Day Trade Definition: Day Trading Terminology
When a day trader places a trade they are looking to capitalize on a stocks price movement on the same day they place the trade and are not looking to hold a trade overnight. This is called day trading. So for instance, if a day trader buys shares of Facebook ($FB) on Monday, they would have to sell it on the same day for it to be considered a day trade. This is important to understand because according to FINRA if you place more than 3 day trades in a 5 day period your account will be labeled as a pattern day trader and you will be required to maintain at least $25,000 in your account to continue to day trading.
Day trading is inherently risky and requires you to have excellent trade and risk management skills. Most day traders utilize leverage in order to take on larger positions where they could potentially make more money than they would without leverage. The downside to this is that you could also lose more money than you have in your account and consequently owe your broker a lot of money. That is why limiting your risk and fully understanding how to trade is important before taking on large positions with borrowed money.
The goal of a day trade is to take advantage of the short-term price inefficiencies by either buying low and selling high or shorting high and buying to cover at a lower price. There are a ton of different strategies that traders use to do this but it’s important to understand that not all strategies work in every market cycle and may not fit certain trader styles. Some strategies can be more riskier than others and require you to act very quickly while others can be slower and last most of the day. It takes time to develop your own strategies that best fit your personality and is why it is best to paper trade while learning before risking real capital.
Warrior Trading Pro Tip
If you’re looking to get into day trading, it is imperative that you give yourself the best chance of success. This means having a big enough cash cushion to cover costs while building your account, finding a mentor that is successful and has a proven track record and having the right trading tools that will provide you with the power and reliability you will need to trade with.