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Strategies for Successful Day Trading

Day traders often trade stocks in lots of 1,000 shares or more, putting large portions of cash at risk with every trade. Although the profit potential is great, so is the risk of losing all your money and maybe even owing money if you use borrowed cash in your margin account.

Before you ever consider day trading, you need to understand the risks you’re taking and how to control them. Otherwise, money can flow out of your account very quickly. Studies show that it generally takes six months to learn how to be a successful day trader, and during that learning curve, you can count on losing money.

Success rates of day traders range from 10 percent to 30 percent of those who try it. In other words, 70 percent to 90 percent of the people who attempt day trading don’t succeed and frequently end their day-trading careers in debt.

Technical needs

Number one on the list of things you need to become a day trader is a very good computer and Internet setup. They’re necessary for successful day trading. Most traders have two or more monitors with a PC built to handle a large number of data feeds at one time. Windows 7 or 8 is the preferred platform of day traders.

Daily computer maintenance is critical for day traders. Computer problems are the last thing you want to experience in the middle of your trading day, especially when buy positions are left open. You can lose a lot of money if you’re waiting for your computer to reboot and a trade goes sour.

Traders recommend that you clear the cookies (files that websites send to your computer when you’re using them) from your Internet cache on a daily basis and that you defragment (reorganize your files so the computer runs more efficiently) your computer at least once a week.

Another key step is finding an Internet service provider (ISP) that is reliable and offers high-speed access to the Internet. Many traders have more than one ISP lined up, so they have a backup in case the first one goes down. Again, you don’t want to lose even mere seconds when you’re in the middle of your trading day, especially when you have open positions.

Trading patterns

Day traders make use of patterns seen in technical analysis. One common pattern that day traders look for is a price gap in a stock at the opening of the market. They find that prices usually move in the same direction as the opening price gap during the first few minutes that the market is open and then the market tends to reverse and fill the gap.

Trading that doesn’t fill the gap during the first five to ten minutes can signal a dominant trend for the day for that particular stock. Some traders watch this action to find their targets for the day and the directions they plan to play them. There is no consensus on this, of course. Others believe early market moves give false signals and that using those moves can be dangerous.

Traders watch for many of the same patterns they find when looking for breakout signals and signs of reversals. The key difference is that a day trader looks for intraday signals, while longer-term traders format their charts for longer periods of time.

Scalping

Scalping basically means you move in and out of a position for a very limited profit in an extremely short time frame, usually just a few minutes or possibly only a few seconds. The scalper’s objective is to make profits of only fractions of a point on any given trade, rather than the several points profit that most traders seek.

Day traders execute their trades in a much narrower time frame, so scalpers look for only 10 to 25 cents per share, hoping to make small gains as often as possible. When scalping with higher-priced ($100 or more per share) or faster-moving stocks, one point can be considered a scalp.

For most stocks, scalping doesn’t pay if you trade fewer than 1,000 shares. Here’s why: A 10-cent scalping profit on 1,000 shares is only $100 before paying transaction fees or commissions. There will be little profit after fees and commissions if you’re trading lots with fewer than 1,000 shares.

Trend traders

Not all day traders use the scalping technique. Some are trend traders. Instead of jumping in and out of a trade for a fraction of a point, they look for profits of at least one or two points and may stay in a position for minutes or even as long as an hour.

Trend traders make fewer trades than scalpers do but seek higher profits per trade and may trade in blocks of fewer than 1,000 shares because they can make a nice profit as trend traders with considerably less share volume. In fact, traders who look for more than a one-point profit sometimes hold a stock for several hours unless the stock is high priced or its price is moving fast.

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