A day trader is a type of trader who conducts a fairly large volume of short and long trades to capitalize on intraday market price movement. The goal is to profit from very short-term price trends. Day traders can also use leverage to boost returns, which can also heighten losses. So, in this article, we will focus on avoiding day trader status with better trades.
Table of Contents
What is a day trader?
A Day Trader is somebody who does four intra-day trades in five consecutive trading days. Let me address some terms here to assist you to understand this better:
Intra-day trade: A trade that is opened and closed on the same trading day (round trip).
Five Consecutive Trading Days: These are calendar days (Mon to Fri) when the stock market is open, all in a row. For example:
If the stock market was open on Monday through Friday that would be five consecutive days.
Then we would have Tuesday through Monday for the next five consecutive days in stock market trade (Unless Monday was a holiday in which case it would then be Tuesday through Tuesday.
Successive, we would have Wednesday through Tuesday, and so on. The key is five trading days in a row.
How to avoid it
One of my favorite methods is to use a calendar to record my intra-day trades. By placing an “X” on the trading day
You do intra-day trades, (2 X’s if you do two, 3 X’s if you do 3 in that day) you can avoid accidentally getting to four by 4 X looking at your calendar. Make sure you mark the days the stock market is closed on your calendar.
Why does it matter?
I thought avoiding consecutive day trade mattered a lot, but after my research for this article, it appears they’re actually are some great benefits to being classified as a “Day Trader” if the Rs 25,000 is not an issue for you. Basically, there are four issues at hand:
Issue one: A Daily Limit and Charges
Your brokerage firm will likely impose the Trade requirements of maintaining a charge of at least Rs 20-120 per trade in your trading account as per contract and that much will not be issued in India but if you are trading in the USA market, options trading fee is $0.65 to $1 per contract. If you’re trading through a traditional brokerage firm, the fee may be much higher. A full-service stockbroker may charge $100 or more to execute trades on your behalf.- and you have 5 days to comply. If you have this sort of money there is no issue! However, if you are starting out with limited funds to stock trade it could be a big issue!. If you are a small trader this fee literally falls you are at a loss.
Issue two: Borrowed Capitals
Day trading usually involves sophisticated products, and day traders often use leveraged investment techniques. Leveraged investing applies to using borrowed capital to purchase stocks or other securities. Some instances of leveraged investing include sophisticated products, such as options trading, and margin trading. Leveraged investing may grow a day trader’s profit if a stock’s price or the market moves in the right direction. However, using a leveraged investment strategy is very risky, and the risks involved may not be noticeable to you at first.
Also Read: Finding a System to Day Trade Futures Market
Issue Three: A Stop-Loss
Manage your risk on each trade by placing a stop-loss order on every trade you make. When starting out as a day trader, your risk on a single trade should never exceed 1 percent of your trading account credit. The risk is described as the difference between your entry price and stop-loss price, multiplied by your position size or how many shares or lots you bought.
Issue Four: Your Broker
Your selected broker is the biggest trade you will make. You are depositing all your capital with them to trade, and yet many traders don’t bother to research their stockbroker until there is a problem.
Common broker issues include scam brokers, which are generally located outside first-world countries, although scam brokers can pop up anywhere. Scam brokers make it very hard or inconceivable for you to withdraw your money and any profits once you have sent it to them. Scam brokers generally don’t last long and show up repeatably in forum complaints, so an online search should reveal any significant problems with a broker. So, before giving your money to many brokerage firms, research and know about them better and then make a decision.
Also Read: Developing a Successful Trading Strategy
Conclusion
Day trading can move very quickly and you as day traders may not have time to research every investment thoroughly. Take your time and don’t ever invest in anything you haven’t thoroughly and independently researched as day traders. Most significantly, if you don’t understand the investment, don’t buy into it.