There are many ways to approach the market, but the style that probably receives the least respect is day trading. It is considered primarily the domain of unsophisticated small investors who are more gamblers than investors. There is some truth in this, as large investors cannot trade enough capital in extremely short time frames.

There are statistics that show day trading has a very low success rate, but they include currencies, futures, options, and non-stock markets. It is in the markets where leverage is used the most that success is least likely. This is a very important question to keep in mind when considering day trading. If you use large amounts of leverage, your risk of failure is much higher.

Ironically, the vast majority of very short-term trades are made by institutions that move the market by trading huge baskets of stocks with holding periods of seconds or minutes. This “algorithmic” or “programmed” trading has a high success rate, but it often only involves a fraction of a penny, and it’s a totally different game than that played by individual traders.

There is a perception that because a market approach is difficult then it should be avoided. The reality is that the reason an approach can be so cost effective is that it is difficult to implement. You don’t get rich by doing easy things. You get rich by doing the hard things really well. There are a lot of hard working people in day trading, and they do extremely well with this approach.

So how do you become a successful day trader?

The first step is to determine a clear style. If you jump in and start trading stocks haphazardly for very short periods of time, chances are you won’t do well. Good day trading is influenced by finding stocks with substantial levels of volatility. If you plan to trade in extremely short timeframes, you need stocks that move very quickly and very quickly.

Generally, the most volatile stocks will have news such as earnings, regulatory approval for example from the Food and Drug Administration, new contracts or other major events. These events attract a large group of very aggressive traders who trade against each other. To a large extent, day trading is all about trading the emotions and reactions of other traders. This is more of a video game than an investing activity, and many day traders actively apply game theory tactics.

Some day traders focus on large cap stocks or indices, but the majority of day traders focus on small cap stocks. Many of them are low-quality, low-priced stocks and are manipulated in various ways. But from a day trading perspective, the only thing that really matters is that they make big moves.

I regularly scan all stocks in the market to find names that move more than 10% intraday. A lot of the action happens in the pre-market, but it’s a fairly simple way to develop a good list of potential day trading candidates.

It’s important to always be on the lookout for sudden moves, but once you’ve identified your trading candidates, it’s all about watching them very intently while waiting to employ your trading tactics. You will need very short-term charts that will give you an idea of ​​where a stock is going.

Trading tactics will determine your success. There are many ways to trade high volatility, such as buying pullbacks to support – or volume-weighted average price, often referred to as “VWAP”. Many traders are looking to buy strength and higher highs.

A big part of this type of trading is measuring the psychology and emotions of traders and how they are influenced by news that moves stocks. How willing will they be to hunt? Is there potential for a short squeeze, will the meme traders go nuts?

The most important aspect of day trading is the exit strategy. It’s what will make or break you. Chip Munn is a very successful day trader who works with me at Sharkinvesting.com. His methodology is to buy a set number of shares and then exit as soon as he has a move of a set size. He will often sell too early, but he will rarely suffer big losses. He has a modest daily target and usually when he reaches it, he stops trading. What makes it successful is that it has a strong focus on a few stocks and seeks to extract very reasonable gains. It does not use leverage and does not take big risks. He is very methodical and has a very high success rate. Chip is a retired line captain and in this business he has learned to always err on the side of caution. You can’t afford to make mistakes. At the first sign of trouble, you act quickly and decisively.

Where day traders go wrong is that they take on too much risk. They trade too big, then get greedy and try to push trades too far. They are not satisfied with constant small daily gains. They want to hit a home run every day, and that’s what’s killing them.

The downside to this type of trading is that there is a limit to how much money you can put to work, and you won’t have the giant gains that are produced by riding the momentum in a position. wider over a longer period. You can only watch a few trades at a time, and you need to exit when you have low enough gains if you want to do so consistently. This type of trading requires intense concentration and can distract you from many other opportunities.

The advantage of day trading is that if you do it correctly you have very low levels of risk, and it may only require a few hours of active trading per day. There is no fear that something will happen overnight and cause your account to drop out of trading hours. You don’t need a lot of capital to get into day trading, but a lack of capital often results in impatience and too much risk taking, so you have to recognize that.

Wall Street traditionally scoffs at day trading, and the majority of people who try it don’t do well, but if you make the effort to learn it and develop a solid strategy, it can produce a steady stream of profits.