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Day Trading Strategies

January 14, 2020 · 10 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Day Trading Strategies

Imagine it now; you roll out of bed, brew a fresh pot of coffee, and sit down in your home office to try to make some money with your computer and its big fancy screens.

It’s undeniable; the thought of making a profit from the comfort of your home is enticing. Potentially earning a buck without even having to commute, or take off your pajama pants? No wonder day trading has such a strong allure.

But what is day trading? And what are day trading strategies?

Day trading is a type of active trading, where an investor is buying and selling stocks or other securities based on short-term price movements. It is the opposite of a buy-and-hold strategy enacted by passive investors and long-term investors.

With day trading, the investor is not necessarily looking for securities that will make money over the long-term, but for price moves in the short-term that can be ultimately be harnessed for profit. This could even mean betting “against” a price movement.

Potential day traders should know that it’s a risky investing strategy and there’s the chance of losing money. Anytime there’s a possibility to turn a profit quickly, there’s a possibility of losing money quickly.

Want to learn more about day trading? Here are some trading strategies for beginners, along with some risks to consider before diving in headfirst.

What is Day Trading?

Day trading is the process of trading stocks and other securities on a short-term basis. It is a type of active investment management whereby “>whereby, according to the SEC “…traders rapidly buy, sell and short-sell stocks throughout the day in the hope that the stocks continue climbing or falling in value for the seconds or minutes they hold the shares, allowing them to lock in quick profits.” Day traders may hope to compound many small trading wins.

This could mean buying and selling within the same day, multiple times over the course of a day, and so on. “Pattern” day traders are classified as ones that make four or more day trades in, though brokerages may standards to identify day traders.

Pattern day traders are also required to maintain an equity minimum in their account of $25,000.

While it is common for day traders to work with stocks, they may also use exchange-traded funds (ETFs), derivatives (like stock options), forex, and other financial instruments.

Day traders gravitate towards securities that trade on an exchange with minute by minute pricing updates, as the price movement is often the very metric they are tracking to determine whether to make a trading move.

In many ways, day trading employs an opposite strategy compared to long-term, buy-and-hold investors. A long-term investor may buy the stock of a company because they believe that the company will grow and continue to create additional value in the world, and that growth will ultimately benefit shareholders.

The long-term investor understands that this may not happen right away, or even at all, and that is okay. Many passive investors believe that short-term timing of the markets is not possible.

A day trader, on the other hand, likely gives little credence to whether a stock represents a company that is a “good” or “bad” long-term investment. Instead, they are concerned with how the price of that stock will move in the near-term so that the trader can then enact a strategy to take advantage of that price move.

Day trading is a form of self-directed active portfolio management, whereby an investor attempts to manage their investments well enough to outpace the stock market average.

If a trader were happy to simply receive the stock market’s average, it is unlikely that they would deploy the resources required by day trading. A day trader must believe, on some level, that “beating the market” is possible and that they have the skills.

It is possible to make a great deal of money day trading, and quickly; that’s the appeal. It is far from guaranteed though. Day traders aren’t interested in waiting for twenty years for their investment picks to make them a return on their investment.

But just as it is possible to earn a lot of money, quickly, it is possible to lose a lot of money, quickly. (Can’t have one without the other.) Any curious day traders should move forth with extreme caution and understand the big risks they’re taking.

Day Trading Basics

Although there are many different strategies for day trading, you may want to consider the basic qualities of securities that day traders tend to look for.

Liquidity in this context refers to how quickly an individual can purchase or sell an asset without causing a drastic change in the asset’s price. How smoothly can a trader make a purchase? How fast can a trader redeem shares for cash? Liquidity is important to day traders because they need accurate and up-to-date price information, and to be able to move in and out of positions with accuracy and ease.

Volatility is the measure of a security’s range of price movement. When a stock has a big jump to the upside or comes crashing down, that’s volatility at work. For a trader, volatility is the name of the game. Because a trader makes moves based on price movement, volatility represents the potential profit—or loss—to the trader.

Volume, also known as “average daily trading volume,” is a measure of how much a security has been traded during a designated period. High volume may indicate that there is a lot of interest in a security, while low volume indicates the opposite. Some traders may use the volume of a security as an indicator for potential price moves.

Day Trading Strategies

Setting aside a dollar amount. Before they begin trading, some investors set aside a dollar amount they’re comfortable investing—and potentially losing.

With any style of investing, but especially active day trading, you mustn’t assume that you’ll make money—or even keep what you put in. You might find it helpful to start with a certain percentage of your investment portfolio, such as 1% or 2%.

Beginning with just a few stocks. Getting the hang of day trading can take some time, so burgeoning day traders may want to start with a small handful of stocks. They may find it to be more manageable, allowing time to hone skills and see if it’s something that they like.

Tracking stocks, determining a strategy, and hunting for opportunities takes practice. Doing so with only a small number of stocks may help new day traders stay organized and on top of their investment management process and more easily tracking results.

Dealing With Penny Stocks. A common point of confusion is to equate penny stocks with day trading. Penny stocks, which are named that because they can quite literally cost pennies, though can cost up to five dollars per share, are often difficult to trade. That’s because many are illiquid, which means that there aren’t many active buyers or sellers of the stock or they don’t trade often. Day trading strategies typically rely on securities that experience more price movement.

Penny stocks aren’t typically traded on the major exchanges, further increasing potential difficulties with trading. Typically, penny stocks sell in over-the-counter (OTC) markets.

Using Limit Orders. There are types of orders that day traders quickly become familiar with. One of these is called a limit order. With a limit order, an investor sets the price at which they’d like to buy or sell a stock. For example, you could say that you only want to buy a stock if it falls below $40 per share, or sell it if the price rises to over $60 per share. A limit order guarantees a particular price or better, but does not guarantee the execution.

With a limit order, investors may be able to place a trade with more precision.
Compare this to a market order. With a market order, you are guaranteed execution but not necessarily price. With a market order, investors get the next price available at that time. This price may be slightly different than what is quoted, as the price of that underlying security changes while the not-quite-instantaneous order is going through.

Researching strategies and staying educated on market happenings. Day trading is a style of active trading, for which there are many different flavors and preferences. The strategy you ultimately choose will probably come down to what you believe in and think you will be successful at.

Some common types of day trading strategies that you may want to research include swing trading, scalping, breakout, momentum, reversal, and so on.

Some day traders would argue that understanding how to trade market swings isn’t enough to set oneself up for potential success, and that good day traders must also stay informed about the underlying events that may cause these price shifts. This could mean staying up to date with market, economic, and geopolitical news in addition to charting trends.

Keeping a cool head. Day traders who come up with a trading methodology or formula may want to try and stick with it. One struggle many day traders contend with is avoiding getting swept up by the moment and deviating from a plan. A good suggestion for almost any situation—don’t let your emotions take the driver’s seat. This can be much easier said than done, so it can be helpful to have a plan to quell reactionary behavior.

At times, it can feel like the market plays tricks on the minds of investors, causing them to engage in harmful investor behavior like making rash moves, or leading with greed or fear.

You may find it helpful to remember that day trading isn’t necessarily about making split-second decisions; it’s about waiting for the right opportunities and acting quickly. The former isn’t planned for, and the latter is planned for.

Understanding the risks. Day trading is very risky, and you shouldn’t do it if you aren’t totally comfortable with those risks.

The Securities and Exchange Commission (SEC) issued a stern warning regarding day trading in 2005, but its intent remains true today: They noted that most people do not have the wealth, time, or temperament to be successful. Day trading may also rely on a good deal of luck. Further, the SEC notes that day trading can be a full-time job—and an expensive and stressful one at that.

Additional Concepts Worth Understanding

Day trading comes with its own sets of risks and regulation. Below are two concepts worth understanding before beginning to day trade.

Freeriding

In a cash account , an investor must pay for the purchase of a security before selling it. Freeriding occurs when an investor buys and then sells a security without first paying for it.

This is not allowed under the Federal Reserve Board’s Regulation T. In cases where freeriding occurs, the investor’s account may be frozen by the broker for a 90-day period. During the freeze, an investor is still able to make trades or purchases but must pay for them fully on the date of the trade.

Margin Trading

Margin accounts are a type of brokerage account that allows the investor to borrow money from the broker dealer to purchase securities. The account acts as collateral for the loan. The interest rate on the borrowed money is determined by the brokerage firm and may be subject to change at any time.

Trading with this borrowed money—called trading on the margin—increases an investor’s purchasing power, but comes with an increased level of risk as well. Factoring in the interest rate, if the securities lose value, an investor trading on the margin could be left losing more cash than they have invested.

In the case that the value of an investor’s securities decline, the brokerage firm might require the account holder to deposit cash or securities into their account, or to sell the securities in the account to cover the loss. This is known as a margin call . A brokerage firm can deliver a margin call without advance notice and can even decide which of the account holder’s investments should be sold.

Understanding the Tax Implications

Investors participating in day trading might want to take a close look at some of the tax implications associated with this type of investing. This can be impactful, since taxes could stand to take a chunk out of the gains made from day trades.

Trader vs. Investor

First, it should be noted that the IRS makes a distinction between a trader and an investor. Generally, an investor is someone who buys and sells securities for personal investment. A trader on the other hand is considered by the law to be in business.

The IRS lists a set of guidelines to determine whether or not an investor is a trader. If an individual does not meet the guidelines for a trader, they are considered an investor.

According to the IRS, a trader must meet the following requirements:

•   “You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
•   Your activity must be substantial; and
•   You must carry on the activity with continuity and regularity.”

The tax implications are different for those considered to be traders than those considered to be investors so it’s important to understand which you are.

Short-Term Capital Gains and Losses

Another important tax implication to note is that the IRS differentiates between short-term and long-term investments when determining capital gains and losses. Generally, investments held for over a year are considered long-term and those held for under a year are considered short-term.

While long-term capital gains might benefit from a lower tax rate, short-term capital gains are taxed at the same rate as ordinary income.

A capital loss occurs when an investment loses value. In certain circumstances, when a capital loss exceeds a capital gain, the difference could potentially be applied as a tax deduction. If you have any questions when preparing your taxes it could be worth consulting with a professional.

The Wash Sale Rule

While capital losses can sometimes be taken as a tax deduction, there are certain regulations in place to prevent investors from abusing those benefits. One such regulation is the wash sale rule , which says that investors cannot benefit from selling a security at a loss and then buy a substantially identical security within the next 30 days.

A wash sale also occurs if you sell a security and then your spouse or a corporation you control buys a substantially identical security within the next 30 days.

Starting to Invest

If you’re interested in utilizing day trading strategies, it’s wise to consider the cost. Many major brokerage firms can accommodate day trading, however, it can be costly to place each trade.

This is called a transaction cost, commission, mark up, mark down, or a trading fee.Some brokerage fimrs also charge various other surcharges associated with day trading or trading penny stocks.

Your trading strategy will likely need to account for the cost of these fees. You’ll also likely want to make sure that the brokerage you choose offers all of the features necessary for day trading.

Some platforms are specifically designed for day trading, offering low-cost trades and a variety of features to help traders research and track the markets. Having tools available to research and make trades efficiently within a single platform can be invaluable for a day trader.

Another option is SoFi Invest® for your trading and investing needs. Whether you’ll be actively trading or long-term investing, SoFi Invest may have a solution for you.

With SoFi Active Investing, you can buy and sell stocks and ETFs with no transaction fees. You read that right! There are no trading costs at SoFi Active Invest for stocks and ETFs, allowing you the opportunity to test your trading strategies and skills without onerous extra costs.

In addition to paying $0.00 on all stock and ETF trades placed with SoFi, you’ll be provided with investing news and data curated to your stock watchlists. SoFi will help you stay informed with information that may be useful as you strategize your trades.

If you’d prefer a more passive strategy, SoFi Automated Investing might be the option for you. Automated Invest builds you an investment strategy that works for you, even when you’re not paying attention. SoFi Automated Invest uses ETFs to build a diversified portfolio, and that service comes at no additional cost.

Can’t decide on a strategy? You could try a few. A day trading strategy does not—and should not—be an all-or-nothing endeavor. Some investors might consider earmarking some money to actively trade with, knowing that this process might involve taking on additional risk with the hopes of achieving increased rewards.

Others may find that focusing on a long-term investment strategy is preferable. You may find that a mixed strategy is worthwhile for both your pocketbook and your sanity.

Ready to place a trade? Use SoFi Invest for no-fee trades and no account minimums.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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