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Day Trading

Day Trading - picture of the NASDAQ building for day traders to place their stock orders with their broker

The Day Trader

There are numerous day trading styles available; each with different objectives, but what they all have in common is that any open positions are exited before the market closes. Day trading simply means to enter and exit a position within the same trading day. In fact, any market participant who enters and then exits before the market close is day trading. These market participants include the NASDAQ market makers, NYSE designated market makers, professional traders and stock traders.

Bid-Ask Spread Trading

The market makers trade the spread between the Bid and the Ask. While they have winning trades and losing trades, on average their profit is simply the difference between the Ask and the Bid. Since this spread is often only a cent or two, their profitability is dependant on trading volume.

Some stock traders prefer to trade in this style. They typically use an ECN (Electronic Communication Network) as their order placement venue. To trade the Bid-Ask spread, the stock trader typically places a relative order to buy on an ECN - a relative order automatically amends the limit price so it tracks the market. When the buy limit order is filled, the stock trader places a relative sell limit order. If the sell order is not filled before the market close, the stock trader amends the limit order to a market order to ensure their sell order is filled by the market close.

This style of trading is extremely active and requires the stock trader to constantly monitor the market throughout the trading day. Inexperienced traders find this style of trading difficult to profit from since the market makers have a tendency to take advantage of them. After all, this is the domain of the market makers and they don't like the extra competition as it impacts on their own profitability.


This is a form of day trading which takes very small profits frequently throughout the trading day. The scalper will typically buy when an intraday resistance level is broken and sell their stock soon after. Unlike the bid ask spread trader, they frequently buy at the asking price rather than waiting to be filled at the bid. That is they place a market buy order.

They often use a profit target for their exit price but generally don't use the standard chart pattern profit targets. The scalper's profit target is generally much lower for a long side trade and they base their target level on the probability that the stock will at least reach this price level most of the time. Therefore this trading style requires a very high %winning rate to trade profitably. This is because the profits are very small and the loss from a losing trade is usually much more than the profit from a winning trade. Should the stock trade down to their stop-loss level for a long side trade, the position is immediately exited. Scalpers are also very active with short selling.

Some scalper's use an intraday momentum based tactic where there hold there position for as long as the stock's price is moving in their trade direction and exit as soon as the stock shows any sign of reversing or even stalling. Typically these scalpers do not use a trailing stop-loss as such since they are constantly ready to exit their position.

Scalpers generally use bar charts for their trading with the common time frames being one to five minute bars.

Like the Bid-Ask spread trading style, scalping is extremely active and requires the stock trader to constantly monitor the market throughout the trading day. The scalper needs to have a strong mindset as just one losing trade will wipe out the profits from numerous winning trades.

Trend Trading

This is the common style of day trading which most non-professional traders utilize. When the financial press refers to day trading, they are usually referring to intraday trend trading.

All the technical analysis concepts from a daily bar chart can be used with an intraday chart. As such there is an immediate familiarity with this style of trading which no doubt contributes to its popularity. In fact, for the most part intraday trend trading using a five minute bar chart with a liquid stock is identical to trend trading using a daily chart. Some market participants even call this style "trend trading on steroids".

An example of an intraday trend trade using 5-minute bars is shown in Chart 1. The entry is taken from a pullback with a profit target based on the morning rally's relative low to high. The profit targets used for daily chart patterns are also applicable to intraday chart patterns.

Chart 1. Day Trade - Intraday trend trading

day trader stock chart showing intraday bar chart for a day trade with MRVL

The trading day shown in Chart 1. above is shown below on a daily chart.

Chart 2. Corresponding Daily chart

day trading end of day candle stock chart used to locate trades with daily bars for MRVL

Day traders typically use daily charts to search for potential day trades and then use intraday day charts to locate a suitable entry point. As Chart 2. above shows MRVL gaps up at the open after a strong close on high volume from the pervious day.

Compared to trend trading using only daily charts, intraday trend trading is quite active and requires the trader to constantly monitor the market to look for position entries and to continue monitoring while their positions are open.

The intraday trend trading strategies that are commonly used are essentially the same as the daily swing trading strategies and the position trading strategies. The only difference is the time frame of the bar chart.

Day Trading - picture of a stock price quote and watch list on a phone used by day traders to place their orders to buy and sell

Other Day Trading Tactics

The three styles of day trading discussed so far are the more popular styles that day traders use. While there are numerous other tactics that are used by day traders, they are not commonly used by retail traders and tend to be used by the professionals.

Some of these tactics involve using computer programs which make the buying and selling decisions. This is an automated style of trading where the computer program places the buy and sell orders rather than the day trader manually entering the order details. These computer programs monitor the markets for trading opportunities by scanning through the data and the program responds when the preset parameters are meet. The computer program style of trading is usually combined with systems trading.

Systems trading is a style of trading that uses a computer program to back test historical data with the aim of locating trading parameters that worked reliably in the past. These parameters can then be used for locating future trades which is usually also done with a computer program (since a computer program was used to locate these parameters in the first).

Short Selling

When short selling a stock and buying the stock back on the same day, the day trader avoids paying the short interest fee since they do not hold overnight. The overnight hold is what the short interest fee is calculated on. This makes short selling cost effective for day traders.

An example of a short day trade is shown below in Chart 2.

Chart 3. Short Selling - Day Trade

day trading stock chart intraday bars over two days with declining trend for short selling stock JKS

As Chart 3, above shows JKS trades down through a support level setup from the previous day.

While short selling is generally considered high risk as there is no limit as to how high the stock's price can go. With day trading, this risk is reduced since intraday stocks tend to go up and go down by the same amount on average.

Intraday Index Direction

The profitability of all day trading strategies is largely dependant on the market indices. As a general rule it is easier and more profitable to trade in the same direction as the market indices. The main market indices are the DOW 30 industrials and S&P 500 from which a day trader can gauge the general market mood for the day. When trading a NASDAQ stock, the NASDAQ composite or the NASDAQ 100 indices are useful. The NYSE composite index is a useful index when trading NYSE stocks.

Day Trading - picture of a stock chart with a bright blue background with the word trade in large font white capital letters across the screen width with the letter A in red

Time of Day

The early morning is generally the most volatile time of the trading day. The first 10 to 15 minutes after the market opens will often provide the biggest moves but also has the largest bid-ask spreads. This works to the advantage of those who trade the spread or who place limit orders but works against those who place market orders. After the initial opening, the bid-ask spread will typically narrow considerably and then tends to remain fairly consistent throughout the rest of the trading day.

The last half hour can also be a busy time with trading activity which can lead to some significant price moves which may even be in the opposite direction to what was anticipated. The lunch time period can be the quietest time of the trading day.


For the most part day trading is extremely time consuming which not all stock traders have or are prepared to spend. Most day trading strategies involves having to monitor the market throughout the trading day. Day trading is attractive to those who have the time to monitor the market during the day.

Day trading is generally only a moderate risk so long as all positions are exited before the market closes. Day trading becomes very high risk once open positions are held after the market closes. The intraday price movement is generally fairly minimal and the profits and losses are both small. However when a day trader holds a position overnight they face the risk that the stock will open considerably higher or lower which can lead to an extremely large profit or an extremely large loss.

Most of the risk that comes about from day trading revolves around the fact that a lot of beginner day traders are happy to exit their winning trades but are reluctant to exit their losing trades (usually in the hope that prices will come back and allow a breakeven exit). The problem this creates for the day trader is that their profits from the winning trades are small, but if they hold losing trades overnight they run the risk that the stock continues to trade against them thus making what was a small loss into a big loss.

Brokerage commission costs are a factor that day traders need to consider since the profits are small and brokerage costs can quickly turn a profitable strategy into a net losing strategy. Also day trading accumulates a large number of positions over time which increases the amount of work needed to locate proposed trades and to record the completed trades.

Some stock traders are happy to day trade while others prefer to trade with a longer time frame such as swing trading or position trading which provides a more relaxed trading style. For those who still prefer a longer time frame they might find speculative trading more appropriate. Speculative trading is essentially a combination of technical trading with fundamental considerations and is sometimes referred to as fundamental trading.

Day Trading - picture of a trend trading stock chart for traders during the day while the market is open




This fast paced trading style requires constant monitoring

The amount of time a position is open varies considerably between the various day trading styles used by day traders.

Some day trading styles such as Bid-Ask spread traders and Scalpers can hold their positions for only a few minutes if not seconds. They are extremely active on the markets and use market quote systems as their primary trading tool and charting as a secondary tool. Their primary aim is to track the Bids and Asks and look for signs that any momentum may be slowing or even reversing.

Then there are day traders who are at the other end of the activity level. These day traders are essentially intraday position traders and their aim is to locate a trend and ride it for as long as they can during the current trading day.

An example of an intraday trend trade is shown below in Chart 1.

Chart 1. Day Trade - Intraday trend trading

intraday trend trading - stock chart day trade for IIVI showing entry and profit target

Intraday trend traders can hold their positions for many hours if not for most of the day.

Most day traders will exit by the market close as holding day trading positions over night can be quite risky. This is because the stock can gap up or gap down on the next day. The amount of the gap can be significantly greater than the previous day's profit. This means that holding a position overnight can yield a significant profit or yield a significant loss.

The advantage the intraday trend trader has is that their relative brokerage costs are much lower than that of the Scalpers or the Bid-Ask spread traders. This is because the profits on their winning trades are much higher for the same brokerage costs.

The Bid-Ask spread traders exclusively use direct access brokers and route their orders to an ECN (Electronic Communication Network). These traders receive a rebate from the ECN for placing Bids and/or Asks onto the ECNs order book. They usually place their orders as a Relative order which tracks the current market price. While these traders only make very small profits, their effect brokerage costs are minimal if not zero or less since they receive the rebate (a payment from the ECN) for placing their orders much in the same way as market makers.

Day Trading - picture of an intraday trend trading stock chart with a magnifying glass highlighting the stocks peak price before falling back down

For most day traders, the intense activity of Bid-Ask spread trading and Scalping tends to deter them and instead they find the relatively more relaxing intraday trend trading as being more appealing, which no doubt contributes to its popularity.

The main enticement to intraday trend trading is that this style of trend trading is independent of bull and bear markets as the stock trader ends each position by the end of each trading day.

Basically the markets have up days and down days in both bull markets and in bear markets. There is however a tendency for bull markets to have more up days than down days and visa versa for bear markets, so day traders tend to spend more time trading on the long side during bull markets and spend more time trading on the short side in bear markets.

The intraday trend trader needs to allow sufficient room for the stock to pullback as intraday trends follow the same trending principle as they do on daily charts. An intraday uptrend is characterized by a sequence of rallies and pullbacks making higher Relative highs and higher Relative lows. Therefore the trailing stop is frequently placed just below the Relative low and raised to the next higher Relative low as the uptrend progresses.

Some intraday traders use a Parabolic SAR indicator as a trailing stop-loss while others will use a trend-line.

An example of a day trade being managed with a Parabolic SAR indicator is shown below in Chart 2.

Chart 2. Day Trade managed with SAR

intraday stock day trading - chart for UPLD using intraday sar stop and reverse to mange the trade on triangle breakout

What type of trailing stop-loss to use is a personal choice and intraday trend traders will often use a trailing stop-loss that is appropriate for the trending nature of each particular stock.

If the stock has a tendency to pullback and rally intraday then the lows of these pullbacks can be used as stops. If the stock rallies strongly during the day without pulling back, then another stop method commonly used is a trend-line placed under the steep uptrend as shown below in Chart 3.

Chart 3. Day Trade managed with a Trend-line

intraday stock trade chart for TRIP over two days with initial stop and trend line until stopped out

Some intraday trend traders use candlestick charting with five minute candles instead of a bar chart. They use the reversal patterns on the five minute candle chart to locate intraday trend reversals and ride the intraday swing.

The use of intraday profit targets is also common with day traders especially when their entries were based on intraday chart patterns taken from a five minute bar chart. They also frequently use intraday support and resistance levels to determine profit target levels, particularly if the stock has made a big move as they will typically lock in their open profits at these levels. Intraday chart patterns and support and resistance levels are also used to determine logical levels for placing their initial stop-loss.

There are some day traders who use the signals from chart indicators as their primary trade entry and exit method. They tend to use these entry and exit signals rather than using chart patterns or support and resistance levels.

One of the biggest issues all day traders face is that of holding onto their losing positions overnight in the hope that they will return to breakeven. This is a sure fired recipe for disaster in the long run. This may work in the short run but sooner or later the day trader will accumulate a portfolio of losing stocks that just will not return to breakeven. When the markets turn, these losses just keep getting bigger and in the end the day trader is so demoralized that they just cannot make any rational decisions and they take on all sorts of stupid trades that should never have been entered. These decisions further increase their losses and they typically hang onto these new losing positions. This snow balling effect eventually totally destroys their trading account.

Holding onto losing positions is not the answer. Day trading is not as easy as it looks and not every trader is ideally suited to day trading. The main attraction to day trading tends to be the nation of making quick and easy money. To be successful with day trading requires discipline with trade management, a solid basic understanding of technical analysis and the mental attribute of making decisions in a very short amount of time while under pressure. Some traders give day trading a go but find it too hectic for their liking and take on a longer time frame for their trading such as swing trading or position trading.

Creating the Day Trading List

How to find good day trading candidates

Day Trading - picture of a day trading screen shown on two monitors with several stock charts and a coup[le of quote screens for bid and ask prices

Day traders do not have the luxury of locating a potential trade during the trading day since the stock market simply has too many stocks to analyze while actively trading during the day. The day trader needs to prepare a short list of potential trades before the market opens, which means most day traders construct this trading list either the night before or early in the morning.

There are numerous approaches that can be used to create a trading list of stocks. It is this short list of stocks that the day trader uses during the trading day to locate a trade entry. The list needs to be manageable and if there are too many stocks in the list, then this puts undue pressure on the day trader since they need to constantly review each stock's chart and/or market quote on the list for a potential trade entry. The number of stocks on the list is a personal choice. As a guide, day traders generally have somewhere between 20 to 50 stocks in their trading list.

One of the simplest methods of reducing the number of stocks available on the stock market is to run a scan. Most charting software packages have a scanning facility. These can be web based or off-line. Also some stock brokers have a scanning facility. Whichever is used does not make any difference, the main point is to reduce the number of stocks by filtering out those stocks that have characteristics which are not desirable.

Generally day traders prefer stocks that are actively traded throughout the day. A simple filter to use is to scan for stocks which have an average daily volume greater than a minimum limit. The average volume can be over the last 20 days or more. The minimum is a personal choice but as a guide stocks with 1,000,000 shares are very liquid, stocks with 500,000 are fairly liquid, stocks with 200,000 are becoming quite illiquid and below 100,000 are generally very illiquid. Day traders will generally prefer a minimum average volume of 1,000,000 or maybe 500,000 shares.

Some day traders have a preference for a particular market capitalization. They may prefer large-caps or have a preference for small-caps. It is simple enough to run the scan to only include market caps that are desirable.

The two main exchanges are the NYSE and NASDAQ. Some day traders have a preference for NYSE stocks while others have a preference for NASDAQ stocks. The day trader can easily filter the scan to only include their preferred market.

Day Trading - picture of a stock trading list chart used by traders to place their stock orders with their broker to buy and sell

The list is now reduced but is still way too large. Depending on the trading strategy, day traders generally prefer day trading stocks in the direction of the general trend. In other words, a long side day trade in an up trending stock. The simplest way to scan for up trending stocks is to use a technical indicator such as moving averages.

An indicator that is good at detecting up trending stocks involves using two simple moving averages. The scan will include the 20 MA being greater than the 50 MA and the last close being above both the 20 MA and 50 MA. If the scan allows it, the 50 MA being greater than the 50 MA of one day ago, which ensures that the 50 MA is sloping upwards which it must for an up trending stock.

Depending on how bullish the market is, this list is now considerably reduced but is still too large for day trading. Further filtering from here is largely dependant on the day trading style.

Intraday trend traders like to trade up trending stocks that have pulled back on the daily chart and then trade above the prior day's high. Stocks that are pulling back on a daily chart can be detected with a scan such as for the last 3 or 4 days the high is less than the previous day's high for the last 3 or 4 days. This will reduce the list of stocks considerably.

The next step is to visually examine the daily charts for each stock in this reduced list. The daily bar chart is popular with day traders. Some stock charts will display daily trading behavior that is not desirable. For example, the chart may show a large amount of narrow range days whereas the day trader needs larger range days. Also some charts will show a lot of gap days (gap up one day, then gap down the next and so on) which generally makes intraday trend trading difficult as the intraday trend is not decisive with such a stock.

The day trader should also check the volume bars to see if the average is suitable. Some stocks will have one extremely high volume day relative to the normal daily volume. This artificially boosts the average volume. For example, a stock may have an average volume of 1,500,000 shares but on examining the volume bars, there was one day with 3,000,000 shares and the rest tend to be around 300,000 shares. Therefore the typical average daily volume is only around 300,000 and the day trader may well exclude such a stock from the list.

Day Traders need to be aware of the stocks liquidity,

since they need to enter and exit quickly

By visually examining the daily chart for each stock, the day trader can pick the stocks that show the most promise for the next trading day and exclude those that don't.

By now the list is getting smaller and the next step is to visually examine the intraday charts for each stock over the last couple of days. Some stocks are ideally suited to intraday trend trading while others are not. Suitable stocks have sufficient trading volume throughout the whole day which can readily be determined from the stocks five minute bar chart. If the bar chart shows no missing five minute bars then each five minute period has trading activity, however if there are a lot of missing five minute bars this indicates that there was no trading during those periods. Also the bar chart should show a trending nature rather than just showing scattered five minute bars all over the chart. The whole point of intraday trend trading is to locate a trend during the day. The day trader excludes any stocks which display intraday charts that are not desirable.

The list by now should be fairly small. If it is still too large to manage then the day trader needs to make a decision on how to further reduce the list. The quickest and easiest way to do this is increase the minimum volume requirement. If a 1,000,000 average daily volume was used, then increase this to say 2.000,000 and exclude stocks from the short list with volume less than this and see how many stocks are left. There is a bit of trial and error here, but the main thing is to have a manageable list size.

The final short list is a list of stocks that the day trader regularly checks during the trading day for an entry. Some of the stocks on the list will have Bid-Ask spreads that are too wide for any day trading strategy which places a Market order (although it will be good for the Bid-Ask spread trader).

Since the market is closed when producing the short list, the day trader has to wait for the stock to trade in order to check the Bid-Ask spread. This means that some of the stocks on the trading list will not be suitable for their trading style due to the width of the Bid-Ask spread. Sometimes a day trader will be familiar with the typical Bid-Ask spread of a particular stock and can therefore include or exclude that stock when producing the trading list.

While there are other considerations day traders can take into account when producing a trading list, the methods discussed include the basic tactics used by most intraday trend traders to produce their trading list.