Day Trading Basics

Day trading basics - what exactly do you need to know to get started? What are the rules and the strategies?

Any discussion of day trading basics has to answer these questions. And the answers won't all be on one page. But, from this page, you can click on different topics and gather lots of information.

Every game has a set of instructions on "how to play the game". The stock market has no such manual. It is approached by many different types of investors with many different purposes.

If you watched the movie Bull Durham (years ago), then you may remember this part of the movie:  click here to watch the scene.  The coach gives the speech that starts with "This is a simple game..."  It's a great scene, but also a reminder to traders:  master the basics.

Warren Buffett, perhaps the most famous investor of our time, is not a day trading investor. He is a value or fundamentals investor. He's a "buy and hold" kind of guy. Obviously, for Buffett, it works.

But one of the first things I discovered about myself as a trader was that I am not a buy and hold kind of guy. Works for Warren. Doesn't work for me. And here's the reason. Over the course of a year, a stock price can fluctuate wildly. It goes on this roller-coaster ride. In 2008, for example, many stocks lost vast amounts of value as the economy slid into a recession amid our national mortgage and banking crisis. A buy and hold investor would have watched as their stock portfolio dropped by 20% or more.

As a day trader, I am in and out of a stock or a currency pair on the same day. I buy because the charts give me a clear picture of the rising and falling prices on individual stocks or currencies. So, I buy and hold alright. But I may hold for 20 minutes or a few hours. I am out of the trade by the end of the day. During those few hours, I often earn over 2% ROI (Return on Investment) and sometimes much more. By doing this several times a day, day after day, week after week, my account can grow between 5% and 10% per week. I have little risk (in my viewpoint) because I am not holding and hoping for a price to go up overnight. I buy low. I sell high. I get out with a profit.  With day trading, I'm not laying awake at night and worrying about what might be happening in the market. 

Personally, I would rather make 2% per day on my investment than loose 20% for the year. That's why I am a day trader.

But, before you can get to that point, you have to learn some day trading basics. This involves choosing a broker, setting up a trading account, and then learning how to trade. Since I've covered these topics on other pages, I want to discuss the day trading basics of buying and selling stock.

Day Trading Basics
The Language of Trading

Every specialized field has it's own body of language.  The language may seem strange at first.  But, with repetition, it all makes sense.  Let's look at some of that special language here.

With a computer and an internet connection, you can start day trading as soon as you set up an account with an online broker. You will establish a trading platform, which is your trading desktop. This desktop will include charts, news, stock symbols, and a way of executing the trade.

The day trading basics of "buy" and "sell" are understood by most people. But some of the other terms may be a little confusing to you. So, let's review some of those.

"Bid" is the price someone is willing to pay for a stock.

"Ask" is the price at which someone is willing to sell a stock.

The "spread" is the difference between the bid and ask prices. Often, this spread may only be pennies. But, especially when the market opens at 9:30 ET, the spreads can be large.  If you are trading currencies, then the spread can be very different between the individual pairs.

If you enter a "market order" to buy a stock, then you are telling your broker you are willing to pay the current ask price for that stock. If you enter a limit buy order, then you are saying you are not willing to pay more than the price you've stipulated for that stock.

Likewise, if you are selling the stock you own, then selling with a market order will sell your stock for the current bid price.

Now, in learning day trading basics, you need to understand that these bid and ask prices are constantly changing. The specific price at which you buy and sell your stocks can have a huge impact on your profitability as a day trader. Likewise, the volume (number of shares) you trade will have a huge impact on your profitability.

For example, if you buy 1000 shares of a stock and it only moves 20 cents (in the right direction), and you then sell it at that price, then you will have made $200, minus the broker fees. If you buy 100 shares, then a 20-cent move would barely cover your fees.

Another aspect of day trading basics involves shorting a stock. Shorting stocks is a difficult idea for newbie day traders. Simplified, it means you are borrowing shares of a stock from your broker and selling those shares at a higher price, then "covering your short" by buying back that stock at a lower price. The difference between the sell and the cover is your profit.

But knowing the basics of buying long or selling short means you can make money in the stock market regardless of the direction of the market. You can make money when the prices go up and when they fall.

A "stop" order is used when you want to specify a price to limit your losses. For example, let's say you buy a stock for $10.00 because the charts tell you the price will go up. This is a long position. But, since you are not sure if the price rise will really occur, you might set up a sell stop order at $9.50. This means if the price goes down to $9.50, then you are ordering the broker to sell your shares at this price.

As part of your day trading basics, you should also know that you can establish a limit order to sell a stock at a designated price. For example, for the stock you bought at $10.00, you might set up a limit order at $10.50. This means you are telling your broker to sell your shares when the price reaches $10.50 - you are limiting your profits. (In a short trade, you would be limiting your profits to the downside.)

You can establish "trailing stops" by dollar amount or by percentage. For example (back to that $10.00 stock), let's say the price goes up to $10.50 and you want to make sure you capture some of that profit. If you think the price will go up some more, then you can set up a trailing order to sell the stock if the price drops by 15 cents. This trailing stop will continually adjust. So, if the price goes up to $10.75, then your trailing stop moves up to $10.60 (15 cents below the most recent high price).

Many newbie day traders fail to understand the day trading basics I've covered on this page. But, knowing them gives you additional tools for making and keeping a profit as a day trader.

I highly suggest that you study your broker's use of the above terms as well, especially when it comes to an understanding of the various types of "stops" and "market orders".

For more information about day trading instruction, click this link: day trading basics .

[Note: Essential to the basics of trading is understanding Support and Resistance on the charts. Get a free Support & Resistance mini-course here. ]

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If you want information on finding stocks for day trading, then click here.

If you want more information about setting up your day trading platform, then click here.

"Understanding Support & Resistance" is a free Foundation series of videos for traders.  Click this link to see more information.