Day Trading Fundamentals

Day trading involves buying and selling stocks within the same trading day. No positions are held overnight, eliminating overnight risk but requiring intense focus and quick decisions. [DEFINITION] Day Trading: The practice of buying and selling securities within a single trading day, closing all positions before the market closes. ### Day Trading Requirements **PDT Rule (Pattern Day Trader):** If you make 4+ day trades in 5 business days, you're classified as a PDT and must maintain $25,000 minimum equity. [WARNING] The PDT rule applies to margin accounts. Violating it can result in account restrictions. Cash accounts aren't subject to PDT but must wait for trades to settle (T+2). ### Key Day Trading Concepts **Leverage:** - Margin accounts allow 4:1 intraday leverage - $25,000 account can trade up to $100,000 worth of stock - Higher leverage = higher risk **Volatility:** - Day traders need price movement to profit - Focus on stocks moving 2%+ daily - Volume confirms the moves are tradeable [TIP] Most professional day traders focus on just 2-5 stocks they know well, rather than scanning hundreds of symbols daily. ### Common Day Trading Strategies **Momentum Trading:** - Buy stocks making new highs on volume - Ride the momentum until it stalls - Requires quick execution **Scalping:** - Many small profits throughout the day - Hold trades for minutes, sometimes seconds - Requires low commissions and tight spreads **Gap and Go:** - Trade stocks gapping up/down on news - Follow-through or fade the gap - Most active in first hour [EXAMPLE] Stock gaps up 8% on earnings. Opens at $54 (from $50 close), dips briefly to $52.50, then continues higher to $58 by noon. A gap-and-go trader buys at $52.50 and sells at $57, capturing $4.50 profit. ### Essential Day Trading Skills **1. Risk management per trade:** Never risk more than 1-2% of capital **2. Quick decision making:** Delayed action = missed opportunity **3. Reading Level 2 quotes:** See order flow in real-time **4. Managing emotions:** Losses must be cut quickly [KEY] Most day traders fail. Studies show 70-90% lose money. Success requires significant capital, education, discipline, and emotional control. [EXERCISE] You have a $30,000 day trading account with 4:1 leverage. What's your maximum buying power? If you risk 1% per trade, what's your max loss per trade? |ANSWER| Buying power = $30,000 × 4 = $120,000. Max loss per trade = $30,000 × 1% = $300. Even with high buying power, keep losses small. [SCENARIO] It's 9:35 AM. A biotech stock is up 30% on FDA approval news. You chase it and buy at the high. Within minutes, it drops 15% as early buyers take profits. What should you do? Cut the loss immediately. The biggest day trading mistake is hoping a bad trade recovers. The stock may continue higher eventually, but your capital is tied up and the opportunity cost is high. Admit the mistake and move on.