What exactly do day traders do all day? How do day traders make their money? The answer would surprise most people. Most of the time, it is not the high stakes game of poker that people on the outside think it is. Remember, successful day traders are not gamblers. They understand the nature of risk, but that does not mean they blindly throw their trading capital at each and every stock that comes up on the quote screen. Nor do they base trading decisions entirely on hunches, gut feeling, or instinct.
The day trader's disposition
before you make your first trade, you must understand the nature of the markets and the special role of the day trader. Day traders serve one and only one function: They are middlemen in the buying and selling of stocks. As middlemen, day traders are not worried about the same things as investors. How is the market doing? What will it do over the next few days, weeks, and months? Is the stock market overvalued, undervalued, or fairly priced at these levels? Which stocks are good investments right now? Day traders couldn't care less about any of these issues. Why? Because they are not concerned about the next six months, they are concerned about the next six minutes, and even the next six seconds.
Think of how successful middlemen operate. It doesn't matter what they are buying and selling - stocks, bonds, cars, stereos, or coins - the product is not what is important. Middlemen should not care if the goods they are buying are expensive or cheap. Only one thing matters: selling the goods at a higher price than they were bought for. That is all middlemen are ever concerned about. So long as they can do this, they will put food on the table. The same is true of day traders.
So what exactly are day traders looking for? What do they see that no one else sees? Day traders are looking at one thing: supply and demand. In the short term, the stock market is very inefficient. Second to second, minute to minute, it is a constant state of flux. When the stock market moves in any one direction, it is to rectify an imbalance between buyers and sellers. For every buyer, there is a seller. When buyers and sellers agree, the stock trades. When they don't, the stock market readjusts its prices until they do agree.
Within that framework, day traders look to make tiny profits on these microscopic supply and demand imbalances. How big are these profits? 1/16, 1/8, and 1/4 point - as little as 6.25 cents per share. How do day traders do this? By being temporary buyers when the market needs buyers, and temporary sellers when the market needs sellers. This may seem to go against common sense. But remember, day traders are nothing more than middlemen. Day traders make a living by taking the other side of the buying and selling of the general public.
A few words must be said about the profits the day traders make. Day traders do not make a living on huge one-time gains. Instead, they are after razor-thin profits. What is the secret? The key is to trade at high volume - 2,000 or even more shares at a time. A profit of 1/16 on 2000 shares is a profit of $125 before commissions. If you do that eight times per day, you will make yourself $1,000.
