Day Trading

Day Trading Guide

17 min read
Day Trading

Day trading involves buying and selling a security within the same day. The goal is to capitalize on short-term moves in price, and traders are typically in and out of trades within seconds to minutes. This trading technique is called scalping. It is also known as momentum trading because traders are looking to ride the volatility of the intraday trend. Traders use their accounts as leverage to buy stocks and scalp profits between $0.10-$0.20. If a trader holds their position longer than one day, it becomes a swing trade. Momentum traders are not investors.

What Is Day Trading?

Momentum traders are hunters of volatility, which is determined by a stock‘s float. Float is the number of shares that can be traded off the security. The lower the float, the higher the volatility, which is a matter of supply and demand. If there is a limited amount of shares to be traded, the demand will be higher, creating volatility. A low-float stock is considered under 20,000,000, and extremely low floaters are under 10,000,000.

If a company has exceeded its earnings forecast for a specific quarter, it usually indicates that the associated stock price will rise. Traders will look for scheduled financial reports and unexpected news that may move the stock. They typically aren’t concerned with fundamental analysis when trading. Technical analysis is the primary focus of day traders. Take our day trading course if you need more help getting started.

Day Trading Guide

Risk Management

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

For many traders, a straightforward approach they use is the 2% risk rule. In short, you don’t risk more than 2% of your account size in any 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 you can only risk $2,000 per trade. Being smart with your money will ensure you see another day. 

Falsehoods vs Reality

You know by now, get-rich-quick schemes are just that. There’s no elevator to success if you want to learn how to day trade for a living. It would be best if you took the stairs.

So the question remains: can you make money as a momentum trader? The question is, “Can you make enough money as a salary to sustain yourself?”.

This isn’t a profession where you get your paycheck every two weeks without fail. Because nothing is certain in the game of trading. The market decides when you get paid.

From market fluctuations to the cyclical boom and bust, some things, well, most, are out of your control. I’d be remiss not to mention commissions, data fees, software fees, taxes, etc., that also need to be accounted for. What’s your situation? If you aren’t independently wealthy, it’s unlikely you won’t have the stress of not having an income while learning to trade. 

Setting a goal is always the easy part of learning how to momentum trade for a living. To achieve your goal, you need to create a system that works.

With a system, you are clear on your strategy. This means having a trigger in the trade instead of just trading the setup. It means knowing when you will enter and exit the trade. You’re clear on profit targets as well as stop levels. It’s either your setup or it isn’t. 

Characteristics of Stocks in Play

  • High relative volume
  • Breaking news or fundamental catalysts just released
  • Unusual pre-market trading activity
  • Trading independently of what their sector and the overall market are doing

News or Fundamental Catalysts

As a momentum trader, you want to capitalize on swift moves in price. And nothing moves a price more swiftly than hot news or, in technical jargon, a fundamental catalyst.

Some examples of fundamental catalysts that will move a stock price are as follows:

  • Earnings Reports – either missing or superseding earnings expectations
  • Mergers and acquisitions
  • FDA News – i.e., approval of a drug to treat a disease
  • Stock splits/buybacks/debt offerings
  • Major contract win/loss
  • Legal actions
  • Restructuring/layoffs
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Day Trading Rules

Momentum trading, or any trading for that matter, is highly regulated. In the United States, Regulation T allows a trader an 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. 

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 over 624,000 brokers nationwide and analyzing billions of daily market events.

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

Many new 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 trading futures

The market of choice for many traders is the micro e-mini futures (MES). Because the E-mini S&P futures are traded electronically, trade executions are very fast and liquid. Futures traders can control around $75,000 worth of stock for about $3,500 in the margin. You can trade to your heart’s content if you maintain the minimum margin requirements. 

Day Trading Margin

Brokers will allow you to trade on margin, which means you can trade with money you don’t have. For instance, if you want to buy $100,000 of Apple stock $AAPL, you don’t need $100,000 cash in your brokerage account. As long as half of your positions are exited before market close, a trader with a $25,000 can buy $100,000 (4x leverage) worth of stock during the day. Even though many brokers will allow you to trade with margin, it’s risky and should be avoided until you have a proven trading strategy.

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

How to Do Day Trading

This trading style can be simplified by focusing on 1-2 proven strategies and trading them repeatedly until they become repetitive. Unfortunately, too many traders get distracted when they don’t get their setup and end up trading poor setups, which creates losing trades. This is called overtrading and is a common occurrence among new traders. Likewise, you have hundreds of technical indicators to choose from. But that doesn’t mean you should use them all or keep changing them to get higher probability trades.

This approach doesn’t work. What ends up happening is that you get several indicators telling you the same thing. Or worse yet, they give you conflicting signals, causing you to second-guess your trading plan.

Limit your indicators to one, two, or gasp…. none! If you take the time to learn how to read price action – the most timely market information – your technical indicators will serve little purpose.

High Relative Volume

You don’t want to look for a high volume total. Instead, looking for stocks trading irregularly higher than normal would be best. In simple terms, they have a very high, unusual trading volume. Stocks that trade millions of shares each day might not meet these criteria if that’s their normal.

Take $ABC stock, for example. If it traded one million shares today, does this mean you should trade it? No. This is because one million might be its daily average. So, you’ll want to look for an unusually high relative volume. Otherwise, the trading might be due to institutional traders and high-frequency trading computers.

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Day Trading vs Investing

The truth is that momentum traders and long-term investors make and lose money. Both are viable forms of trading! Some successful long-term investors lose their money when attempting to momentum trade, and some traders need help to pick a good long-term investment.

What amount of time are you able to commit to trading? Are you a busy parent working 9-5 and unable to look at the markets during the day? Or are you flexible and able to participate during the busy opening and closing power hours?

You’ll need to spend time on serious introspection. How will you react when a trade goes against you? Are you able to keep your emotions in check? Can you stick to your strategy, or will you panic and sell only to have the stock reverse? How will you handle money conversations with your spouse? Will they think you’re gambling with your family’s livelihood?

If this sounds too demanding, momentum trading is not a good fit for you. However, swing trading options, for example, are quite flexible. Not to mention, it’s a great way to capitalize on the moves in the market. Meanwhile, with investing, most of the time is spent researching and plotting your approach for the long term. 

Small Accounts

Did you know you can open an account for $500 and start trading micro Emini futures? They’re cheap and won’t cost you $50 each time a trade moves against you at one point. The/MES is 1/10th the size of their respective “normal-sized” counterparts (i.e., ES, NT, RTY, and YM). Check out the image below from CME Group.

Day Trading Micro Futures

I want to put this in perspective. One standard e-mini futures contract (ES) is worth USD 50 * the agreed-upon e-mini futures price. Since futures move in ticks, each tick movement in the E-Mini S&P 500 is worth $12.50. A five-point move in the wrong direction will cost you $50, ten-point, and $100.

The MES is only USD 5 * the agreed Micro E-mini futures price. And with micros, a five-point move equates to only $25. With the right strategy, you can capture 5 points and quickly grow your account. Check out this great fact sheet from the CME group.

Depending on your broker, margins can vary by broker. Luckily, micro E-mini futures have some of the lowest day trading margins, only $50, with some brokers. You only need $50 in the account (plus room for price fluctuations) to buy/sell one micro E-mini S&P 500 contract.

News

When you momentum trade, your sole goal is to trade your system; that’s it, that’s all. To do this, you need the mental clarity to spot your setup so you can trade it.

With live chat streaming and news in the background, we overload our mental circuits and lose our ability to think clearly. People’s opinions in the news may bias you and cause you to end up trading a stock that doesn’t meet your strategy or skipping a trade you should take.

The news will not give you valuable trade insight as a day trader. By the time something reaches the news, it’s probably too late to capitalize as the action’s already happened.

However, I suggest you check the economic calendar before trading. The economic calendar will provide precise times when conditions may become more volatile. It would be best to step back at these times, as things can be hairy and unpredictable. Reading momentum trading books might be more helpful during these times.

Fading the Gap

Many momentum traders pay close attention to the previous day’s closing price and the new day’s opening price, also known as “fading the gap.” This is a popular strategy. In some cases, overnight news will move the market one way or the other. Fading the gap is when a trader buys or sells in the opposite direction of a gap – the trader would buy shares in a company if a stock gapped down or would short shares if a stock gapped up.

Let’s take Microsoft (MSFT), for example. On Wednesday afternoon, MSFT closed at $25.45, and Q3 earnings are set to be released after the bell. Fortunately for MSFT, earnings are fantastic, and on Thursday morning, the price “gaps up” to $27.10. 

A savvy trader has been doing homework and believes the earnings report is over-inflated, the market overreacted, and the price will wash down.

So what does he do? He “fades the gap” and shorts 1,000 shares of Microsoft at $27.05. The gap was short-lived; the price swiftly fell to $25, and he made a tidy profit.

Range Trading

Stocks don’t always go up or down in price. They sometimes trade within a well-defined range, bouncing off support and resistance levels like a ping pong ball. Every time the stock hits a high, it returns 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 the trade. At the same time, you assume that the price will continue in the same direction once the range breaks.

Scalping

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

Scalping highly liquid stocks involves taking quick profits while minimizing risk. To do so, scalpers utilize over/underbought, support and resistance zones, and trendline trading to profit quickly from small moves. 

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

Competitive Edge

Emotional trading is an account wrecker. Once emotions have been controlled, the next aspect in learning to be a successful momentum trader would be the skills or the competitive edge. In trading, there is no such thing as not having losses. There will be times when the market makes an unexpected move. The trick here is to ensure that all the wins outweigh the losses. This is why one would need to have some edge in their belt.

When most people start trading, they’re immediately results-oriented. But, they only see the money behind the activity. When they only look at the possible profits, they will immediately become clouded about how the process should go and how to increase skills.

Unlike gambling, day trading is an art that needs to be perfected over time. With that in mind, it is more important to have a process-oriented mindset when trading. 

Frequently Asked Questions

  • Write down your monthly expenses.
  • Decide how much money you need to live on each month
  • Figure out how long you can afford to live without a steady paycheck.
  • Create a trading plan on how much you want to make as a trader monthly
  • Breakdown your monthly goal into daily and weekly  goals

Studies have shown that successful day traders are much less common than usual. The majority of day traders lose money. It requires a lot of discipline, money, research, and, most importantly, time. Yes, there is the occasional lucky trade that boosts our ego. Full of confidence, we figured it out and placed another trade. That one does not go as well, and we’re either back on Step 1 or we’ve lost our initial gains and more.

Anyone who has ever been to a casino was down on their initial buy-in and had to work their way back up. Trading should not be treated in the same way. If you are down on a trade, take the loss and move on to the next trade. Many inexperienced momentum traders keep averaging down on their bad trade, claiming they can buy lower and average down. They often catch a falling knife and blow up their brokerage accounts.

Traders can day trade without $25,000 by using an offshore broker. The PDT rule does not restrict traders when using an offshore broker. Fees can be high using a specialty broker, so do your research. Another way is to trade in a cash account, which allows you to trade up to your daily buying power.

More Frequently Asked Questions

Learning to control your emotions is one of the most important steps to becoming a successful day trader because emotions may cloud our judgment—the two most prominent emotions when trading are greed and fear. Greed comes out when a trader has already earned substantial profit but wants more than what his or her trading plan would command.

The next emotion one has to watch out for is fear, specifically the fear of losing money. There are times when one is already in a completely losing trade. However, their fear of loss is clouding them, prompting the trade to continue even if it is already a losing trade. The answer to this would be to have a stop loss and stick to it.

Traders can start day trading with $500 but are limited to three day trades within five calendar days due to the PDT rule. They need at least $25,000 in a brokerage account to avoid the PDT restriction. 

  • Choose a trading broker
  • Fund an account
  • Take a trading course
  • Read books on momentum trading
  • Research stocks, social media, and forums
  • Watch live streams on YouTube
  • Join a trade room
  • Interact with other traders and share trade ideas
  • Use a stock scanner to search for stocks to trade
    Develop your trading strategy using a paper trading account

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That being said, our website is a great resource for traders or investors of all levels to learn about day trading stocks, futures, and options. Swing trading too! 

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Our content is packed with the essential knowledge that’s needed to help you to become a successful trader.

It’s important to treat day trading stocks, options, futures, and swing trading like you would with getting a professional degree, a new trade, or starting any new career.

Invest the proper time into your Trading Education and don’t try to run before you learn to crawl. Trading stocks is not a get-rich-quick scheme. It’s not gambling either, though there are people who treat it this way. Don’t be that person! 

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