Day trading is a common stock trading strategy that depends on interday price fluctuations in a specific stock. The greater the volatility of the stock, the more appropriate it is for day trading. Of course, day trading tends to increase stock price volatility. Day traders recognize which stocks are coming into play — by their increased volatility — and take advantage of this market phenomena. The attraction is the volatility more than the intrinsic value of the underlying company. Many day traders specialize in trading penny stocks, found on the Pink Sheets, because they are generally young companies that are eager to promote their successes via press releases — which, in turn, provides a reason for stock pumpers and bashers to post their messages at online stock bulletin boards such as Raging Bull and Investors Hub. This adds more volatility.
Open an account at a reputable online brokerage firm that has interactive stock screeners, interactive price charts, company news and research reports.
Learn to use the online tools, particularly the interactive price charts, before you start trading. Technical analysis of stock price movement will be your most important tool.
Pay attention to the hot stock tips floating around and the email stock promotions, but do not invest in those stocks until you have studied their price charts and followed the action during the promotion. Often, when you stop hearing about a stock, it drops in price because traders take the opportunity to sell out their positions.
Practice day trading for a few months until you feel comfortable buying and selling for small gains. Your brokerage firm probably has an online paper trading program that is intended to help you practice before you jump in cold and lose all your money.
Accumulate your positions over time, buying on dips and selling out all or a portion of your position when the stock trades up. Don't dump all your money into one stock in one transaction. Reserve approximately a third of your cash for those times when you see a good opportunity and can't sell out your current position without a loss.
- Always take a quick loss rather than hang on to a position that is proving unsuccessful. If you still believe in the stock's potential, you can always purchase it again when it hits a low trading range.
- Day trading is risky, and you can lose all your money, so don't play with money you can't afford to lose, and don't borrow money to use for day trading. Vigilant skepticism and a trading buddy who will knock some reality into your overly optimistic head are keys to successful day trading.
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