Day Trading Skills - Strategies For Becoming A Skilled Trader

Despite the dire admonitions by the Securities and Exchange Commission cautioning investors against the controversial yet potentially well-paying world of day trading, people continue to try and attain day trading skills, and a day trading stock tip is literally worth it's weight in either gold, or dross! The following is some information on learning trading techniques, the risk inherent in the system, and tips for becoming a skilled trader.

Just what is day trading and how do investors acquire day trading skill? Day trading is the process of quickly buying and selling stock throughout the day in the hopes to profit from the marginal changes in the market for that particular day. If possible, day trading strategies permit investors to reap profits from the fractional increases in the market.

Day traders observe a certain set of indicators when figuring out whether a stock is a candidate for day trading. First, the stock should have high liquidity. This means that the stock in question has lots of buyers and sellers. The liquidity enables day traders to rapidly buy and then sell stock. Liquidity is based on the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Many stocks on the NYSE and NASDAQ have a high degree of liquidity.

A day trader also watches volume individually, in addition to using it as measure for liquidity. To be eligible for day trading, a stock must trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more will allow the day trader to purchase or sell a large amount of stock without greatly altering the price of the stock. Volatility is another issue in assessing a stock for day trading. The word refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders study the pattern and volatility of stocks over an individual day. Stocks that change price many times over one trading day are good prospects for day trading. A fluctuation of at least $2.00 per day is recommended.

Finally, a day trader looks at the price transparency of stock. This term relates to the ability to amass information on the order flow of a stock. Also called market depth, price transparency helps the day trader calculate just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who arrange to access the NASDAQ level II quote screens can assess the performance of a stock and determine its swing in price.

While these trading techniques are entirely legal and entirely ethical, they are highly risky. Day traders usually buy on borrowed money with the hope that they will realize higher profits through their acquisitions and sales. People who are called "pattern day traders" by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops significantly, the investor is required to deposit more cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the associated risks.

The first few months, a vast majority of day traders endure massive financial losses and only a handful make it through to become profit-making day traders. For this reason, day traders should only invest money that they can afford to lose. They should never invest money set aside for the essentials such as living expenses or second mortgages.

Remember that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme hazards of prices changing to the detriment of the trader. Day traders do not invest, rather, they hypothesize on the movement in price of a stock throughout the day.

There are numerous websites whose sole purpose is to make their living from those who are trying to find a day trading stock tip. These websites promise speedy results and sell hot tips to their members for a fee. The sources are usually paid to make these recommendations and must be avoided. Seek the advice of a proven professional, and take plenty of time to use trading strategies for longer term success. Remember, there is no free money, and day trading skill is often paid for with enormous stress and cataclysmic losses.

About The Author-- For a wealth of free info on understanding stock trading, check out the articles at Stock Trading Information Resource, or make sure to read The Wall Street Journal - my #1 pick for stock information. Ron King is a web developer; visit his website Authoring Articles.

Copyright 2008 Ron King. This article may be reprinted if the resource box is left intact and the links live.

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