The definition of a day trader is a trader who holds a position for a very short time from minutes to hours and can make many trades each day. It the expectation not to hold position overnight so most of these trades are entered and closed out within the same day. A day trader can trade in numerous markets such as stock, options, futures and forex.
Now that we have the basic understanding of a day trader, let’ s get with the ‘down and dirty’ on what it really means to trade in this environment. There is huge profit potential when day trading and where there is great return possibility, the other side of the coin is that there is also huge risk.
The US securities and exchange commission (SEC) has identified the risk involved in day-trading and will not allow anyone who has under $25,000 to be a day trader. Any trader of US stock and options cannot execute more than 3 day trades in 5 consecutive days. This rule applies whether you intentionally enter and exit a trade on the dame day e.g. you get stopped out on the day you entered.
Day trading is a fast paced environment and you will need to have the ability to make decisions while ‘the bullets are flying’. Day trading can be fraught with emotional turmoil where fear and greed can fight for control. The best day traders are those who have a trading plan and have the steely resolve to stick to the plan. Those who become almost mechanical in their trading see the best results.
Now that we have identified three components of what it mean to be a day trader, how can you use that knowledge?
Risk management is key. You will need to develop a trading plan that deals with the high level of risk and where things such as your stop positions to mitigate loss and protect profit is paramount. If you do not have enough knowledge yet to develop your own plan, find a good template to give you some guidelines. Paper trading is another step in managing risk. Paper trading is never the same a trading when with your own money but it does give you an arena to trial, test and learn.
There is nothing you can do to work around the SEC ruling on pattern day trading. Everyone has to play by the same rules and have been put in place in part to protect novice traders from themselves.
The ability to stick to your plan is paramount in day trading. You will have tested your strategy through back testing and paper trading and what comes out of this will make up the key components of your trading plan.
Now comes the next ‘tough’ part. How do you stick to your plan throughout the course of the day when your emotions are running away and you are doubting the decisions you made when all was calm. There is now a knot in the pit of your gut and maybe you now doubt your entire plan? It’s the markets fault or those darn market makers!
Don’t blame anyone.
Just get moving to work on yourself and find out more about what makes you tick and how you can control your emotions so they don’t control you or your trading decisions.
Find it within yourself to obtain nerves of steel and laid back calm to deal with any trading scenario. You will find it – you just have to go looking in the right place. What you might not know about yourself is probably the key to what is holding you back from trading success.
Your unconscious mind holds the key.
For more on how to unlock your trading potential, check out our tips and tools.