In the past stocks were generally approached as a long-term investment. The trader would put their money into a company they felt was solid and wait for the value to appreciate as the company’s assets grew. As trading technology has evolved, traders have looked for more diverse instruments and strategies to leverage money from the markets. The day trader makes short-term bets on marketplace volatility, generally buying and then selling their positions over the course of a single trading day.
1. Money, Money, Money
Volatility is at the heart of day trading. As opposed to trading on a company’s strength or potential over time, the day trader is taking positions based on short-term market movements. This kind of trading necessarily involves substantial risks. Be prepared to take losses. Developing the skills, strategy, and temperament to eventually become a successful day trader can require years of practice and study. When starting out make sure you are only using disposable income.
2. Nerves of Steel
Risking and inevitably losing money is imminently stressful. While the notion of becoming a successful and wealthy day trader is alluring, the reality is it will take many months, and potentially even years, of suffering losses before a novice trader, finally enters into the world of the successful, profitable day traders. Make sure you’ve got the mental fortitude and temperance to suffer those losses without causing damage to yourself and others.
3. Knowledge, Education, and the Right Tools
Image via Flickr by rednuht
In addition to the proper mental outlook, the day trader needs to have a solid combination of skills, knowledge, and work ethic. Good math skills are essential, as is a working knowledge of markets and trading. But even more importantly the day trader has to have discipline. The day trader is their own boss, in control of the schedule and strategy. Becoming a successful day trader requires consistent practice and observation. Practically this means putting in the hours and keeping abreast of the latest trading technology. There are many programs available that chart market movement and can help you keep track of your positions and balance. Additionally, there are trade simulators available for free that the aspiring trader can use to test their efficiencies before risking any real money.
4. The Pattern Day Trader (PDT) Rule
An obstacle that might impede the aspiring day trader is known as the Pattern Day Trader or PDT Rule. Fearing the possible volatility resulting from inexperienced traders entering into a complex marketplace, the Financial Industry Regulatory Authority (FINRA) determined to create a rule that would limit the potential for over-exposure. The PDT rule requires a day trader who is making more than four trades over the span of five days, and whose day trades comprise more than six percent of total trading activity, to maintain a minimum balance of $25,000 in their trading account. Should a trade result in that balance dipping below $25,000, the day trader’s account is suspended until the balance requirement can be met.
Possessing the right combinations of experience and attitude, the day trader can learn to successfully navigate the inherent risks in trading on volatility to generate a solid extra income, or even become their own boss.
