Techniques For Becoming A Skilled Day Trader

Despite the dire warnings by the Securities and Exchange Commission cautioning investors against the controversial yet potentially well-paying business of day trading, people continue to try and obtain day trading skill, and a day trading stock tip is literally worth it's weight in either gold, or dross! The following is some information on learning trading techniques, the risk you may incur, and techniques for becoming a proficient trader.

Just what is day trading and how do individuals learn day trading skill? Day trading is the act of quickly buying and selling stock throughout the day in order profit from the minute fluctuations in the market for that particular day. If possible, day trading strategies permit investors to reap profits from the minuscule increases in the market.

Day traders observe a certain set of indicators when deciding whether a stock is suitable for day trading. First, the stock must have high liquidity. This means that the stock in question has many of buyers and sellers. The liquidity allows day traders to rapidly acquire and then sell stock. Liquidity is determined by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Almost all stocks on the NYSE and NASDAQ have a high degree of liquidity.

A day trader also studies volume individually, in addition to using it as measure for liquidity. To qualify for day trading, a stock must trade at least 500,000 shares each day. Stocks with 500,000 trades a day or more will allow 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 term refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders watch the pattern and volatility of stocks over an individual day. Stocks that change price several times over one trading day are ideal candidates for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader evaluates the price transparency of stock. This term pertains to the ability to amass information on the order flow of a stock. Also called market depth, price transparency helps the day trader calculate just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who can access the NASDAQ level II quote screens can assess the performance of a stock and ascertain its swing in price.

While these trading strategies are completely legal and totally ethical, they are very risky. Day traders generally buy on borrowed money with the hope that they will procure higher profits through their acquisitions and sales. People who are determined to be "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 a great deal, the investor is required to deposit additional cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the associated risks.

The first few months, a huge majority of day traders endure tremendous financial losses and only a handful 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 such as living expenses or second mortgages.

Keep 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, instead, they speculate on the movement in price of a stock throughout the day.

There are lots of websites whose sole purpose is to make their living from those who look for a day trading stock tip. These websites promise rapid results and suggest hot tips to their members for a fee. The sources are usually paid to make these recommendations and must be avoided. Enlist the advice of a proven professional, and take plenty of time to discover trading strategies for longer term success. Remember, there is no easy money, and day trading skill is often paid for with intolerable stress and cataclysmic losses.