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Day trading: That intense, fast-paced, and sometimes volatile form of trading where investors carefully monitor stock price movement minute-by-minute.
It's not for the faint of heart. But it draws the attention of many investors, young and old, novice and seasoned.
With the advent of popular fintech platforms like Robinhood, day trading has become more accessible and interesting to novice investors. But that may also have some drawbacks.
Beginner investors can easily get in over their heads if they hastily jump into day trading. But with some research and time, you may be able to avoid some common day trading missteps.
If you're curious about jumping on the Robinhood day trading bandwagon, this is the article for you. Learn what day trading is, tips to get started, and how to make the pros and cons of Robinhood work to your advantage…
What Is Robinhood Day Trading?
Robinhood day trading is gaining steam as an innovative way for novice investors to try their hand in the markets.
Day trading involves the purchase and sale of securities within the same trading day. It involves monitoring of price changes to leverage their investments. While it can be lucrative given the right strategies and approach, it can also be risky, especially for newcomers.
Robinhood day trading is no different than traditional day trading, except that trades are executed through their streamlined app by the investors themselves. With the push of a button, users can make trades, access watch lists, and customize their notifications to make sure they never miss an important opportunity.
Popularity for the app grew with its claims of commission-free trading, making trading of stocks, ETFs, options, and cryptocurrency accessible to anyone. But there are still costs associated with trading on Robinhood to be aware of.
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The Robinhood app is used by millions of people. It's targeted toward a younger generation of investors who want to day trade but and aren't sure where to start.
Of course, this comes with potential risks. Without proper research and understanding of how to effectively engage in day trading, novice users could lose a lot of money. And Robinhood isn't exactly known for providing substantial information to its customers.
Before you get started, let's take a look at some of the basics of how to day trade. We'll start with the pros and cons of using the Robinhood app.
What to Look for in Day Trading Stocks
Whether you're venturing into the world of day trading using the Robinhood app or another platform or service, make sure you have a grasp of what to look for in your securities choices. While variables will change day to day, here are a few common things to consider…
What Is Volatility?
Volatility refers to how much the price of a security changes over a certain period of time. Think of it as the potential for big pendulum swings in a security's value. The more volatile the asset, the riskier it is, which could equal big gains - or big losses.
The key to Robinhood day trading, or any day trading, is to find those securities that are just volatile enough, but not so much that it will take you out.
Stick with What You Know
While it may be tempting to make a big move, before you do, ask yourself if you are familiar enough with that specific security to make a wise trade. Choosing securities in which you know the patterns, volatility, and company history is more likely to warrant a beneficial trade.
High Volume Stocks
Always be sure to check how much a certain stock is being traded. Higher-volume stocks typically mean it's a more sustainable option, and thus, may be a better investment. They are in-demand, which is a good thing for day traders.
Keep your eye on the news and what's happening with securities. People are watching, and the more hype around a security, the more potential for volatility and liquidity.
5 Beginner Tips for Day Trading
If you're a beginner, you want to proceed with a little extra caution. There are a number of ways to do that…
No. 1: Do Your Research
No matter how you choose to day trade, you need to know all about the stock and the company behind it. One of the pitfalls of Robinhood day trading can be lack of knowledge. It's easy to make a move. But if you don't know anything about the move, it could be costly.
Make sure to research the history of the company, as well as news about the company and its stock, including:
- Recent stock news and events
- Current interest rates
- State of the economy
- Noteworthy patterns in performance
No. 2: Focus on a Couple Stocks, Not Many
It's tempting to want to see all the different stocks out there and get excited. But remember, you want to have some familiarity with them.
To prevent getting overwhelmed and making any potential missteps, try focusing on a couple key stocks when you begin day trading. This will give you more time to research them and see their patterns.
If starting small is your game plan, you may also consider fractional shares. This is simply buying a portion of a larger share (think Apple or Alphabet/Google shares). Larger companies can be pricey if you're trying to buy whole shares. But adding fractional shares to your Robinhood day trading practice could be a way to still invest in those with less risk.
No. 3: Know Which Type of Order to Use
Day trading is not simply buying and selling blindly. There is strategy involved every time you do it. Different strategies for buying are called "orders." There are numerous types of orders, and each serves a different purpose. Here are a few basic orders to know before investing.
A market order occurs when a stock is at the best available price on the market. They also take priority over other order types and are often used when investors want a quick trade.
Investors may use limit orders to maintain control over execution prices because they can only be executed at the investor's set limit price, or better. To be successful, there has to be both a buyer and seller at either end of the trade.
With a stop order, an investor can set a stop price for the stock to be bought or sold, which gives a higher chance of achieving the preset entry or exit price. This may limit an investor's loss. But once the stock meets or crosses the stop price, it could turn into a market order. In this case, it would be executed at whatever the best price is available.
Stop Limit Orders
This one combines features from a stop order and a limit order. That makes a stop limit order. If a stock reaches the stop price set by an investor, it triggers a limit order. At that point, the limit order is executed at the limit price or better. Investors want to avoid the consequences of a stock moving in the wrong direction, so a stop limit order can help to limit those potential losses.
Trailing Stop Orders
Using a trailing stop order involves keeping track of (or trailing) the best price of a stock before it triggers a market order, which may help investors mitigate potential losses. If it keeps moving in a good direction, the trailing stop price will follow the stock. If it goes an unfavorable direction, the stop price will remain the same.
No. 4: Avoid Day Trade Calls and Pattern Day Trading Restrictions
If opening trades exceed day trade buying power and close in the same day, it may trigger a day trade call. At that point, an investor has five business days to satisfy the call by supplementing their account with case or other securities.
If a trader has less than $25,000, they can't make more than three trades over a rolling five-day period. If they do, they are considered a pattern day trader, and their account is flagged until they can supplement their account with over $25,000. When it comes to Robinhood day trading, this only applies to users with an Instant or Gold account.
No. 5: Know Your Limits
No matter how long you've been investing, you need to start with clearly defined limits of what you're willing to invest. Consider your monthly income and other expenses to help determine what's available for day trading.
Robinhood day trading is popular among younger investors who should focus on long-term gains and goals, with less concern about short-term risks. Of course, it's always important to only invest what you're willing to lose as day trading can be inherently risky.
Robinhood Day Trading Accounts
Now you've got some of the basics about day trading down, but how does this apply to Robinhood?
If you're signing up for Robinhood, you'll see that there are a few different account options: Instant, Gold, and Cash:
This is Robinhood's default account type. It's known as a margin account, which means you have access to instant deposits and extended trading hours. If you sell stocks or make a deposit up to $1,000, you don't have to wait for funds to process.
Similar to Robinhood Instant, but with a few extra perks that come with a $5 per month charge. With Gold you have more buying power and larger instant deposits. Just keep in mind that it is still a margin account.
With Robinhood Cash, investors can place commission-free trades during the standard and extended-hours trading sessions. But they don't have access to instant deposits or instant settlements.
Pros and Cons of Robinhood Day Trading
Any form of day trading is going to come with risks and rewards. Robinhood is no different, so we're going to dive in and look at the pros and cons of using Robinhood for day trading.
Pros of Day Trading with Robinhood
Robinhood isn't for everyone, particularly experienced day traders who want a lot of diversity. But here are some of the pros, particularly for newer investors:
- Simple app/platform that's user friendly.
- Commission-free trading.
- Execute trades directly from the mobile app.
- Interest rates for margin loans are less than many competitors.
Cons of Day Trading with Robinhood
There are many advantages to the accessibility of Robinhood day trading. There are also some potential pitfalls, particularly for novice investors who are just learning about day trading:
- It offers commission-free trades, but competitors do, too.
- Many necessary features are only accessible with a paid Gold account.
- Poor customer service is reported by many users.
- Limited options - Robinhood does not currently allow for mutual funds, bonds, warrants, and stock commodities.
Are There Fees for Day Trading on Robinhood?
Robinhood advertises commission-free trading, which it does hold true to, but its service is not without ANY fees. Some users feel like fees are hidden, but Robinhood does offer a comprehensive fee schedule on its website.
Robinhood trading fees range from those for services and wire transfers, to the most notable fee, the ACATS (account transfer) outgoing fee of $75. Before using Robinhood, be sure to review its fee schedule to see how it may affect day trading.
Is Robinhood Day Trading Changing the Market?
Day trading on Robinhood has become increasingly popular as more mobile apps have surfaced. This has been a great boost for the markets.
But an influx of new, inexperienced investors can increase volatility and make things relatively unstable. One minute could be a steep gain, with a sharp turnaround the next. It's more important you do your due diligence.
Research the financial history of your chosen security, stay updated on the company's news releases, look at its quarterly reports, and get as many opinions as you can.
You'll be successfully day trading in no time.
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