What You Need to Know As a Beginning Day Trader

The first step of the journey is to understand the term "day trade". The SEC defines a day trade as "the purchasing and selling or the selling and purchasing of the same security on the same day". The term "intraday" is also used to describe such trading behavior.

Another term, which beginning traders must be aware of, is the so called "pattern day trading". The SEC defines this term as "executing four or more day trades within five business days". Understanding this term is important because once you become a pattern day trader you will have to comply with a special rule. This rule requires that you trade an account in which a balance of at least $25,000 is maintained at all times.

Having grasped the basic terms, the newcomer in the field can make a more prudent choice between the path of the swift intraday trade and the path of the long term investment. Many people argue over which path is best, but the truth is they both have their advantages and disadvantages.

Day trading, for example, can offer opportunities for a quick and modest profit. Unfortunately, the risk level of trading this way is very high and loses can equally be swift and devastating. In addition, trading is an intensive, devouring process which is usually more time consuming than long term investing.

In general, traders do not care whether a company has a potential to grow ten times in the future. Profits and future sales projections numbers may be overlooked by a trader. What they care about is whether the company can provide enough speculative opportunities during a given day regardless of its financial health.

While long term investors rely primarily on fundamental analysis, traders use predominantly technical analysis. In particular, successful day trading depends on the ability to correctly discern buy or sell signals emitted by daily price charts. Day traders believe that all the information available about a company is reflected in its current price and price history.

In order to effectively discover such signals, most day traders usually focus on:

(*) Volume
(*) Trends
(*) Formations - triangles, channels, flags, breakouts etc.
(*) Indicators - Stochastics, MACD, MA and RSI.

Most day traders usually put fundamental analysis out of main focus, however, fundamentals such as important company updates and news should not be ignored in the day trading process.

In short, one must get armed with knowledge, experience and perspicacity before entering the deep seas of day trading. With this arsenal at hand, traders have more chances to survive the volatile waves of the market and keep themselves financially alive until they reach the coveted treasure islands described in the tall tales of "expert" day traders.