In retail FX trading the day trader buys and sells within the same day. Some day traders are very active, trading many times a day and some only make a couple of trades a day.
Pattern day trader is a term defined by Financial Industry Regulatory Authority (FINRA) to describe a stock market trader who executes 4 (or more) day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.
Day trading generally suits high volume and liquid markets such as FX, Futures and Stocks.
The main benefit of day trading is a much lower cost, higher leverage and reduced risks associated with holding positions overnight when unexpected developments can cause huge moves that cannot be acted upon until the following morning.
Day trading became accessible to the retail market in the early 2000’s due to the evolution of the internet, and more specifically improved connectivity ultimately leading to broadband technology. Previously trading intraday would have been only feasible for members of the exchanges.
With the advancement of computing technology and bandwidth it became affordable to have price data streamed from the exchanges via brokers to their customers. At the same time it became feasible to route customer orders electronically with risk management built into the route.
Over the last decade or so the technology has improved vastly, to the point that almost anyone with a modest amount of money can actually begin day trading.
Day trading originally promoted the image of the young whizz kid trading stocks and making fortunes on IPO’s and gaining power over mere companies by using internet chat rooms to spread rumors and move prices. As its popularity grew its image became more of desperate gamblers trading with high leverage
More recently Day trading is constantly marketed by a variety of companies. And its surrounded by myths. Some myths promote day trading as a way of getting rich quickly – it isn’t true. It can be a way to get rich for some but it takes time and the long-term success rate is low.
Other myths say it is impossible to make a living in day trading – this isn’t true either because there are well documented cases of success, however instant success without a learning period is not probable.
Separating the myths from the truth before we start looking at day trading is essential. It will take up to 6 months of learning and practice before you become comfortable with the moves in the market.
Mindset of a Day Trader
Building the knowledge and experience takes a lot longer than one might think. This is because apart from learning about technical analysis indicators or about economic factors, it takes years to build the psychology and mindset required to apply any technique or method consistently.
The correct mindset requires one to be very humble and to avoid the mood swings that come with winning or losing. It’s important to take it as a job and eliminate emotions.
Keeping ones ego in check is also important. Have no delusions when it comes to your market opinion as it’s mostly a matter of luck to predict the market correctly.
Unlike other careers, day traders must be happy to take quick losses often, and not to get discouraged after taking losses.
Without having these factors under control, even the best trading system or indicators or analysis will fail to make you consistent profits.
When day trading, it is important to have the right tools and to know what is available for your budget.
You will need a good, fast PC, with at least 4g ram. Two monitors are a minimum of at least 19 inches each plus a dual output graphics card.
You will also need the fastest broadband connection you can get. If you can afford it then you should get a backup line as well.
Apart from your trading system provided by your trade facility provider (we will come to that in part 2), you will need charts and real time news. Expect to pay a small monthly subscription for news and for charts to be provided with your trading system. Free streaming charts are an option for FX trading, less so for futures and stocks.
Fast reliable news is a must and can be found at sites such as Financial Juice
Twitter is a good source of news and gossip if you follow the right people
In Part 2 – Getting Started
In part 2, we will look at getting started and will cover where and how to day trade