Day trading can be an exciting and profitable profession. The industry got a lot of negative media attention in the early part of the last decade when too many folks used margin accounts and got into financial trouble. Nowadays, many pros in this industry don't trade on margin at all, or follow the rules for pattern day trader accounts and cover themselves in the event of losses. Those early years of the day trading industry are over, thankfully, and today's professionals know how to avoid the most common pitfalls of the job. Learning how to day trade can be a lifelong skill that pays 'dividends' for years to come.
Understand Pattern Trading
You'll officially be deemed a pattern day trader if you execute four or more round-trip deals in a single week. A round trip means buying and selling the same security in a single day. The rule only applies to people who have a margin account, not those who trade with cash and don't use leverage. If you do choose to have a margin account and you want to day trade, then you'll be required to have at least $25,000 in your account before you begin buying and selling shares.
In fact, most people who do this type of work for a living maintain accounts with enough funding to avoid getting shut down by their brokerage firm. It's important to understand the low and keep enough money in your margin account at all times. Otherwise, just a few round-trip trades will cause your account to be suspended. In most cases, a suspension means three months of no buying or selling, even if you bring your margin account up to snuff the same day.
Learn the Three Most Important Letters
They are E, E and E. They stand for enter, escape, and exit. When you place a trade, know what your exact entry price is before buying. Equally important, you must have a set exit price for capturing the amount of profit you're aiming for. Finally, your escape price is the dollar amount at which you'll get out if things go south.
Go with Limit Orders
Using limit rather than market orders will save you a bundle of money. That's because limit orders define your exact order prices, for both buying and selling. Market orders simply instruct your broker to buy or sell at the best price they can get at that moment in time. There's no definition on exact amounts, so you're in danger of buying high and selling low. Use limit orders and make your life simpler, and more profitable.
Abide by the 15-Minute Rule
Even the most experienced traders stay away from the action for the first quarter-hour after the opening bell. Why? That's a time when many institutions execute or close huge trades, which means there's just too much noise to read prices accurately. If you're new to the game, or even a seasoned pro, stick with the 15-minute rule and don't buy or sell until things settle down and the price charts are readable.