intact and the links live.