Day trading activity has been on its peak recently and many of you must be curious to know more about it. In this article, we shall discuss who is a pattern day trader and how this kind of trading is done in detail.
Stock market has two types of participants: traders and investors. Traders are again of two types-short term traders or those who buy shares of companies for a few days and the intra-day traders who buy and sell securities in the same trading session. A pattern day trader is referred to that person who trades the same share for four or more times in a single day in a consecutive five day period. Thus, in simple words, he is a very aggressive intra-day trader who executes transactions as per market speculations. Before we know more about the job of a pattern day trader, let us first know about day trading in general.
As said above, day trading involves buying and selling securities on the same day. This is indeed a very difficult task considering the fact that the market has become extremely volatile. What day traders have to do first is predict a range for the index on that particular day. He has to keep a close tab on all stock market related news and change his strategies as and when the need arises. A day trader has to bet on certain select sectors of the economy for the day. For example, some trader might be bullish on banks on a given day for some reason (good financial results, attractive valuations etc). There is always a reason behind every move of a day trader. His job is to out think others and rake in maximum profits by selling at higher levels.
While some traders go long, others prefer to go short on a weak market day. Short selling on an intra-day basis involves selling first and then covering up positions before the trading session ends. Stop losses are important in both ways of trading to protect yourself from heavy losses in case of sudden and unexpected market moves.
Pattern Day Trading
As mentioned above, a day trader has to trade the same security for four or more number of times in a day. So, this is indeed a challenging task as he needs to have very sharp reflexes and ability to take instant and smart decisions. There are some rules and requirements for a pattern day trader which he needs to fulfill before being allowed to play in the market. It is necessary that he has a balance of $25,000 in his account for such type of trading. To get this facility activated, a stock trader has to approach his stock broker and understand the terms and conditions of the stock exchange regarding such transactions.
Volumes denote the investor interest in a particular scrip. Volume study can help traders understand what can be the future moves in the stock and trade it accordingly.
Intra-Day Technical Charts
Studying intraday trading technical charts is imperative to become a successful pattern day trader. Technical analysis helps in predicting future stock prices and knowing support and resistance levels for stocks.
Timely Profit Booking
Profit booking at the right levels is a must for intra-day traders. After all, you enter the market to earn good money and this is possible only when you exit your positions at the right time. So, when you think the valuations are stressed, get out of the stock immediately.
The life of a pattern day trader is full of action and he has to be very attentive and sharp to earn good money. This is an experts job and hence it is recommended that you learn long term investing first before you try it. Good luck and do well!
DISCLAIMER: This article is just for reference purposes and does not recommend any stock market transactions.