Day Trading Meaning

  • October 21, 2020

Day trading, meaning two trades of the same financial instrument on the same trading day, can be as lucrative as it is risky.

Stories of people turning $1,000 into $100,000 leave many wondering how they can do the same. With this in mind, we need to cover a few things before you throw your life savings on the line. 

Day Trading Meaning Defined

  • What is the day trading meaning? Buying and selling the same stock within the same trading day is considered a day trade. Any positions held overnight is not considered a day trade. Some of the more commonly day traded financial instruments are stocks, options, futures and currency (i.e. crypto and contracts for difference).
Day Trading Meaning

1. How to Buy $100,000 Worth of Stock With Only $25,000

Sounds somewhat fishy doesn't it? Well, it's not. Surprisingly, if you want to buy $100,000 of Apple stock, you don't need $100,000 of cash in your account.

As long as half of your positions are exited out before market close, a trader with a $25,000 can buy $100,000 (4x leverage) worth of stock during the day.

I must warn you, though, the use margin is risky if not suicide for a new trading account. To prevent disastrous losses, avoid trading on margin at all costs until you're a seasoned trader. 

Another worthwhile point to mention is the risk of margin calls. At any time, your broker can revise the value of the collateral securities (margin).

If they decide the securities' market value falls below their updated margin, they can immediately issue a "margin call." Situations like this require you to bring your account back into the green.

To do so, you either pay the money owed or sell the securities. And if you fail to act, they do. In extreme cases, your broker can sell your stocks for you, and not always at a price you want, to bring your account back into line. 

Knowing the day trading meaning might helps you find some risk free trading.

2. Day Trading Meaning Using Margin to Day Trade

Day trading or any trading for that matter is highly regulated. In the United States, Regulation T allows day trader's initial leverage of 2:1.

However, many brokers allow traders to have 4:1 intraday leverage as long as it's reduced to 2:1 by market close. And the restrictions don't stop there. 

Our free day trading course can help you learn the in's and out's of trading. As well as the day trading meaning. 

3. Do You Fall Under the Pattern Day Trader Rule?

FINRA, the government-authorized not-for-profit organization that oversees U.S. broker-dealers, is authorized by Congress to protect America's traders and investors.

Their role is to ensure the broker-dealer industry operates fairly and honestly. They accomplish this by overseeing more than 624,000 brokers across the country; and analyze billions of daily market events.

Akin to the market watchdog, they watch for people placing more than three day trades within a five day trading period. Those who fall into this category are called pattern day traders. And if you don't have at least $25,000, you can't day trade stocks - thank the PDT rule for that. 

Many new day traders are discouraged when they realize they need a minimum of $25,000 in their account to day trade. The good news is that the PDT rule doesn't apply to day trading futures! 

Having said that, the market of choice for many day traders is the micro e-mini futures (MES). Because the E-mini S&P futures are traded electronically, trade executions very fast and liquid.

What's more, futures traders can control around $75,000 worth of stock for about $3,500 in the margin. As long as you maintain the minimum margin requirements, you can trade to your heart's content. 

Day Trading Techniques

  • To be successful day trading, meaning you don't lose your shirt, you need a precise trading strategy with a statistical edge. Each trade must be executed with the precision of a brain surgeon. The following are a few basic trading strategies many successful day traders use. 

1. Momentum Trading

Momentum or trend trading is based on the assumption that stocks that have been rising steadily will continue to rise and vice versa. You may have noticed that if you've spent any time in our trade room, we use technical indicators to identify trends. 

One thing I know to be true in the trading world is this:  Moving averages are a great way to identify trends. A rising moving average means prices are rising.

Likewise, a falling moving average indicates prices, on average, are falling. And the farther the price is away from the moving average, the weaker the trend.

Personally, I like to use the 9 and 20 EMA's on my charts. Similarly, when these lines cross, it signifies a shift in price direction. And I use the 9/20 EMA crossover to verify my entry and exit points.

2. Range Trading

Stocks don't always go up or down in price. In some cases, they trade within a well-defined range, bouncing off support and resistance levels like a ping pong ball.

That is, every time the stock hits a high, it bounces back to its low, and vice versa. As a range trader, you want to buy the stock when it's close to support and short sell when it hits resistance. 

An alternative approach to range trading is breakout trading. To trade this approach, you wait for the range to break and enter the trade. At the same time, you assume that the price will continue in the same direction once the range breaks.

3. Scalping

Originally referred to as spread trading, scalpers exploit the small price gaps in the bid-ask spread. Typically, traders who scalp are in and out of positions within minutes or even seconds. 

Scalping highly liquid stocks involve taking quick profits while minimizing risk. To do so, scalpers utilize concepts such as over/under-bought, support and resistance zones, and trendline trading to make quick profits from small moves. 

The fundamental premise behind scalping is to exploit the market's inefficiency when volatility increases and the trading range expands. 

Scalping is essential to the day trading meaning, 

4. Risk Management

Risk management has many names. From money management, bet sizing, or even position sizing, the fundamental premise remains the same; to live to trade another day.

For many traders, a straightforward approach many use is the 2% risk rule. In short, you don't risk more than 2% of your account size in any given trade.

With this in mind, you take your account (whatever size it is) and multiply by 2 percent. So let's say you have a $100,000 account, 2% means that you can only risk $2,000 per trade. Being smart with your money will ensure you live to see another trading day. 

If you're going to day trade on Robinhood for example, you need to know the day trading meaning. 

Day Trading Meaning Parting Thoughts

Knowing the day trading meaning can be really helpful. Because of the nature of margin and the potential of rapid returns, day trading results can range from extremely profitable to extremely unprofitable. Sadly, most people who day trade struggle to make money. 

In my honest opinion, I think it's a lack of both preparation and discipline required that causes many people to fail. Day trading can be an unforgiving game, regardless of the security you trade.

However, for those willing to do the homework and stick with you, you just might have a chance of turning $1,000 into $100,000. 

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