Daytrading FAQ
Most commonly asked questions about day trading- The following are some of the most frequently asked questions by visitors to this site, together with my answers to these questions.
Q: What is the difference between day trading and swing trading ?
- Day traders usually buy and sell securities during the same market day and, as a general rule, do not hold stocks overnight. They are therefore said to be “flat” at the end of the day. Many day traders make dozens of trades every market day hoping to capture profits that arise from small intraday price fluctuations. Swing traders usually hold a stock from one day to a week. Most swing traders concentrate on just a few selected stocks that they believe will likely make a significant move in price in the near-term.
Q. What rules do you think are the most important for day traders?
- There are many important rules that day traders should adhere to but the most important of these are:
- always trade with the trend;
- cut losses short;
- never get emotionally involved with your trades.
Q. How much capital is needed to begin day trading?
- Generally, an aspiring day trader should have enough trading capital to enable him or her to buy at least 1000 shares of any given stock on any particular day – preferably without having to use margin. There are very few stocks priced under $20 that have the degree of liquidity necessary to make them suitable for day trading. This means that a novice day trader should normally have trading capital of at least $25,000 to start. In addition, the new day trader should treat this as 100% risk capital and should not have to unduly worry that the whole amount of this capital may be lost very quickly.
Q.What is the difference between a market order, a limit order, and a stop loss order?
- Here are the key differences between each type of order:
- a market order instructs your broker to buy or sell shares immediately at the current market price. This will usually take place at the “ask” price.
- a limit order instructs your broker to buy or sell shares at certain price specified by you. When (and if) the price of the stock reaches the price you previously specified, your order will be executed at that price.
- a stop loss order instructs your broker to liquidate your position if the share price drops by a certain amount specified by you.
Q. What does it mean to “short” a stock?
- To “short” a stock you simply borrow stock (that you do not own) from your broker and sell it immediately for cash. You will have the obligation to buy back the stock and return it at some point in time in order to “cover” your short sale. When you sell a stock short, you are hoping that the stock price will drop so that you can buy it back at a lower price than what you sold it for, thereby making a profit on the transaction.
Q. Is every stock suitable for day trading?
- No. A day trader should never trade unlisted or thinly traded (low volume) stocks These stocks have poor liquidity and hence a higher price volatility. This may make it hard for you to exit your position quickly at a fair price. Trade only high volume, well-known stocks.