The Basics of Day Trading

What Day Trading Is All About

Day traders try to fashion a career out of buying and selling stocks quickly throughout the day. A certain amount of day trading is critical to maintaining the liquidity of the stock market because the techniques they use keep the market moving. They’re known as institutional day traders — market makers.

Retail day traders, on the other hand, are a different bunch. They may make dozens or even hundreds of trades a day, but they also close out all their positions at the end of each day. Retail day traders use technological developments that first became available in the late 1990s to get in on the action that used to be the sole province of the institutional day traders.

Institutional day traders (market makers)

Market makers are a critical part of the New York Stock Exchange (NYSE). All are members of an exchange either as an individual, a partnership, or part of a corporation. They’re responsible for making markets in certain exchange‐traded securities, maintaining inventories of the securities for which they’re responsible, and making sure the market for those securities is orderly.

Market makers play a critical role in maintaining the liquidity and efficiency of NASDAQ‐listed stocks and stocks that are sold over the counter and not listed in a particular exchange. They’re usually part of a brokerage firm or bank that facilitates the buying and selling of stocks in these markets. A market maker must be ready to buy and sell stock on a regular and continual basis. More than 500 firms operate as NASDAQ market makers.

Market makers trade into and out of positions throughout the day, often executing orders in a matter of seconds. We discuss these types of traders in greater detail in Chapter 2.

Retail day traders

Retail day traders try to make money in a totally different way. The playing field of day trading opened for retail day traders in the late 1990s, when computer software was developed that enabled individual investors to have direct access to securities markets in ways that previously were technologically available only to licensed and registered professionals. Today, regulators believe retail day traders are responsible for about a third of NASDAQ’s trading volume. Although stocks listed on the NASDAQ are a common choice for day traders, the preferred trading platform for most day traders is the electronic communications network, or ECN, because being connected to the markets in this manner makes becoming the highest bid or lowest ask price easier than doing so via directly trading on the NASDAQ (see Chapter 2). Since the NYSE bought ARCA (an ECN), the difference between NASDAQ and listed stock has shrunk, and we’re now seeing significant day‐trading volume on both NASDAQ and NYSE stocks.

It’s all about access

Brokerage firms that promote day trading provide their customers with real‐time links to the major stock markets and the NASDAQ system, which, in turn, gives them information not readily available to average retail investors. Brokerages also provide customers direct entry into their order‐processing systems. This direct access enables day traders to send their orders to a particular market or market maker and to determine the order route — a task that only licensed professionals previously were able to accomplish. Although other online and traditional brokerage houses may provide real‐time quotation information, they don’t offer their customers linkages to markets and market makers. Instead, some have preset algorithms that determine where a customer’s order is routed for execution, which may or may not be the cheapest way to go. Many times the algorithms are set based on trading agreements among firms without regard to cost effectiveness.

Why does direct access matter so much? Speed and, again we say, speed! Systems that provide more and more direct access give day traders the opportunity to execute their trades within seconds. In addition, by using a more direct route, traders can choose market makers whose bid or ask prices look the best and fill their orders instantly.

Traders also can post bid or ask prices directly on an ECN, or they can cancel orders with the click of a button, all because they have direct access. When establishing a position using a limit order through a traditional online broker, traders must go to the website and cancel their orders, and under those circumstances, they can’t know whether their orders have been filled until they receive notice of cancellation.

Day traders aren’t looking to make a large profit on one huge sale every day, but instead they seek smaller profits on much more frequent changes in the positions they establish during the day. Mere seconds are critical when you’re trying to get in and out of a position, trying to make money on small stock price differences that may be much less than a single point, which, in trading lingo, translates to a dollar in the nontrading world. Although swing traders and position traders seek profits of several points (dollars) with each position they enter, day traders may exit their position after earning a profit of only a few cents. Traders usually buy or sell at least 1,000 shares at a time, so 25 cents translates into a $250 profit for every 1,000 shares traded. In only a matter of seconds, what looked like a good price to a day trader can be lost.

By controlling where their orders are sent, day traders also gain better control over the costs of their trades. One of the ways that some traditional brokers make money on trades they execute for customers is charging a fee called a payment for order flow. These fees can be a penny or more per share of stock, providing something of a kickback to the brokerage house and enabling deep discount brokerages to charge smaller upfront commissions that barely cover the cost of their trades. Although online discount brokers send trades to particular markets or market makers through which they’ve established trading deals, day traders have the inside information to select the routes that give them the best prices.

Brokers must inform clients in writing upon opening an account whether they accept payments for order flow. If they do, the brokers must provide a detailed description of the type of payments. They must also disclose on trade confirmations whether they receive payment for order flow. Customers have the right to request the source and type of the payment for any particular transaction. So look for the details about payment for order flow when you choose your broker and look for details on your trade confirmations. For more information, read this primer on trade execution (https://www.sec.gov/investor/pubs/tradexec.htm) from the SEC.

Day‐trading firms

In addition to direct access, day‐trading firms provide (for a fee, of course) their customers with training in how to participate in this rapid‐fire, price‐sensitive buying and selling and then encourage their trainees to use their strategies and their software. These firms developed proprietary software and systems that day traders use to analyze and chart activity and execute orders. This software usually is available only at on‐site trading facilities or downloadable to your computer rather than being used through websites.

Day trading through a website isn’t usually done because the added seconds it takes to download price information and then send back an order is likely to result in the loss of your order to some other trader. Even when a trader has high‐speed Internet access, the trader can spend too much time waiting for pages to load and sending orders. So to be successful, day traders need the instant access they get through proprietary software.

Day‐trading firms are organized in one of two ways — as traditional broker‐dealers (day traders open accounts with the firm and trade using their own accounts) or as proprietary trading firms (or a prop firm for short) that either sell interest in the firms to traders who want to day trade or hire traders as independent contractors. Typically, a proprietary trading firm is organized as a limited liability company (LLC), which is a corporate structure used to minimize the legal exposure of the firm. LLCs are not a separate entity for tax purposes, but they still enjoy many of the legal protections offered to C corporations.

You can find a directory of proprietary trading firms at Traders Log (www.traderslog.com/proprietarytradingfirms). Some of these firms offer stock trading, and others focus on futures and options trading.

As part owners or contractors rather than customers, day traders are associated with the firm, and as such, they can trade using a portion of the firm’s capital. Most of these arrangements require traders to put up at least $25,000 to buy in. More often, however, the buy‐in required is closer to $100,000. This arrangement enables day traders to use much more leverage than traditional broker‐dealer arrangements do, where borrowing on margin is limited to amounts held in individual traders’ accounts under Regulation T margin requirements. (We explain how margin accounts work in Chapter 15.) In addition to buying into the LLC, traders for these firms also are required to get a Series 7 license, and some firms require Series 55 and Series 63 licenses.

Understanding Account Restrictions

The Federal Reserve’s Regulation T is one of the key restrictions in the SEC arsenal of tools for controlling day trading. Rules related to the settlement of stock transactions and borrowing from others to meet margin requirements also limit what day traders can do.

The Fed’s Regulation T: Margin requirements

The world of day trading became much more restricted in August 2001 when amendments to Regulation T were approved that focus on pattern day traders. Your broker and the Financial Industry Regulatory Authority (FINRA) consider you a pattern day trader whenever you buy and sell (or short and cover) any security on the same day within a margin account four or more times during any rolling five‐day period. Days when the markets are closed — Saturday, Sunday, and market holidays — are not included when calculating the rolling five‐day period.

After you’re designated a pattern day trader, you’re required to maintain a minimum of $25,000 of equity in your margin account before you’re ever permitted to do any more day trading. For most day traders, that means having at least $25,000 in cash at the end of every trading day. This limitation can impact other investing activities in your account, so if you’re considering day trading, be sure to talk with your broker to gain an understanding of the impact that margin account minimums have on other stock transactions you may want to make within your account.

After you’ve been designated as a pattern day trader and maintain the $25,000 minimum in your margin account, you’re entitled to borrow up to four times any amount you maintain in your margin account. For example, if you maintain $50,000 in your account, this gives you up to $200,000 of day‐trading buying power. But remember, this extra buying power is limited only to intraday trades. If you hold positions overnight, you can’t take advantage of the day‐trading margin when opening a position. You must adhere to the traditional 50 percent initial margin requirements.

Typically, day traders are flat, or back into a cash position by the end of the trading day for all day trades; otherwise, you risk a margin call (see Chapter 15). Whenever your day‐trading activities result in a margin call, you have at most five days — but some brokers require payment in fewer days — to deposit cash or securities in your account to meet the call. If you fail to meet the margin call, your account will be restricted to traditional margin requirements.

Although brokerage firms aren’t required to monitor whether day‐trading accounts fall below the $25,000 minimum throughout a given trading day, customers must cover any losses incurred in their accounts from the previous day’s trades before they’re allowed to continue day trading. If a day trader exceeds the four times leverage rule during the day, a brokerage firm can impose additional restrictions on the account to protect itself from additional risk and prevent any recurrences of such activities.

Members of FINRA are required to issue day‐trading margin calls to pattern day traders who exceed their day‐trading buying power. Traders then have five days unless their broker has stricter rules to meet these calls. Until a margin call is met, the day‐trading account’s buying power is restricted to traditional margin requirements, which allows the day trader to leverage equity only two times. For example, if a day trader has $50,000 of equity but the account is restricted due to exceeding buying‐power constraints, the day‐trading buying power is only $100,000. These stricter requirements begin on the trading day after buying power is exceeded and stay in place until the trader either meets the call by depositing the necessary cash or securities or until five business days have passed. After five business days have passed and the day trader still has not met the call, the day trader is limited to trading only on a cash‐available basis for 90 days or until the call is met.

Traders can’t meet the call and then just take the money right out again. Funds deposited to meet the call must be left in the account for at least two business days. Traders also can’t use cross‐guarantees (guarantees from third parties) for the margin call. The cash or securities must be deposited directly in the account.

Settlement: No free rides

An official stock transaction is settled three days after the date of the trade, meaning that day traders frequently are buying and selling stocks before their transactions are officially settled. Day traders can’t free ride, meaning they can’t buy a security and sell it an hour later without first having enough funds to cover the settlement of the initial trade. If a trader buys a stock or other security, he or she must have the funds to cover the initial trade even if the security is sold for a profit within the same day.

A margin account with leverage of four times excess equity is what enables day traders to get around this rule. To play within these rules, all the trader needs to have is sufficient cash to pay for the shares or sufficient reserve in his or her margin account. Brokers can restrict the use of margin funds for three days until a stock transaction is settled, but they’re not required to do so.

Before trading, be sure that you understand the restrictions your broker imposes on margin accounts related to stock transaction settlements. The settlement time for options is the next day, as opposed to the three‐day waiting period for stocks. To trade using options, funds must be in the account before you place the trade or you’ll be stuck wiring funds around, which can add plenty to the costs of your trading.

Strategies for Successful Day Trading

As mentioned throughout this chapter, day traders often trade stocks in lots of 1,000 shares or more, putting large portions of cash at risk with every trade. Although the profit potential is great, so is the risk of losing all your money and maybe even owing money if you use borrowed cash in your margin account.

Before you ever consider day trading, you need to understand the risks you’re taking and how to control them. Otherwise, money can flow out of your account very quickly. Studies show that it generally takes six months to learn how to be a successful day trader, and during that learning curve, you can count on losing money. Success rates of day traders range from 10 percent to 30 percent of those who try it. In other words, 70 percent to 90 percent of the people who attempt day trading don’t succeed and frequently end their day‐trading careers in debt. We explain more about risks in the later section “Recognizing That Risks Are High,” but first we need to review some of the basic strategies that day traders use.

Technical needs

Number one on the list of things you need to become a day trader is a very good computer and Internet setup. They’re necessary for successful day trading. Most traders have two or more monitors with a PC built to handle a large number of data feeds at one time. Windows 7 or 8 is the preferred platform of day traders because most of the trading platforms are written for these environments and because they’re able to handle multiple monitors. Windows 10 has gotten mixed reviews because of its automatic updates that sometimes are not compatible with a trading platform. If you do have Windows 10, check with the provider to find out if there have been problems using Windows 10.

Daily computer maintenance is critical for day traders. Computer problems are the last thing you want to experience in the middle of your trading day, especially when buy positions are left open. You can lose a lot of money if you’re waiting for your computer to reboot and a trade goes sour. Traders recommend that you clear the cookies (files that websites send to your computer when you’re using them) from your Internet cache on a daily basis and that you defragment (reorganize your files so the computer runs more efficiently) your computer at least once a week.

Another key step is finding an Internet service provider (ISP) that is reliable and offers high‐speed access to the Internet. Many traders have more than one ISP lined up, so they have a backup in case the first one goes down. Again, you don’t want to lose even mere seconds when you’re in the middle of your trading day, especially when you have open positions.

Trading patterns

Day traders make use of patterns seen in technical analysis that are similar to the ones we discuss in Part 3 of this book. One common pattern that day traders look for is a price gap in a stock at the opening of the market. They find that prices usually move in the same direction as the opening price gap during the first few minutes that the market is open, and then the market tends to reverse and fill the gap (see Chapter 10). Trading that doesn’t fill the gap during the first five to ten minutes can signal a dominant trend for the day for that particular stock. Some traders watch this action to find their targets for the day and the directions they plan to play them. There is no consensus on this, of course. Others believe that early market moves give false signals and that using those moves for planning your trading day can be dangerous.

Traders watch for many of the same patterns they find when looking for breakout signals and signs of reversals (see Chapter 10). The key difference is that a day trader looks for intraday signals, while longer‐term traders format their charts for longer periods of time.

Scalping

Scalping basically means you move into and out of a position for a very limited profit in an extremely short time frame, usually just a few minutes or possibly only a few seconds. The scalper’s objective is to make profits of only fractions of a point on any given trade, rather than the several points’ profit that most traders seek. Day traders execute their trades in a much narrower time frame, so scalpers look for only 10 to 25 cents per share, hoping to make small gains as often as possible. When scalping with higher‐priced ($100 or more per share) or faster‐moving stocks, one point can be considered a scalp.

For most stocks, scalping doesn’t pay if you trade fewer than 1,000 shares. Here’s why: A 10‐cent scalping profit on 1,000 shares is only $100 before paying transaction fees or commissions. There will be little profit after fees and commissions if you’re trading lots with fewer than 1,000 shares.

Trend traders

Not all day traders use the scalping technique. Some are trend traders. Instead of jumping into and out of a trade for a fraction of a point, they look for profits of at least one or two points and may stay in a position for minutes or even as long as an hour. Trend traders make fewer trades than scalpers do but seek higher profits per trade and may trade in blocks of fewer than 1,000 shares because they can make a nice profit as trend traders with considerably less share volume. In fact, traders who look for more than a one‐point profit sometimes hold a stock for several hours unless the stock is high‐priced or its price is moving fast.

Recognizing That Risks Are High

Reading about trading patterns and the high volume of stock trading, you’ve probably already figured out for yourself that the risks are high. Within a matter of minutes, trading in and out of stocks in 1,000‐share blocks can be costly whenever a stock quickly moves in a direction you weren’t anticipating.

In fact, the U.S. Senate investigated the risks of day trading after a shooting spree at an on‐site day‐trading facility in Atlanta, Georgia, left nine people dead in July 1999. The shooter, Mark Barton, was a chemist before getting involved in day trading and losing $105,000 in just one month. He killed himself after the shooting spree.

Senate investigators found that the revenue of the 15 largest firms that specialize in day trading for 1999 was $541.5 million, or 276 percent higher than their revenue in 1997. Profits went up by more than $66 million, and by 1999, the 15 firms had opened 12,000 new accounts. Investigators also found that the 4,000 to 5,000 most active traders were borrowing huge sums of money and losing it. In that year traders paid an average of $16 per trade and made an average of 29 trades per day. Using these statistics, investigators concluded that a trader needed to make more than $111,000 a year in stock market gains just to break even with that level of costs.

A study by Ronald L. Johnson done for the North American Securities Administrators Association released in 1999 found that 70 percent of a sampling of accounts at one trading firm lost money. He concluded that 70 percent of people who attempt day trading will not only lose but will also likely lose everything they initially deposited in their day‐trading account. He found that only 11.5 percent of day traders made short‐term trading profitable.

Another study, released in May 2004 by university professors who looked at day traders on the Taiwan Stock Exchange, found that 82 percent of traders lost money. Some may profit most days, but they end up in a losing position after calculating costs of operations.

Liquidity

To be considered liquid, a trader must have the ability to change holdings quickly into cash. Although you can see that a day trader must trade a large number of shares to make a profit, he or she must also have significant cash and securities in his or her account to be able to continue trading activities.

Slippage

Slippage can cost day traders significantly if they’re not careful how they execute their trades. Slippage relates to the difference between what you expect your exit or entry stock prices to be and what you actually end up paying for and getting out of that stock when your order is finally executed. Depending on the volatility of the market, a stock price sometimes can vary by as much as one or two points from the time you see the stock quotation until the time your order is actually executed.

Traders can control slippage with the right type of order. The three basic ways to enter a position are at market, with a stop order, or with a limit order. Day traders rarely use market orders, which means buying or selling a stock at the market price. Instead they use stop or limit orders to better control when their orders are filled and how much they pay for the stock. We discuss types of orders in Chapter 2.

Most traders recommend that you never enter a position without immediately placing a stop‐loss order at an exit price that you decide is the most you’re willing to lose on a particular position. Although a stop order means that once a stock hits the exit price, the order changes to a market order and may result in your selling the stock at less than that price, it nevertheless is safer than placing a limit order, which can mean that you miss the exit point altogether and possibly lose even more. Stop‐loss orders can cause some slippage, but you usually lose less with these types of orders than with limit orders. A limit order can be completely missed when your stock breaks into a downward trend because the fall in price was too abrupt or rapid for it to be executed.

When buying stock, traders use limit orders because they place limits on the entry prices traders are willing to pay. Traders certainly don’t want to end up paying higher prices than they intend, which, in turn, raises the bar for making a profit higher than is reasonably possible to attain.

Trading costs

Many of the day‐trading firms set a per‐share cost for stock trades or a per‐trade cost. Per‐trade costs vary from $4.95 to $9.99 per trade depending on how much trading you do in a month. In addition, you may be charged a fee for routing as well as for the trading platform provided.

Cost of trading is the same whether you have Level I or Level II access (see Chapter 3 for information on Level I and Level II quoting alternatives). The number of trades you do impacts whether you have to pay for Level II access. To get Level II access for free, your broker will set a minimum number of trades you must make per month; otherwise, the monthly fee for Level II access can be $150 or higher. Options‐trading fees vary by broker as well.

In addition to these fees, per‐share charges can range from $0.005 per share to $0.01 per share, depending on the exchange on which you choose to trade. If your computer crashes or your Internet access goes down, phone orders can cost you $15 or more per trade.

So if you trade 30 times a day for 20 days a month, the number of your trades totals 600. At $4.95 per trade, your commission costs are $2,970 per month, and if you trade 1,000 shares with each trade, that adds up to a total of 600,000 shares per month. Even at the lowest per‐share exchange cost of $0.005, that means an additional $3,000 in per‐share charges. Thus, your monthly cost for this volume of trading would be $5,970. Some brokers offer a higher per‐trade price without fees for per share, so shop carefully for a trading cost that will best meet your trading style.

NerdWallet reviewed the best platforms for day traders: https://www.nerdwallet.com/blog/investing/best-online-brokers-platforms-for-day-trading/.

In addition to these costs, many traders also pay for newsletters or join trading chat rooms that give them alerts for the best opportunities each day. These services can add another $200 to $250 to your monthly costs. So before you see even one penny of profit, your monthly outlay can be $6,000 or more (that’s $72,000 annually or more). You can easily understand why so many day traders never see a profit for at least six months and why such a high percentage of day traders actually give up before their businesses turn profitable.

Taxes (of course)

On top of all these costs, you must consider taxes that you’ll have to pay on any short‐term profits at your current individual tax rate and not the preferred tax rates given to long‐term investments that are held more than a year. However, full‐time day traders have tax advantages that other traders and investors don’t have, provided that they meet the following qualifications:

Buy and sell a high volume of stocks every day. If you’re day trading full time, proving that you’re meeting the requirements to qualify for the special day‐trading tax breaks is easier. If you work full‐time and trade part‐time, qualifying for the tax break may be more difficult.
Establish (in their accounts) that they regularly and continually make numerous trades just about every day the market is open. A broker designating you as a pattern day trader and requiring you to maintain a margin account minimum of $25,000 may help prove you’re a day trader in the eyes of the Internal Revenue Service (IRS).
Make a profit buying and selling stocks with short‐term horizons rather than profit by holding stocks for long‐term gains or dividend income.

If you successfully prove to the IRS that you’re a day trader, you can consider your day‐trading activities as a business and thereby write off your trading costs as a sole proprietor on Schedule C of your tax return. The reason doing so gives you such a great tax advantage is that other investors are able to write off only the costs that exceed 2 percent of their adjusted gross incomes. Any losses reported on your Schedule C business return can be written off against your adjusted gross income and thus reduce your tax bill, which, in turn, can help you qualify for other tax breaks.

In addition to the costs of making your trades, you can write off many more items against your business on Schedule C. You also can write off any interest you pay on your margin account and possibly depreciate up to 100 percent of any equipment that you bought to start and continue to run your trading business as a Section 179 business deduction. This deduction could be as much as $500,000 in 2017. If you use a space in your home exclusively for your trading activities, you also can take a home‐office deduction.

Any gains that you make on your trading activities are considered capital gains and, as such, are exempt from any self‐employment taxes that other sole proprietors must pay on their business profits. You still have to report your gains and losses on Schedule D, and to avoid additional scrutiny, you may want to attach a note to your Schedule C explaining why you have losses and no income. The IRS red flags returns from people who report losses on Schedule C for several years in a row, a factor that also can trigger an audit.

Avoiding the Most Common Mistakes

If the risks and costs don’t scare you away from day trading, you need to become familiar with some common mistakes that lead to failure for many day traders. Some traders talk about their more common mistakes, especially the ones that cost a lot of money while they were building their businesses. Here are some of the more serious mistakes new day traders make:

Breaking stop‐loss rules: When a stock starts dropping, newer, not‐yet‐disciplined traders tend to panic as their picks begin losing money, so they decide to hold the stock rather than exit when their initial stop‐loss is reached. However, traders go broke using that strategy because they don’t stop their losses as planned. You must set your exit prices based on your technical analysis for both losses and profits when you first buy the stock. Follow those rules mechanically when the target price is hit, and don’t let your emotions get in the way.
Chasing trends: New traders who aren’t yet confident in the way they read patterns often wait to see confirmation that they’re right before they enter a position. That hesitation causes them to miss planned entry points and, if they’re right, can end up forcing them into buying at a stock price that’s higher than they intended when an upward trend is expected or selling at a lower price than they intended when a downward trend is expected. By missing intended entry prices, traders end up chasing the trends and finding that their original entry and exit points no longer are valid because many others already acted on the trend, and the stock is no longer available at the planned prices. Experienced traders just walk away from that particular trade instead of getting caught up in trading points that don’t match technical analysis and thereby chasing a trend.
Not waiting for the right trade: A new day trader must exhibit the patience required in waiting for the right trade to match what the technical analysis indicates. Experienced traders know to wait for the right timing instead of forcing a trade, entering at the wrong price, and overtrading their account.
Not establishing set rules before the trading day begins: To avoid getting caught up in the emotions of a big win or loss, you need to decide your entry and exit points before the trading day begins and never deviate from them after the day begins. Experienced day traders know that you either focus on your trades or think about your rules. You don’t have time to do both, and trying to do so can be a recipe for disaster. Staying objective and following your rules is crucial to maintaining the control a day trader needs.
Forgetting that fundamentals don’t matter: New day traders get caught up in the idea that the company whose stock they’ve purchased is a good company and that when its stock loses ground, it’s therefore bound to head back up. Experienced traders know that how good the fundamentals look doesn’t matter and that when the market is selling down, even the price of a good stock goes down. Day traders must follow market signs and not worry about how good or bad the fundamentals of the company they’re trading may appear.
Averaging down: Although investors may average down, meaning they buy a stock and if the price goes down they buy even more shares, believing that it’s a good stock that will recover, this technique doesn’t work at all for day traders, and most experienced traders of every variety will tell you that using it is a fatal mistake. Day traders instead believe that you need to set a stop price and get out (called stopping out) of a losing stock and possibly reenter again at a lower price. Doing so gives you time to look objectively at what is happening with the stock and determine whether getting back in is worthwhile. Stopping out also is likely to cost you less than averaging down, and you won’t risk getting caught with a margin problem. Averaging down can tie up too much money that you can otherwise use for a more profitable trade with a different stock. The worst feeling, even for an experienced trader, occurs when a stock plunges far below the stop position because deciding whether to take the large loss is difficult. In most cases, if you’re uncertain of your next move, experienced traders recommend that you get out of the position before the situation grows worse or out of control.
Not knowing when to take profits: New traders sometimes make the mistake of either taking profits too early or not taking profits at all. Both can result in unnecessary losses. Most of the time, indecision strikes when traders are afraid they’ll lose a profit if they hold it too long or miss a profit if they exit too soon. Just as with losses, you need to determine exit points before entering a position, and you must follow rules. Remember that as a day trader, you must focus either on your trade or on your rules. Day traders who move into and out of positions within seconds or minutes don’t have time to do both.
Walking away from the computer with open positions: Experienced day traders never walk away from their computers when they still have an open position. Although we touch briefly on holding open positions overnight in the introduction to this chapter, this rule is even stricter. Because experienced day traders respond to price changes that occur in mere seconds or minutes, they definitely don’t want to be away from the screen while a position is still open.

Day trading is a high‐risk career choice that you should consider only after doing a considerable amount of initial research, hunting down good resources for educating yourself about the risks and rewards, and finding all the techniques you need to use to day trade successfully. Even before you get started, be sure to check out the firms you’re planning to use as resources by calling up their disciplinary records and complaint histories through the SEC or state regulators. You’re putting a good deal of money at risk, so take the time to find out all you can before spending even that first dime.

You also may want to consider taking your Series 7 exam, the exam all stockbrokers are required to pass. Although you must be sponsored to take the exam, many training centers near your home or online can help you find a sponsoring broker. Even though you may never want to work as a broker, the information you’re required to know for the exam gives you a much stronger awareness of the securities markets and the laws by which they’re governed. Studying for the test, you’ll also discover more about the various investment products on the market and the risks you take when buying and selling each type. For more about the Series 7 exam, read Series 7 Exam For Dummies, by Steven M. Rice (Wiley). For a closer look at day trading, read Day Trading For Dummies, by Ann C. Logue (Wiley).