Fifteen months ago, I knew nothing of the stock market and day trading. I presumed it was a rich man’s game and quite honestly I wasn’t even too interested. However that all changed when personal success stories crept into my YouTube feed of people who were making hundreds, even thousands in just one day from day trading. Consequently, this caught my attention and I asked myself, “What is Day Trading?”
I have studied the heck out of the stock market.
Realised the obscene amount of money that you can make in a matter of minutes,
and now I’m completely hooked!
In this post, I will share with you an outline of what day trading actually is.
If you are a complete beginner and you want to learn about trading, keep on reading ( and maybe grab a coffee!)…
What Is Day Trading?
What is day trading?
Firstly let us look at what trading is.
Trading is a term used to describe the purchase and sale of goods. There are different timescales with trading.
Day trading, as you can imagine, is the purchase and sale of goods usually within the timescale of one day.
Swing trading uses a larger time frame than day trading. With swing trading, the goods are usually held for a longer period such as overnight, over a period of days, or sometimes even weeks.
The next step from swing trading would be medium-term investments. Whereby the goods are held longer than the time period associated with swing trading. Generally, these are held for a period of months.
Different types of trading
We have explored the timescales, now let us look at the different types of trading.
The stuff that gets sold and bought!
Day Trading is the buying and selling of stocks (company shares) on the same day, most often the transaction is carried out online.
So what does this mean?
Generally, the trick with trading is the ability to predict the movement of a stock (whether the price is going up or down). To do this, traders use what is known as technical analysis to analyse company charts and plan entries/ exits for trades.
There are many factors involved in a day trading strategy but the general concept is that you buy a stock and sell it at a higher price, making a profit from the difference. This is also known as going long.
E.g. You buy 100 shares of a company stock priced at $5.00, the stock rise to $5.50 and you sell the stock, making a profit of $50.
There are different types of stock available for day trading which can depend on your personal preferences and budget.
Day Trading Small Capital Stocks (Small Caps)
Small Caps are small growing companies, which tend to be cheaper to day trade, as their stock prices are usually between $1-$10 per share. They also move differently and require a different strategy to large caps.
Day Trading Large Capital Stocks (Large Caps)
Large Caps are more established companies with larger capital (larger financial wealth).
You have probably heard of many large capital companies, e.g. Apple, Netflix, Facebook etc. There are many different large caps and their prices vary. Generally, stock prices range from $20 + depending on the company.
At the time of writing this article, a large-cap company such as Facebook is currently trading at $184.00 per share.
Below you can a 5-minute chart for Facebook. (More about charts to come later).
Consequently here lies a large difference between the small caps and large caps for day trading…
In order to buy 100 shares of a small caps company stock trading at $5, you would require an account balance of at least $500. Which basically means that you need to have enough money in your account, to buy the amount of stock that you want.
On the other hand, to purchase 100 shares of a large-cap company, such as Facebook trading at $184.00 per share, you would require an account balance of $18,400.
Although it is possible for a beginner trader to day trade some of the more affordable large-cap companies, small-cap companies provide a more accessible option for beginner traders.
Penny Stock Trading
As with day trading, penny stock trading involves the buying and selling of low price stocks on the same day. Again, they are often online and profit can be made from the short term price fluctuations.
The difference with penny stock trading is that the penny stocks are usually between $0.01 – $1 per share. According to the SEC (Securities and Exchange Commission), penny stocks are considered to be any stock trading below $5 per share.
Although they can be another affordable option for beginner traders, they also bring with them new areas of risk because logically if the stock prices are that cheap, it is usually because the companies are weak.
Forex Trading (Currencies)
Forex trading includes the trading of currencies. This type of trading can be carried out in a day (day trading), or held for a longer time period (swing trading). Forex trading includes all aspects of buying, selling and exchanging currencies at current or determined prices.
Futures Trading is the trading of a contract which details the buying/ selling of an asset.
A futures contract is an agreement between the buyer and the seller of the contract. Whereby some asset, commodity or currency will be bought and sold for a specific price, on a specific day in the future (including a contract expiration date) and you would make the difference.
Commodities are physical goods including; corn, crude oil, gold, cotton, coffee, wheat etc.
A cryptocurrency is a form of digital currency that can be sent from one person to another anywhere around the world. There are different types of cryptocurrencies that can be traded including one of the most well-known Bitcoin.
Below is a daily chart for Bitcoin against the US Dollar. Each candlestick on the chart below represents a day. As you can see from the chart, there is an uptrend over time.
This chart shows just how much Bitcoin can move.
The lower red dotted line indicates the price of $5091.10, which was the price of Bitcoin in April 2019.
In late June, the price went to a high of $13,761.70, as shown by the upper red dotted line. This is a massive gain in a matter of a couple of months.
However, the risk is also just as huge, as the price is now currently at $9441.10 in late August 2019.
This demonstrates the potential gain and risk involved with trading. I imagine that people gained a lot from this move, but some also lost a lot as well.
Options trading is very similar to futures trading. With options trading, you are buying/ selling contracts which give the holder the right to buy or sell a stock at a specific price by a specific date.
However with options, as the name suggests it gives the buyer/ seller the right but not the obligation to buy or sell an asset at a specific price at any time during the life of the options contract.
Options trading can be an affordable way to trade large-cap companies.
E.g. Instead of buying 100 shares of Amazon, (currently trading at $1780.12). With options, you buy a ‘call option‘, which is a contract giving you the right to buy 100 shares of Amazon at a specific price (strike price) by a specific date (expiration date).
The cost of buying the call option is generally much cheaper than buying the actual stock of Amazon. As a result, options can be an affordable trading option for beginners, but they have their own areas of risk involved. Therefore, I would certainly recommend plenty of study, research and consideration before taking any trades.
What Is Day Trading – In Conclusion
I hope that this article gives you a good outline of day trading, the different types of trading and periods of time associated with trading. As you can see, with trading, there are many different options and routes available to take. These mainly depend on your budget and personalpreference.
There are also different markets available to day trade. Personally, I day trade stocks on the American stock market as I find that there are more companies available and it historically it is a strong resilient market. However, you can also trade stocks with the London Stock Exchange, Australian Securities Exchange etc.
If you enjoyed learning more about day trading, I would certainly recommend further reading. Explore the different types of day trading and in particular the one that most appeals to you. As day trading is a complex topic to learn, it is best to choose one area to focus on until you master it!
I day trade small caps companies in the American stock market. Mainly because as a beginner I didn’t have much capital to use for trading. However the more I learnt about the strategy used for day trading small caps, the more I enjoyed it. They tend to move quickly, providing fast-paced trading opportunities known as scalping and are a great potential for gains.
Which type of trading most appeals to you? Let me know in the comments below!