Day Trading has sort of a tarnished name. I guess it wasn’t helped much by the guy who went to the offices of his day traders, flipped out and started a shooting spree. But what is the real alternative? A look at the chart below shows that the market took a serious nose dive between June and December, and then pretty much flattened out after December. The purple line is the 40 day moving average and it shows these general trends. The fact is anyone who simply invests in a stock and holds on to it really would have difficulty showing any kind of profit during these times. On the other hand, look at the black line. It’s up and down and up and down. That means that on any given day there are profits to be made… and that’s where Day Trading comes in.

In a particular day, the market will be up or down and an individual stock will be up or down. One stock may be up on an up market day and other stock may be down on the same day. The trick of day trading is to figure out what the trend will be for a stock on any given day, then buy the stock and sell the stock on the same day after making a small profit.

Good day trading can yield about 0.5% profit per day on the average. Some days will be hot and some days will be cold, but 0.5% is a good average. That amounts to 5 dollars per thousand dollars invested each day. When the compounding effect is considered that amounts to around $2,500 profit per year per thousand dollars in the market… and this can be dramatically increased with margin accounts because day trading essentially eliminates the likelihood of margin calls. In essence, in margin accounts you trade with borrowed money. Don’t worry if you don’t understand margins. The point here is that good day trading can lead to some spectacular results compared to CDs or mutual funds.

In a previous post the importance of a trading plan was discussed. In day trading, a trading plan is critical. Here is the essence of a day trading plan. The best day trading results are achieved by looking for both long and short trades, but for simplicity here assume that only trading long is considered – that is, stocks are bought that are expected to increase in value on the specific trading day.

At the start of each trading day you need a plan that includes the following:

• A list of 15 to 20 stocks that you think are likely to increase in value during the day.
• A plan to allocate the total dollars you have to trade among your list of stocks.
• An entry price for each stock. If the stock hits that price it is likely that it will, in fact, continue to increase during the day. That is the price at which you will buy the stock. It makes no sense to purchase a stock that is dropping in value.
• A target price for each stock. If the stock hits that price after you buy it, then you sell it. You will have made enough profit.
• A stop loss price for each stock. If the stock falls to that price instead of rises then you will sell it to control your losses.

Have those numbers for each stock before the market opens. When the morning bell sounds sit tight. The stock market is pretty goofy during the first hour of trading. Start trading at 10am EST. If any stocks have already hit their entry price, don’t purchase them; just forget them. For the remaining stocks purchase them when they hit their entry point and sell them when they hit their target price or their stop loss price. At 3:30pm EST sell everything no matter what the price. Follow your plan to the letter.

Of course, the trick is to pick the right stocks. Fortunately, there are services that will help you in that respect. Vector Vest is a service that rates stocks. Strictly speaking they do not support day trading, but you can do quite well using their service to pick stocks once you learn how to use it. Even better, there are services that will provide you with your day trading plan. You just watch the market and execute the trades. 

A word of caution… day trading is not for those with weak hearts. It can be quite stressful and, frankly, you’ve got to know what you’re doing to make the profits that are possible. Take a good course on stock market basics before you even think about trying it.

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