The Basics of Day Trading

There is a vast world out there that many people don’t know about.  A different world with a unique language and a distinct set of people that are involved.  Day Trading is one of the most profitable businesses in the world for companies selling day trading software and training, as well as massive banks that have day trading operations around the world.

In order to get started with day trading you have to understand how that specific world works.

When you learn how to day trade you have to understand there are very different ways that people make money day trading.  Understanding what day trading is and the different methods to day trade is the first step in learning the process.  The information below are the basics of learning how to day trade.  Click here if you would like to learn what day trading is.

Brokerage Accounts

You need a checking account to write checks, in order to day trade you need a brokerage account.  There are many different types of brokerage accounts but most come from massive financial institutions like Ameritrade and Bank of America.  Just like everything in our world today, there are low cost brokerages such as Scottrade that have emerged to service the masses.

If you are trading futures, options, or forex, there are specialized brokers that are significantly designed for retail day traders (you) with very low costs.  Don’t even consider day trading with any of the large financial companies if you are considering day trading any of those three.

Types of Day Traders

• Institutional Day Traders:

These types of day traders work for massive financial corporations and work with millions of dollars every day.  It is said that institutional day traders have a lot more resources than retail traders since they work with companies that can provide very expensive resources, tools, and equipment.  In my opinion, you don’t need the fancy equipment and tools that these guys use.

There are many low cost direct access brokers that have emerged to assist the common day trader like you and I.  Many times the institutional day trader will trade the financial organization’s funds or investor’s funds that have been given to the financial company.

• Retail Day Traders:

Retail traders are people that trade their own funds and essentially work for themselves.  Partnerships can be formed with other traders to create companies and there are instances when retail day traders trade other people’s money.  Unless you are looking to become part of a large bank, you will be classified as a retail day trader.

The Different Types of Day Trading

• Stocks:

Day Trading stocks consists of buying and selling shares in a company.  When you day trade stocks you are essentially owning a piece of the company when you buy a share and selling part of that company when you sell your shares.  You purchase stocks via stock exchanges which is where the shares of stock are listed.  Because you are actually purchasing part of a company, there is a significant amount of restrictions when it comes to day trading stocks.  The money needed to open an account is minimal but due to federal restrictions you need a minimum of $25,000 in your brokerage account to day trade stocks.

• Futures:

Futures have come out of the market need to have an agreed price (contract) for something in the future, very similar to the contract you agree on to purchase a home.  In the past it has been used mostly for products such as oil, corn, and other agricultural products.  From these markets, futures contracts have been transferred to financial products such as stock market indexes.  When your trading a futures contract for a product like oil, you have to make sure that you sell your contract before the expiration date or you will receive the product at your house.  The futures market is what I prefer to day trade.

• Forex:

Forex trading is where the big boys play.  The forex market is the largest day trading market in the world and is a  trillion dollar industry due to the massive involvement of many global financial companies.  Forex trading has to do with currencies, trading US Dollars for Euros for example.  Forex is the only market in the world that isn’t traded at a stock exchange, they are actually traded at currency trading centers.  Fast movement and very high liquidity means that you better know what you are doing or you will lose your shirt in a heartbeat.

• Options:

Day Trading options means exactly how it sounds, you have the option to buy or sell a financial product such as currencies, stocks, or even futures, at a specific time or price.  Options are different than futures in that you have the option to buy the underlying commodity where as futures you are required to buy the commodity unless you sell the contract.  The buyer, or person that placed the option, has the right to choose whether or not they will complete the transaction.

After you realize what kind of method and vehicles you want to use to start day trading it’s time to decide which kind of strategy you choose to use. This depends mostly on your risk tolerance.  There are some traders that want to be in the market the least amount of time possible and others that prefer to have longer term positions.  It’s important to understand that you want to start with something that you feel comfortable with.  If you don’t, the only thing you will be doing is spending money on random training for no reason.

Types of Day Trading Styles

• Scalping:

Scalping involves trading, or being in open positions, for seconds or minutes at a time.  When you scalp the market you only want to have a position open (buy something and hold it) for the least amount of time possible.  Scalpers generally trade very big positions to make very big money with a lot of small transactions.  You never hold trades overnight which means that scalping has the lowest money requirements.

• Swing Trading:

Swing Trading involves holding a medium term style of day trading where day traders hold a position (open trade) for one day but generally less than a month.  Most swing traders hold their positions for a few days or a few weeks depending on what the market is doing.  When you are a swing trader you hold positions overnight which causes higher requirements for brokerage accounts.

• Position Trading:

Position trading is the longest form of day trading where trades are held between a few days to a few months.  Most position traders use technical (charts & indicators) and fundamental (company financials and news) to make decisions about whether to hold or get out of their positions.