A day trader is defined as a person who is attempting to make a consistent profit by making short term trades mainly in stocks and exchange traded funds (ETFs).

As a rule of thumb, most day traders will close out all positions before the end of the day and go home “flat” which means in all cash.

Many day traders will utilize leverage in their accounts which is a fancy term for margin.  During the trading day, the are able to purchase more equity than their account has in total.  For example, if you have at least $125,000 in a trading account many brokerage firms offer up to four to one leverage or buying power.  This sounds nice on paper (or on a blog) but don’t forget about the other side, you can lose four times as fast…

Most people who enter the day trading arena have grand plans of sitting around in their underwear in front of a computer for a couple of hours a day, earning a hefty income off their “trading expertise.”

Not so fast.

While the number is debatable, it seems that less than 10% of people who day trade actually make any money at all.  The main reason is lack of knowledge.  Not so much knowledge about the market, but knowledge about how the market works, how it trades, why certain things happen and when.

Day traders tend to move in herds just like the average investor does.  They will buy and sell based on the news, momentum, earnings, and any other metric they can find to justify a trade set up.

Professional traders by in large use technical analysis to make their determination of where their capital would be exposed to the least amount of risk for the desired return.

The pro is not concerned what she is trading, but more interested in the probabilities based on their systematic analysis.  Traders who use the charts would rather not see what stock they’re analyzing, but only the chart pattern which takes the emotion out of the equation.

Let’s say you’re looking at a chart of Apple.  You see one of your favorite patterns setting up for an up move in the stock.  Under normal circumstances you take the trade expecting a profit.  However in the background you’re listening to financial news and the pundits are discussing a rumor that Apple users are experiencing problems with a just released new product.  Well, you may stay away from that trade based on what you just heard, which is based on your emotions.  Fast forward a couple of hours, the rumor was just a rumor and the stock proceeds to rally $5.00.

What just happened?  You let your emotions dictate the trade (or non trade) and it cost you money.  If you trade on emotions, don’t trade.

Day trading is not for everyone, but if you can learn to trade with a system that works, and use proper risk measures you might stand a chance.

Some of the more commonly used chart patterns found to be effective are: