Day trading is the act of buying and selling stock in the same company in a single day. Due to increased risk, day trading is subject to special financial regulations that you should fully understand before you start. Once you’re ready, follow these three steps:
1. Pick a stock that trades more than 500,000 shares per day. Always pay attention to volume. Since some low-cost stocks aren’t traded frequently, it may be difficult to find buyers when you need to move out of a stock. 500,000 shares is an arbitrary number, but it can prove a helpful guide to avoiding ending up trapping your money in a stock for the long-haul. If you can’t move out of your position, after all, you won’t be able to buy and sell other stocks.
2. Consider trading penny stocks. Penny stocks are officially defined as stocks that trade for less than $5. They often prove volatile, providing great opportunity for reward (and, conversely, they’re much riskier than more expensive stocks). Stocks that trade for less than $5 and more than $3 are generally safer than stocks that truly trade for pennies. Margin accounts require investors to hold stocks that are trading for $3 or higher. That means that if a stock falls below $3, some investors who are holding that stock may be forced out of their positions. That can push the price of the stock even lower. Avoid going long on stocks that are trading right around $3.
3. Look for stocks in hot sectors. If shares in flash drive-maker SanDisk Corporation (NASDAQ:SNDK) are rising, consider buying shares in a lower-cost stock that’s in the same sector; Micron Technology, Inc. (NASDAQ:MU), for instance. Sectors generally move together. If one stock in a sector appears to have moved too high, it’s probably wise to look at one of that stock’s peers.
The key is to remain patient when you’re day trading. Don’t pull the trigger until you have strong reasons to believe a stock will move in one direction.
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