- A day trade is any trade that is opened and closed on the same day. The hours of a single trading session ("day") depend on the market being traded, but most American financial exchanges end their market hours between 4 p.m. and 5 p.m. Eastern time in the United States. For stocks, a day trade is opened after 9:30 a.m. and closed before 4 p.m. For futures, the closing time is 4:15 p.m. for most products and the next trading day opens only 15 minutes later. Foreign currency exchange (Forex) markets never close during the week but the sessions restart at 5 p.m. every day.
- Unlike futures or Forex, day trading stocks is highly restricted by the Financial Industry Regulatory Authority (FINRA). Brokers are required by law to terminate any brokerage account that engages in stock day trading if certain rules are not followed. The minimum balance in the account must be no less than $25,000. This can be a combination of cash and stocks. However, three day trades in a five-day period are allowed in accounts with less than this value. Once this number of trades is exceeded, the account is formally flagged as a "pattern day trading" account.
- If a brokerage account is flagged as a pattern day trading account for stocks, the margin ratios change for that account to provide the trader with more leverage. Traders may purchase up to four times the value of equity in their accounts so long as the trades are closed on the same day. For example, a day trading account with $30,000 of cash or stock equity can purchase up to $120,000 worth of stock on a single trade. However, the stock must be sold before the end of the session or the brokerage account could be suspended. This high leverage is what allows day traders to make meaningful profits from small price changes in a stock.
- The process of day trading is usually based on technical analysis rather than other factors. Long-term investors often employ technical analysis when studying price charts, but they also have fundamental criteria at their disposal for stock selection, such as a company's balance sheet. These criteria have little significance for trades that last just a short period of time, so day traders primarily study charts. The Dow Theory is a century old but is still the core of most analytical studies. The theory states that when a stock is creating new highs over a period of time, but the declines off these highs fail to create new lows, it is said to be trading. This simple concept can be used over a span of just a few hours to see intraday trends. Day traders may purchase a trending stock after a slight decline with the expectation that it will reverse and continue the trend.
- Day trading can be potentially very lucrative, but the learning curve is steep. It is highly advised that you consider opening a virtual day trading account with the broker of your choice before committing hard-earned capital to this risky game. Most brokers provide this service to their clients. The entire process of day trading will be the same as if you traded with real money, but there is zero risk. Only when you have established consistent "profitability" with the virtual account should you consider trading with real money.
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