How to Day Trade Successfully

Day trading became popular in the late 1990s and coincided with the growing availability of high-speed internet connections. As online brokers offered increasingly sophisticated research tools and discounted commissions, skilled traders began to develop strategies that revolved around purchasing and selling specific securities within the same trading day.

Establishing a Brokerage Account

Selecting the right online broker is a crucial component in building a successful day trading business. Since traders will often engage in numerous buy/sell transactions in the course of a single session, it is important to choose a low commission broker. When calculated over thousands of trades, a no frills broker who charges $2.50 per trade can have a substantial impact on the profits of a day trader when compared to a broker who charges $10 per trade.

In many instances, day traders choose to set up multiple accounts for different purposes. Discount brokers help reduce the cost of each trade, while fully-featured brokers provide critical charts and strategy tools.

Most importantly, day traders must work with a broker that routes orders through an electronic communication network (ECN).

This allows traders to complete transactions directly with one another without having to go through a middleman.

Level II and Other Tools

It is critical for a day trader to gain access to the Level II quote facility. Continuously updated in real-time, Level II highlights the size of every active order as well as each bid and ask price. The constantly fluctuating display provides deep insight into how a particular stock is trending.

Charting tools are also an indispensable part of a day trader's arsenal. By looking at the performance of a stock over five, ten and sixty minute intervals, the trader can identify emerging patterns that signal favorable trading opportunities.

Day Trading Strategies

A day trader is constantly assessing the market while looking for stock candidates that fit a specific trading profile. In particular, equities that have extreme volatility and heavy volume are usually scrutinized carefully by experienced day traders.

Volatility is a measurement of the inter-day stock price fluctuation, while heavy volume ensures an ample supply of both buyers and sellers. When a stock has been targeted, a day trader will further analyze its measurables while looking for trend lines and patterns that confirm the likelihood of a predictable price movement.

Pattern Day Trading

Do to the extreme risk associated with day trading, the SEC has implemented strict regulations relating to margin and account funding requirements. Anyone who executes four or more "round trips" transactions in five successive business days will be flagged as a "pattern day trader."

An account that has been identified as engaging in pattern day trading must maintain a minimum balance of at least $25,000 in cash or equity. If the balance falls below the threshold, the day trader must restore the required minimum either through a cash deposit or a transfer of marginable securities within five business days.

Selecting the right online broker is a crucial component