What is day trading?

You’ve probably heard the term day trading on TV or in movies, but what is day trading? FINRA, or the Financial Industry Regulatory Authority, defines day trading as buying and selling the same financial instrument within the same day. Day traders take three or more day trades within a seven-day rolling period. 

Why has day trading become so popular? 

In the last few years, the advancement in software and technology has placed the ability to trade in the hands of ordinary people. Companies like Robinhood, eToro, and ThinkorSwim have developed mobile apps that allow trades to be executed anywhere with cell service. Combined with the ensuing bull market after the 2020 crash, these technological advancements enabled millions of new traders to throw their stimulus checks into the market.

Even internet personalities like Dave Portnoy, aka “Davey Day Trader,” got in on the action. But as we know, all good things come to an end. When the bull market died, so did their “ability” to earn a profit. That begs the question, did they ever learn how to trade profitably? The proof is in the pudding, i.e., the number of zeros in your trading account. 

5 essential tips to improve your day trading

Get your psychology right: Importance of psychology in trading

It is a well known fact that psychology may be the single biggest factor regarding successful trading. This subject has been studied for decades using large groups of subjects. One of the leading doctors who pioneered the study of trading psychology was Dr. Van Tharp.

According to Dr. Van Tharp, a trader’s psychological outlook and thinking towards trading is one of the most significant determining factors as to whether or not a trader will be successful. He believed psychology was more critical than a trading strategy, which he ranked least important. 

Dr. Van Tharp identified some of the reasons traders are unsuccessful:

  • Human Psychology: Traders make decisions with their emotions assisting their judgment.
  • Performance chasing: Traders who chase performance will likely lose money over the long term.
  • Casino Investing: Some traders are waiting for one big trade, like winning the lottery, and risk too much. 
  • The “me too” lemming strategy: Common among “traders” who have no real strategy or plan and trade based on what they hear from others or the news. 
  • Fear and Greed Investing: Those are the most powerful motivations for investors. Unfortunately, investors tend to alternate between these potentially destructive emotions.

These issues are just a few that many traders must contend with daily. How can traders improve their psychology? We recommend reading books rooted in trading psychology, like Trading In The Zone by Mark Douglas. The main contents of Trading in the Zone are dedicated to one goal – to become a consistently successful trader. Studying and applying the work of Mark Douglas can help traders find their edge in the market. We recommend this book to all new traders. 

Learn Risk Management

Your number one job as a trader is to NOT lose money

Start with small trades. Proper risk management is different for everyone. Typically risk management means you’re not over-positioned. What does that mean? Not having too much capital in any one trade. This number is different for every trader due to risk tolerance and account size. Risk management also means you get out of trades when they are no longer profitable. 

Don’t trade what you can’t afford to lose

This first rule is essential: don’t trade money you can’t lose. Every successful trader, regardless of expertise, has losing trades… and losing days. Mindset is everything. No one ever sets out to lose money, but if you understand that taking a loss here and there is part of the process, then your emotional state – and your desire to keep trading – will stay intact. If you want to trade a smaller account, it’s doable, but you’ll want to learn more about the pattern day trader rule and how to get around it.

Stop-Loss

Every trade setup should include a stop-loss. Failing to utilize a stop-loss in your trading plan can result in losing more of your capital faster. Most traders have a specific amount they will allow a trade to move against them before they exit. Setting up your stop-loss after you execute your trade should be the next thing you do. 

Position Size

Appropriate position sizing usually means that you aren’t over-positioned in any one trade. Professional traders usually allocate a certain percentage of their account to any one trade, i.e., one or two percent of their account balance. If you are in a trade, and you are uncomfortable with losing 100% of the risk used on the trade, you may be over-positioned. 

Find A Trading Strategy

Identify trading strategies to help you become profitable.

There are hundreds, if not thousands, of trading strategies. Not all of them apply to day trading stocks or options. Your job is to identify the strategy that matches your trading plan, risk tolerance, and current market conditions.  

Here are a few of the most popular day trading strategies:

  • Momentum Trading
  • Swing Trading
  • The Squeeze
  • Scalping
  • Opening Gap Trade
  • Tick Fade
  • Credit Spreads

Get The Right Indicators

Why are indicators important

Indicators may derive data from historical prices or predictive data like the market sentiment. They are used to perform technical analysis on charts, helping traders make informed decisions about entering and exiting trades, and identifying trends and changes in volume and momentum. Indicators also help reveal where critical support and resistance levels are and identify when stocks are overbought and oversold.

Our Favorite Free Indicators

  • VWAP – The VWAP is an anchored volume-weighted average price; unlike other indicators that focus on price or time, the VWAP focuses on volume. 
  • Moving Averages – Moving Averages plot the average price history of a specified number of days for a security and can be set anywhere from 5 to 200-days. The resulting line that’s plotted over the price on your chart helps you determine key information about your stock.
  • TTM Squeeze – Our all-time favorite indicator is the Squeeze. It incorporates a lot of information into one tool and provides easy-to-use visual signals to help you see when a trading opportunity is present.

Amazing Premium Indicators

  • 10X Bars – two indices in one tool that show the volume and direction of the average price range for trend quality and strength 
  • Voodoo Lines – a support and resistance level prediction, based on Fibonacci analysis and Elliot Waves, for future and potential entry and exit points
  • VWAP Max – average pricing throughout a given day, with volume factored in, showing the strength of a move in greater precision

Indicators can be complicated, and we’d love to give you more insight into these Simpler Trading favorites. Download our free ebook, Best Day Trading Indicators, for an in-depth explanation of each of these tools and how Simpler Trading’s professional day traders use them in their own trades.

Create A Trading Plan

All the other tips in this blog are useless unless you create a trading plan and use it. If you are under the impression that you can “wing it” as a trader, you are gambling with your financial destiny. Having no trading plan would be like driving across the country with no map or destination; there’s no point. A trading plan outlines the basic parameters for entering and exiting any trade. Download a free trading plan here. 

Here is what to include in a trading plan:

  • Why are you trading?
  • What are your goals?
  • What time frames will you trade? I.e., multi-day swing trades, intraday swing trades, etc.
  • Which setups will you trade? What strategies will help you stick to these setups?
  • Entry/exit rules that you will follow once in a trade
  • Risk management rules

Ready to Get Started Day Trading? 

If you think you’ve got what it takes to become a day trader, download our free ebook, “Getting Started with Day Trading” And join us in our Day Trading Room. For only $7 you can try it out for 7 days. This membership includes access to our live trading chat room, premium weekly videos, access to the Free Trading Room, and more. It features our traders in real-time as they execute day trades and answer your questions. We look forward to seeing you there!

FAQs

Can you day trade with less than $1000? 

No. Day traders need a $25,000 minimum balance in their trading accounts at the end of the trading day, according to US regulations. Traders will less than $25,000 in their account only place 3-day trades in a rolling 5-day period. There is a way to get around the day trading rule by trading in a cash account instead of a margin account. Click here to learn a strategy around the PDT rule. 

Is day trading really worth it?

Day trading is fast-paced, and that fast pace is not for everyone. And it’s not easy. To answer if day trading is worth you need to determine how much time you’re willing to invest in learning the craft. With a finely tuned strategy, day traders can make consistent profits over time. 

Is there a limit to day trading?

Traders with accounts less than $25,000 are only allowed to take 3-day trades within a rolling 5-day period. If you take four or more “day trades” within a rolling period of 5 business days, then you are considered a Pattern Day Trader, according to FINRA rules. If you don’t have $25,000 in your account and you take more than 3-day trades, your broker could lock your account to closing trades only.

What is swing trading?

Swing trading is taking trades that you expect to close within a few days to weeks. The goal is to take profits from shorter time frame moves in a stock.