Introduction to Day Trading

Day trading: Do your own research, don't get caught up in systems that deliver "signals" for a high fee. Is it true that day traders can make enormous profits?

There is a very specific definition of a day trader. The SEC states that a day trader is one who has at least $25,000 in a stock market account, and who buys and sells an equity within the same trading day, at least four times in a five day period. In addition, these same-day trades should account for at least six percent of the trader's activity. Day traders are also subject to a variety of special SEC rules.

Because a day trader buys and sells multiple stocks within the same trading day, they typically pay a large amount of money in commissions, which can eat into profits. Nonetheless, when done judiciously, day trading can still yield a good return.

A day trader becomes successful by carefully studying charts and being ready to react to small swings in the market that take place over a short period of time. It's a fact of the market that many equities rise and fall several times throughout the trading day, and the day trader hopes to be able to predict those small swings and capitalize on them. Knowing when the stock is going to go up or down is the difficult part.

There are a number of day trading systems, advisory services, newsletters, and alerts that promise to send you signals throughout the trading day, to give you entry and exit points for specific day trades. Some of these services can be useful to the day trader, when taken the right way.

Such a service that provides entry and exit points for specific stocks will usually start by issuing you an alert that says something like, "waiting for an entry point for XYZ Company," and may even give a target amount. When the stock reaches that target amount, you will get another alert that says, "buy XYZ Company," at the specified price. Here's where you can do your own due diligence.

Even while day trading, it still is wise to know as much as possible about a stock before trading it. Following those alerts blindly can lead to disaster. There's a lot more to day trading than subscribing to a service and waiting for their signals. Between the "waiting for entry point" alert and the "buy" alert, you have a limited amount of time to do some research. It may not be much time, but you should at least have enough time to access some online resources to view a profile of the company, review the stock charts, and get some basic information about the company's financial performance. You should also be able to at least get a few recent news headlines to see if the company has made any positive or negative news lately. You won't have time to do much in-depth research, but even fifteen minutes worth of due diligence will give you a fairly good idea of the stock's stability, the company's performance, and whether or not the CEO has just been indicted.

Research day trading systems like this before paying money. They may charge several hundreds of dollars, or even thousands of dollars, for a subscription. Some of them are good, some amount to nothing at all. Research the promoter and the company as much as possible beforehand. And keep in mind that the promoters of such systems are not necessarily brokers, or even investors themselves, they are publishers. And as such, they are not required to register with the SEC or other regulating bodies. However, the SEC will maintain information about fraudulent advisory services that have been in trouble before.

And as always, beware of extravagant claims, guarantees, testimonials and promises of easy wealth. Day trading is like any other type of wealth building, it's not easy to become successful--if it were, more people would be doing it.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.