In stock market parlance, day trading refers to buying or selling shares and squaring up the bought or sold positions on the same day. However, sometimes, they carry forward their positions for one day at the most. Individuals who participate in this activity are referred to as day traders.
It is easy to become a day trader, but many do not stick to prudent, common sense financial principles, which is why you must have heard that they lose a lot of money. In reality, this is not true - they most often make money because they have access to sophisticated stock price forecasting tools, the latest news and most of all, they do not take any positions home and hence are not subject to vagaries of company announcements, economic indicators, commodity prices, the sub-prime mess, and so on.
Having said that, let us also add that to become a successful day trader, you need to follow sound financial tenets and get a basic grip on the stock market.
Basic issues faced by day traders
1. Newbies regard day trading as a glamorous, hotshot job - it is anything but that. Day trading is about acting swiftly while purchasing/selling stocks at a price and squaring up positions at a profit. One has to be street-smart and nimble to survive.
2. They must understand the stock markets and different indices - for example, if the utilities indices fall, then they can go short on the weakest stocks in that category, and so on.
3. They need to work with adequate working capital. Brokers registered with the New York Stock Exchange will insist of a deposit of $25,000.
4. Online traders also have to invest in a high-speed broadband connection and subscribe to a sophisticated, proven website that doles out technical recommendations at regular intervals every trading day.
5. They must use their judgment wisely when it comes to booking profits or cutting losses.
Day trading problems and how to overcome them
1. Many do not book profits or cut losses quickly - they wait to gain some more out of the trade. The result is that many times profits evaporate and losses build up. As a trader, you must learn to snake in and out of your positions quickly and be content with small profits or losses.
2. Some do not cut losses at all - instead they take delivery of the security (if they have gone long on it). The result is that they have very little or no capital left because of which they are not be able to trade daily, and that might frustrate them.
3. They should trade within their financial capacity and at no time overextend themselves. Overextending yourself amounts to gambling, not trading.
4. Sometimes they get emotional about the stocks they deal in and feel like holding their position/s for a while. On the other hand, some traders act in haste after watching the price fluctuations on the stock ticker. These are dangerous mistakes no one can afford to make because it is an unwritten rule that a trader should only deal in, and not marry, any stock and he should always stick to his profit/loss no matter how the prices on the ticker move.
5. They must be wary of dealing in stocks of suspicious companies even though such stocks are riding the momentum wave. Typically, they must stick to trading in liquid and reputed stocks and try to avoid the mediocre ones. Having said that, some rare opportunities in mediocre stocks can be taken advantage of by these traders.
6. They must read financial papers and listen to the experts on TV. This information can clue them on in their trading.
This is what you need to know if you want to become a day trader. So, go ahead, organize enough capital, use your judgment and then play the game to go long on profits. Good luck!
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