What is Day Trading?

Day Trading is a broadly used term with many shades of meaning. To add precision to our definition, we need to break it down into individual areas.

• Scalping – Quickly jumping in and out of positions with 1000 or more shares with the goal of making between 1/16 and 1/4 point. 1000 shares with a profit of $0.25 each would be $250. Achieved repeatedly throughout the day, this can produce incredible income. If things go wrong the results can be equally decisive. All positions are closed by day's end and the trader is in all cash.

• Day Swinging – Finding between one and three nice moves a day. The goal is to make between 2 and 5 points per trade while holding a position between 5 minutes and 5 hours. Share quantities can be much lower than 1000 and still have positive results. All positions are closed by day's end and the trader is in all cash.

• Sleeping – Holding a moving stock overnight with the anticipation of a significant gap the next morning. Retail investors come home from work and see that the stock is up and place orders overnight, which brings the price up further. The stock then Opens the next morning significantly higher than the previous day's Close. The goal is to sell before or at the Open for a gain of 2 points or more.

• Swinging – Holding a stock between 2 and 10 days, with the goal of making 5 points or more, and selling the stock when its daily trend reverses direction. The trader uses day trading direct access software in an attempt to get in and out at a more optimum price.

Many Day Traders use a combination of these methods, depending on what each individual situation would appear to warrant.

The advent of the Internet and electronic trading has put real power into the hands of ordinary traders and investors that was never previously dreamed  possible. Demand for services has brought prices down to unparalleled levels. For between $80 and $130 a month -- even less, depending on number of trades executed --  anyone can now have all the bells and whistles of real-time access to the Stock Market.

But this power is a double-edged sword. The ability to buy and sell thousands of shares with the click of the mouse can be extremely rewarding or devastatingly dangerous. With power comes responsibility. It’s estimated that the washout rate for new day traders is between 80% and 90%.

Simply put, just because its so easy doesn’t mean its easy. Everything is easy when you know what you’re doing, but the learning curve can destroy you. Unfortunately, many people get into the market without learning all they can before putting their money on the line. By the time they start to understand the game, it’s too late. They’re broke. Or worse, in debt -- when the broker sells their losing stock out from under them to meet margin calls.

The secret of success in trading the stock market is the following:

• Have a Methodology for anticipating the probabilities

• The ability to control emotions

• Discipline to adhere to a tested plan

• Carefully managing Risk. 

Failure, therefore, can be attributed to this:

• The habit of allowing greed, fear, or sloppiness to assert itself over intelligent planning and execution. 

The goal then, is to work with a tested rationale for Entry, Exit, and Risk Control. History repeats itself, over and over again. The Day Trader must understand the past in order to confidently anticipate the future. Using the odds as a tool, trading stocks becomes a game of waiting patiently for high probability situations to present themselves, and then taking full advantage of them. In the event that things don’t work as expected, the discipline to exit quickly and not wait for the stock to “come back” is mandatory.

That's how I define Day Trading. Feel free to email your own definitions.