This article will take a look into what exactly it means to be a pattern day trader, and the various practices surrounding it. We will also go into information on what you should do should you want to become a pattern day trader, and what things to look out for and what not to!
A day trader refers to someone that makes different lengths of trades in order to take advantage of price changes that occur naturally within the stock market within the same day. This is known as “intraday” trading, which means the same things – the buying and selling of securities within the same day’s business hours. The price changes that occur in the stock market within the same day form the basis of why day traders exist.
“Intraday” in the world of finance and trading is the term that refers to the maximum (the highest) and the minimum (the lowest) points of any particular stock that is in question. Day traders are extremely interested in these price shifts that occur throughout the day, as the main goal that they have is to reap the benefits of changes in price that happen over a short time. For example, one particular stock may have went up in value over a time period of 3 hours, at which point they may decide to sell their holding for more than they paid for it three hours previously – thus making a profit. These changes in price that occur throughout the same days are because of the differences in the interest of that stock throughout the trading day – i.e. how many investors choose to invest in it.
What does a day trader typically do in one day?
Becoming a day trader does not require one to do anything in particular apart from, funnily enough, trade! It is generally accepted that a day trader refers to a person that makes a large number of trades every day, such as upwards of five trades over a period of time, usually four days.
The idea of a day trader is that they do not leave anything open to possibility except from when they are trading during the day. They are sure to sell all of their stocks and complete their trading before the end of the trading day. There are many expenses that could have an impact on a day trader, as well as time they must invest in numerous areas in order to ensure that the decisions they are making throughout the day are the best ones that they can be. For example, day traders must be fully informed of all happenings on a massive variety of companies and their stocks, so that they know where best to place their money. In order to do this, they will need to make use of news that updates constantly and is live, as well as various pieces of software that allow them to analyse the market and the stocks that are available, and help them to make their decisions. All of these pieces of software require investment of both time and money from the day trader, as well as a wealth of high quality experience so that they can use their past experiences in order to better their future decisions!
To put it in simple terms, a person that works as a day trader operates off of the different prices that various stocks experience throughout the day. Their practices are the complete opposite of a standard investor, who will analyse each organisation that they invest in as a whole, with the view of their investment being one that is there for a long time. A stock changing in value is absolute paramount to the operation of a day trader – if they purchase securities and they do not change in price (go up in value), then they will have no means of making money. It is also essential for day traders to trade in a market in which there is high liquidity, to ensure that they are able to sell those securities that they take on within the same day. Day traders are interested primarily in those stocks that have a considerable change in price, not those that fluctuate just a tiny amount – they want to buy into those that change considerably to allow them to make more money.
Things that day traders should look out for
As a day trader, one should be vigilant and aware of all market happenings, including importantly those happenings that are related to the stocks in which they are investing. The stock market and the value of stocks change based on supply and demand – i.e. how many investors are interested in purchasing the security in question at any one point in time. This interest of investors is usually based on recent news on that company – if day traders are vigilant and they keep themselves up to date with proceedings regarding the stocks that they are interested in as soon as newsworthy events take place, then they should be able to judge more accurately the direction which a stock is going to take within that day.
Another common technique of day traders is to examine what price a particular stock was at at the close of the market the previous day, and to estimate whether or not the price will return to this on the present day should it have fallen lower over the previous night – creating what is known as a gap.
The key point that day trader’s operations thrive upon is that of the movement of prices – as aforementioned, these price movements are always based on real world happenings. The aim of the day trader is to inform themselves on various areas of the stock market, to identify where these changes could have an effect on prices in the stock market, and to use this knowledge to their advantage in order to purchase stocks that will rise in value throughout the same trading day based on this news. Becoming a day trader is not an easy task, and one will suffer many losses before they are regularly successful! A pattern day trader refers to a day trader, but one that is bound by stricter requirements including minimum account balances.