In short
- Day trading means buying and selling within one trading day. It is risky and you can lose money quickly.
- Tech stocks often move sharply and react fast to news.
- Fixed rules help: a maximum per position, a stop-loss and a maximum loss per day.
- Be extra careful before the market opens and around earnings.
- Costs apply to every trade. With frequent trading they add up.
What is day trading?
A day trader buys and sells stocks within the same day. At the end of the day they usually hold no positions. The aim is to profit from small price moves. Not everyone manages that. Losses are a normal part of the process and can affect your entire stake.
In this article we use a hypothetical example: ‘stock X’. We name no companies and give no stock tips. The numbers are illustrations.
Characteristics of tech stocks
Large price swings
Tech companies often have high expectations built into the price. So the price can swing sharply up and down. This is called volatility. A lot of movement means more chance of profit, but also of loss. Both sides are equally real.
Sensitive to news and results
A product announcement, an interest rate decision or an acquisition can move the price quickly. The quarterly results (the figures companies publish every three months) in particular can cause a big move. Read more about reading earnings reports.
Gaps
A gap is a jump in price between yesterday’s close and today’s open. It often happens after news outside trading hours. A stop-loss does not always help here, because your order may be filled at a worse price than you chose.
Liquidity and spread
Liquidity is how easily you can trade without disturbing the price. The spread is the difference between the buy and sell price. For large, heavily traded stocks it is usually small. For smaller companies, or outside normal hours, it can be wider. A wide spread is a hidden cost. See bid-ask spreads explained.
Simple risk rules
Rules set in advance take emotion out of the moment. Adapt them to your situation and practise first on a demo account (paper trading).
1. Position size
Decide in advance the most you will risk per position. Many people choose a small percentage of their trading capital. The position size calculator shows how many shares fit.
Example (hypothetical): Your trading capital is €5,000 and you risk at most 1% (€50) per position. You buy stock X and place your stop-loss €0.50 below your entry price. That allows a position of at most 100 shares. The point is the method of calculation, not the numbers.
2. Stop-loss
A stop-loss is an order that closes your position when the price reaches a certain level. It limits the loss. Set it in advance, and do not move it further away when the trade goes against you. Allow for gaps: a stop-loss does not guarantee the price at which you exit. Read more in risk management fundamentals.
3. Maximum loss per day
Agree with yourself that at a certain loss you stop for the day. Many losses happen because people raise their stakes after a bad start to win it back. A daily limit protects you against that.
4. Keep a journal
Note every trade and the reason for it. That shows patterns in your mistakes. See keeping a trading journal.
Pre-market and earnings: extra care
Outside normal trading hours (pre-market and after-hours) there is less trading. That means wider spreads and faster price jumps. Not every broker offers it, and the terms differ.
Around earnings the uncertainty is high. The price can move sharply in either direction, sometimes against what the news would suggest. Many day traders choose not to trade on such a day, or to trade much smaller. That is your own choice. At least know when results are due and what your plan is.
The cost of frequent trading
Every trade costs money: commission, the spread, sometimes currency fees and, with some products, financing costs. If you trade often, these amounts add up quickly. You must first earn back the costs before you make a profit. So check your broker’s fees in advance and work out what an average trading day costs you. For tax, read trading tax basics.
Staying realistic
Day trading is not suitable for everyone. It takes time, discipline and money you can afford to lose. Many people find it harder than it looks. Start small, practise first without real money and trade only with money you can afford to lose.
This article is educational and not investment advice. Day trading is risky and you can lose all or part of your investment. The examples are hypothetical.