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There are many online sources of education for those who wish to day trade. Day traders are frequent traders and are the target market for many of the web sites promoting trading systems. A decision on whether or not we should day trade can be aided by http://daytrading.about.com/ where there are several articles about the characteristics of successful day traders, the need for discipline, and other guidelines.
In 2001 the Securities and Exchange Commission ruled that “pattern day traders” must have at least $25,000 in their account and can only trade in margin accounts. A pattern day trader is anyone who executes four or more day trades within five business days, provided the number of day trades is more than 6% of the total trades in the account during that period. http://www.realitytrader.com/ has an interesting article titled “Overcoming the SEC $25K Limit” which is the story of recovering from a situation where the account balance fell under the $25,000 required for day trading on margin.
http://daytrading.about.com/ has extensive education on its site. http://www.bullinvestors.com/ has a Day Trading Course on its site that includes an explanation of direct access.
If and when we day trade we will want to use a direct access system rather than using a broker’s internet system. Many brokers will provide a direct access system free of charge to frequent traders, otherwise there are several that can be licensed for a monthly fee.
Direct access provides advantages in speed and control of the transaction. Typically the system will provide real-time Level II bid and ask quotes so that we can see trade by trade whether the price pressure is up or down and what limits to place on the order. It will allow initiation of a transaction with one or two clicks instead of the multiple pages that are usually necessary with an Internet based system. It may also automatically find the ECN or market maker with the best price, or the route can be selected manually. Finally, and this is very important, it will give us rapid confirmation that the investment has been made. It’s psychologically painful if the price takes off and we do not know if our limit order has been filled.
Not only do we want a direct access system if we are day trading but we also need low commission rates. Typically we are looking for gains of less than a dollar a share because many shares do not move much more than that during a day. If we are paying over $20 for a round trip trade and trading a small number of shares the reward to risk ratio does not justify day trading.
More information on direct access and Level II can be found at http://www.bullinvestors.com, http://www.daytrading.about.com, and most of the glossaries listed in the Introduction Chapter. A comprehensive list of market makers is available at http://www.allstocks.com/ which can also be accessed through http://www.daytrading.about.com/.
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