If you’re new to the markets, you’ve probably heard a lot of people mention day trading … but do you fully understand how to day trade and what it really is?
I’ll start with the quick-and-easy definition: Day trading is where a trader enters a position in a stock before closing it out that same day — hopefully for a profit.
Since day traders don’t hold anything overnight, their capital isn’t at risk of a stock gapping up or down the next morning, possibly causing massive losses to their accounts.
Download the key points of this post as PDF.
Most stocks make the bulk of their gains over weeks and months, so day traders typically play for reasonably small percentage moves. But in the right market, many day traders can find multiple opportunities for trades every day.
Sound good? Cool. Now it’s time for the best part: educating yourself. The more you learn, the better. This primer can help get you started.
Let’s take a look at what day trading’s all about and how to day trade …
Table of Contents
- 1 How to Day Trade
- 2 Day Trading Tricks and Tactics
- 3 The Bottom Line
How to Day Trade
First of all, you’ve gotta be ready for action. Day trading requires greater dedication, reaction speed and psychological toughness than longer-term trading strategies.
Think about it: You’re playing with smaller movements, that happen quickly, while still paying the same amount of brokerage. If you don’t have all the pieces of the puzzle in place before you get involved, you can kiss your money goodbye.
Fortunately, you’ve picked a great time to learn how to day trade. Because now it’s easier than ever to learn which pieces of the puzzle you need to concentrate on. It just requires the right educational material and the will to study your ass off.
If you’re going to succeed at day trading, you need to approach it as a business.** That means you need the right trading software, charting platform, a good broker, and the discipline to only take trades where the odds are in your favor.
Here’s what you need to know about how to day trade…
Develop a Trading Plan
The first step toward getting ahead with any trading strategy is having a trading plan — and this is probably fives times as true for day trading.
Having a trading plan means:
- You know exactly which stocks you should be looking at
- What sort of price behavior you want to see before entering
- How you’ll enter your orders
- Where you’ll get out if you’re wrong
- And more
Yeah, it’s a bit of a grind to work these things out at first, but it’s a total necessity. You don’t want to put off developing your strategy in the heat of the trading session, or you’ll screw it up.
To learn more, check out this video I made on how to plan your trades well …
(If you want to learn the ins and outs of developing a trading plan, apply for my Trading Challenge.)
The Best Times to Day Trade The Stock Market
Not all times of the day bring the same opportunities for day trading. Generally, there’s a flurry of activity in the first hour or two after the market opens.
The middle of the day is usually sleepy for most stocks, but as the final hour of the trading day approaches, volume and volatility often picks up again as traders try to get their positions on before the market closes.
Since day traders need volatility to profit, most trades will be triggered and executed either after the open or within the closing hour of the market.
Since most trading opportunities happen in a small portion of the trading day, preparation for these times is absolutely key.
Types of Stocks You Can Day Trade
With thousands of different stocks traded on the major exchanges each day — all within different sectors — featuring different market caps and presenting unique day trading opportunities, it can be challenging to determine the best place to focus.
Here are a few ways to learn how to day trade like a pro and break down the ocean of day trading possibilities:
S&P 500 Stocks
The S&P 500 stocks are the 500 largest companies traded on the New York Stock Exchange (NYSE) and NASDAQ. These are companies like Microsoft, Ford, Netflix, and Amazon.
The trading volume in most of these stocks every day is enormous — most traders rarely have trouble placing an order at any time of the day and getting it filled.
But the downside when you trade these stocks is that you’re competing with the uber-rich big dogs. Your competition: the world’s best traders, hedge funds and proprietary trading firms.
Apart from the competition, these stocks generally aren’t as volatile as smaller companies. They’re mainly reputable companies and it takes some pretty extreme circumstances to make these stocks move a lot in price during the day.
Thankfully, this isn’t the only part of the market a day trader can trade in …
High Volume Penny Stocks
A stock’s so-called volume can be easily determined by the amount of shares traded during the course of a day — both in terms of buy and sell orders. The higher the amount of activity in either direction, the higher the volume of a given stock.
So, a high volume stock is one that’s being traded in large amounts.
If you go and look at the top daily movers for stocks on any given day, what do you generally notice? All penny stocks, for the most part.
Penny stocks are tiny little companies with prices under $10 a share or so. The companies themselves are often total bullshit — and since they’re so small, a single news story or rumor can send prices skyrocketing or collapsing.
Maybe that sounds scary, but if you know what you’re doing and what to look for, penny stocks could be right for you.
Compared with the large-cap stocks, your competition in penny stocks is largely idiots. But that’s why I love I love the niche, and why I focus almost entirely on penny stocks!
But, let me warn you, not all penny stocks are right for day trading.
Many of these tiny companies have barely any trading volume each day — i.e. no one is there buying and selling throughout the session.
It’s no use trying to identify a great day trade when there’s no chance of getting into the stock, so if you’re day trading, stick to high volume penny stocks.
Knowing How to Work Your Orders Is So Important
When you trade longer term, you can, for example, place a buy order at $10, your stop loss at $9 and walk away, confident that your trade idea seems solid. Even if you mess up by a few cents on a few orders, the math of the trade generally works.
This isn’t really the case for day trading. Since you’re playing for those intraday moves, your margins are a lot thinner, and you really have to on top of your order entry.
Another example: You might want to buy a stock at $10, with your stop loss at $9.90, looking to take your profits if the stock hits $10.20 later in the session. If you screw the order entry up and miss out on a few cents here and there over many trades, you can completely mess up your risk/reward ratio and possibly turn a profitable strategy into an overall money loser.
That’s why it’s so important to know how to day trade, what you want to buy and sell, at which prices and with which order types, preferably before the market gets anywhere near those prices.
Day Trading Tricks and Tactics
- Be happy to take small losses. Never let a small loss turn into a big one! If you keep them small, it’s often easier to let your winning trades more than make up for the losses.
- Start small until you have confidence in your strategy and properly learn how to day trade. Don’t swing for the fences before you know what you’re doing.
- Don’t use leverage. The number-one killer of trading accounts is leverage. You simply don’t need it. Don’t be greedy!
- Only trade stocks that are moving. It’s no use tying up your capital in stocks that go nowhere — just don’t.
Technical Analysis and Chart Patterns
When we trade longer term, it’s often a good idea to consider the fundamentals of a company — things like the company balance sheet, sales growth, earnings, etc.
Those are factors to consider in fundamental analysis, but they aren’t that important for day trading. Day traders are more concerned with technical analysis. Here’s why …
Day trading relies on rapid price movement within the day, which basically means a bunch of traders piling into or out of a stock, pushing the price up or down. That’s why day traders tend to rely on price action, chart patterns, and Level 2 order flow quotes. These are all facets of technical analysis.
Rather than fundamental stats, it’s more important to know where traders are looking to buy or sell, whether that means prices breaking out of an all-time high, prices collapsing down out of a trading range, or even just seeing a ton of buyers bidding stocks up on the Level 2 quotes.
The only real fundamentals that play a major part are news catalysts, where a news article or company announcement create action in the stock — be aware of these.
Finding the Best Stocks to Day Trade
That’s a lot of stocks and information to keep track of … what do you do?
Back in the old days, it meant clicking between 15–20 sites, loading up clunky charting programs and waiting for crappy websites to load. Believe me when I tell you that it sucked.
New traders are fortunate that there’s software (aka trading platforms) for all that now. That’s why I always say there’s never been a better time than now to be a trader.
Simply put, software rules (when you find the right fit). It offers a much easier process for finding all the best day trade ideas, scanning for the right stocks, keeping on top of them in watchlists, and more.
Check out the infographic I did about the different types of trading software.
Unsurprisingly (since I helped create it), I use StocksToTrade. My partners and I created it with the goal of developing the best piece of software any penny stock trader could ever ask for.
StocksToTrade is a total solution for all your scanning, newsfeed, charting and order entry needs — and it features broker integration. Many penny stock traders around the world start their day by loading up StocksToTrade, so check out a free trial today.
The Importance of Using Risk Management and Stop Loss Orders
Fact: You will have losing trades. And any “guru” who claims they can help eradicate your losses is flat-out lying to you.
That’s why it’s crucial for you to learn how to manage your risk when day trading — don’t trust anybody else to do this for you!
Managing your risk means making sure you only lose small amounts of money when you’re in an unprofitable trade. Your goal is for the profits from your winning trades to more than make up for your losses.
The simplest risk management tool is a stop loss order. This is normally an order with your broker to get out of a stock at a certain price if you’re losing money on the trade, but it can also be a mental stop, where you make a commitment that you’ll exit the trade at a certain price.
Always use a stop. I don’t care what anyone tells you — ALWAYS use them.
Best Broker For Day Trading
Over my 20+ years of trading, I’ve used dozens of brokers, maybe even more than that. Let me tell you, not all brokers are the same.
I stick with bigger brokerage firms with lots of capital backing — and they must be insured by the FDIC. The last thing you want to do is use a cheap offshore broker who might run off with the capital you’ve deposited.
It’s important to have a brokerage firm big enough that they’ll have shares to short if/when you need them, and while you don’t want to pay higher commissions than you have to, the cheapest firms generally aren’t the best.
Here are a few examples:
TD Ameritrade is a great broker if you’re just starting out and ready to get your feet wet. They’re one of the most well-known brokers and they have the credibility that comes with being such a big name.
There’s no platform fees and no minimum account requirement, so I’d definitely consider them if I were a newbie.
E*Trade is one of my most used brokers and they’re great for day traders with smaller accounts. Their commission rates are similar to TD Ameritrade but have a slightly easier to use interface.
Both these firms are great, but if you’d like to know more of my thoughts regarding brokers (including the best vs. worst), check this video out:
Never Stop Learning
No matter what trading strategy or timeframe you pick, if you’re not constantly learning and developing your skills, the odds are against you succeeding. This especially applies to day trading.
When I started out, there was hardly any educational information out there. I wish I’d had someone to help me figure out how to day trade. I had to figure it out the hard way because there weren’t any great resources out there.
I want to make trading more accessible to others by becoming that resource for aspiring traders.
Read my blog posts. Subscribe to my YouTube channel. Apply for my Trading Challenge. I share everything — including my many mistakes, so you can avoid them — that has helped me get farther in the trading world (and traveling the world while doing it) than I ever dreamed possible. **
My Trading Challenge encompasses not only everything I’ve learned in 20+ years of trading, but you learn from my top students — and from a dedicated community of peers. It’s a stellar opportunity for those aiming for trading success.
It’s all about you taking action and being dedicated. No matter what, keep learning how to day trade!
The Bottom Line
Now you know how to day trade and the steps you need to take to pursue day trading. Still interested? If you have the discipline and focus for it, the laptop lifestyle could be for you.
Make sure you start out developing a robust trading plan. Don’t be lazy about this! Learn everything you can on how to day trade before making any single trade.
Find the right broker for your needs, and give yourself an advantage by making sure you’re equipped with the right trading software. Start out with paper trading before you even think about risking a cent of your money. Be smart!
Learn from traders who are doing what you want to do in the future. Keep a trading journal. Study, study, study. There are tons of things you can do to help make your day trading career aspirations a reality.
Never stop learning, keep losses small, and don’t give up!
Does day trading seem like the right trading style for you? Why or why not? Leave a comment below!