Day trading stocks is the practice of buying and selling shares within the same trading day. Unlike investors who hold positions for months or years, day traders close all positions before the market closes. This guide will teach you the fundamentals of day trading stocks, from choosing the right stocks to managing your risk.
What is Day Trading?
Day trading involves opening and closing positions within a single trading session. The goal is to profit from short-term price movements rather than long-term growth. Day traders typically make multiple trades per day, holding positions for minutes to hours.
Key principle: Day traders never hold positions overnight. All trades are closed before the market ends to avoid overnight risk from news events or gap openings.
Requirements for Day Trading Stocks
Before you start day trading, you need to understand the requirements:
Pattern Day Trader Rule
In the United States, if you make four or more day trades within five business days, you are classified as a pattern day trader. This requires you to maintain at least $25,000 in your trading account. This rule applies to margin accounts only.
Essential Equipment
- Reliable computer: A fast processor and multiple monitors help you watch different charts and indicators
- High-speed internet: Slow connections can cost you money when prices move quickly
- Trading platform: Choose a broker with fast execution, low commissions, and good charting tools
- Trading journal: Track every trade to learn from your wins and losses
How to Choose Stocks for Day Trading
Not all stocks are suitable for day trading. Here are the characteristics of good day trading stocks:
1. High Volume
Look for stocks that trade at least 1 million shares per day. High volume means you can enter and exit positions quickly without moving the price against yourself. Popular day trading stocks often trade 10 million or more shares daily.
2. Volatility
Day traders need price movement to make money. Stocks with average true range (ATR) of at least 2-3% give you enough movement to capture profits. Too little volatility means small profits, while too much volatility increases risk.
3. Liquidity
Liquid stocks have tight bid-ask spreads, usually a few cents or less. Wide spreads eat into your profits because you lose money the moment you enter a trade.
Example: Good vs Bad Day Trading Stocks
Good choice: A large-cap tech stock trading 15 million shares daily with a $0.01 spread and 3% daily range.
Poor choice: A small-cap stock trading 200,000 shares daily with a $0.10 spread and unpredictable moves.
Popular Day Trading Strategies
1. Momentum Trading
Momentum traders look for stocks making strong moves on high volume. They buy stocks breaking out to new highs and sell stocks breaking down to new lows. The key is finding stocks with a catalyst like earnings, news, or sector rotation.
2. Scalping
Scalpers make many small trades throughout the day, aiming for tiny profits on each trade. They might hold positions for only seconds to minutes. Scalping requires very low commissions and fast execution.
3. Range Trading
Range traders identify stocks bouncing between support and resistance levels. They buy near support and sell near resistance. This strategy works best in choppy, sideways markets.
4. Breakout Trading
Breakout traders wait for stocks to move above resistance or below support levels. They enter when the price breaks out and ride the momentum. Volume confirmation is essential for breakout trades.
Technical Analysis for Day Trading
Day traders rely heavily on technical analysis to make decisions. Here are the most important concepts:
Key Chart Patterns
- Flag patterns: Short consolidations after strong moves that often continue in the same direction
- Double tops and bottoms: Reversal patterns at key price levels
- Head and shoulders: Major reversal pattern signaling trend changes
- Cup and handle: Bullish continuation pattern popular with momentum traders
Essential Indicators
- Volume: The most important indicator confirming price moves
- VWAP: Volume weighted average price shows institutional buying levels
- Moving averages: The 9 EMA and 20 EMA are popular for intraday trading
- RSI: Helps identify overbought and oversold conditions
Risk Management for Day Traders
Risk management separates successful day traders from those who blow up their accounts. Follow these rules:
The 1% Rule
Never risk more than 1% of your account on any single trade. If you have a $25,000 account, your maximum loss per trade should be $250. This allows you to survive losing streaks without devastating your account.
Use Stop Losses
Always enter a trade with a predetermined stop loss. Place your stop at a logical level based on support, resistance, or volatility. Never move your stop further away from your entry to avoid taking a loss.
Position Sizing
Calculate your position size based on your stop loss distance and maximum risk amount. If your stop is $0.50 away and you can risk $250, your position size is 500 shares.
Position size formula: Risk amount divided by stop loss distance equals share quantity. $250 risk / $0.50 stop = 500 shares maximum.
Common Day Trading Mistakes
Avoid these mistakes that trap most beginning day traders:
- Overtrading: Taking too many trades out of boredom or the need for action
- Averaging down: Adding to losing positions hoping they will recover
- Ignoring the trend: Fighting the market direction instead of trading with it
- No trading plan: Entering trades without clear entry, exit, and risk rules
- Emotional trading: Making decisions based on fear or greed rather than your plan
- Oversizing: Taking positions too large for your account
Building a Day Trading Routine
Successful day traders follow consistent routines:
Pre-Market Preparation
- Review overnight news and futures
- Scan for stocks with pre-market activity
- Identify key support and resistance levels
- Create a watchlist of 5-10 stocks to focus on
During Market Hours
- Focus on your watchlist, not every stock
- Wait for your setups, do not force trades
- Follow your trading plan exactly
- Take breaks to stay mentally sharp
Post-Market Review
- Record all trades in your journal
- Review what worked and what did not
- Calculate your daily profit and loss
- Identify areas for improvement
Track Your Day Trades Automatically
Pro Trader Dashboard syncs with your broker to track all your day trades. See your win rate, average profit per trade, and identify which setups work best for you.
Getting Started with Day Trading
If you are new to day trading, follow this path:
- Learn the basics: Study chart patterns, indicators, and order types
- Paper trade: Practice with simulated money for at least 3 months
- Start small: Begin with small positions when you trade real money
- Track everything: Keep detailed records to learn from every trade
- Scale gradually: Only increase position sizes after consistent profitability
Summary
Day trading stocks requires discipline, proper capitalization, and a solid understanding of technical analysis. Start with a trading plan, practice with paper trading, and always prioritize risk management. The traders who survive long enough to become profitable are those who protect their capital and learn from every trade.
Ready to learn more? Check out our guide on day trading entry signals or learn about risk management for day traders.