There are a variety of different markets available to day trade, with stocks, futures and forex being the most popular. Each of these markets has its own advantages and disadvantages for a day trader. In this article, I’ll lay out why I consider U.S. stocks (that is, those stocks listed on a U.S. exchange) represent the best market to specialize in for a day trader.
The Advantages Of Stocks For A Day Trader
Let’s start first with the advantages of stocks for a day trader:
1. Number of stocks to trade: The most significant advantage that stocks have over every other market is the number of stocks available to trade. There are thousands of stocks listed on the three major exchanges (New York Stock Exchange, NASDAQ, and the American Stock Exchange), and each one of these stocks represents a potential opportunity for a day trader. Even on days when the overall stock market may not move that much, you’ll be guaranteed to find at least a handful of stocks with excellent volatility and volume. With both futures and forex, you’re stuck with a handful of markets to trade so on days when those markets aren’t moving, there may not be much opportunity for a day trader to make money.
2. Access to nearly every asset class: With the rise in ETFs (Exchange-Traded Funds), stock traders now have access to a variety of different asset classes for the very first time. Whereas before a stock trader who wanted to trade Treasuries or the spot price of gold had to do so in other markets, now they can simply place a trade in TLT (the 20-year Treasury ETF) or GLD (the gold ETF) without having to venture into the bond or futures markets. The beauty of these ETFs is that whereas before stock day traders could only trade the price of individual companies, now they can trade the price of nearly any major market or asset class in the world. In other words, being a stock day trader can still grant you access to ways to trade most futures and forex markets, whereas traders in those markets don’t have ways to trade individual stocks.
3. Professional support – There are more professional trading firms that cater to individual stock day traders than any other market. These firms provide training, high-speed direct connections to the exchanges, access to ultra-cheap commissions not available to retail traders, office space and a host of other benefits to a day trader. In my opinion, trading at one of these proprietary trading firms is the best way to start your career if you’re serious about becoming a professional trader.
4. Institutional participation – I also think stocks represent such great day trading vehicles due to the amount of institutional participation in the stock market. By institutions, I’m referring to those pension funds, mutual funds, and hedge funds with large stock holdings. Why is this important? Because when these behemoths want to buy or sell a particular stock, you can bet that the price of that stock is going to move! Unlike an individual investor that may purchase a handful of shares of a company, these institutions may purchase hundreds of thousands or even millions of shares of that same company. A large part of my own trading and the methods I teach my students revolves around identifying and taking advantage of these large institutions.
Disadvantages:
Now there are a few disadvantages to day trading stocks:
1. The Pattern Day Trader Rule – This SEC rule basically states that pattern day traders (defined as those who buy and sell a particular security in the same trading day, and do this four or more times in any five consecutive business day period) must maintain a minimum balance of $25,000 in their account. If you have less than $25,000, however, you can bypass this rule by trading at a proprietary trading firm.
2. Leverage – Many people point to the smaller amount of leverage available to stock day traders compared to other markets such as forex and futures. This is true only for retail day traders and not for those of us day traders that trade at a proprietary trading firm. These prop firms can provide access to greater amounts of leverage than retail day trading accounts. Also remember that leverage is a double-edged sword in that your losses are also magnified. Trading an over-leveraged account as a beginning trader is a surefire way to end your trading career before it even begins.
Conclusion
While I may be slightly biased in that I day trade stocks for a living, I really do think that stocks represent the best opportunities for a day trader. The wide array of stocks to trade, the unparalleled access to nearly every asset class and the institutional participation in the market allow skilled to day traders to extract profits from stocks on a consistent basis. While there are a couple downsides to retail stock day trading, those issues are eliminated when trading for a proprietary trading firm.
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