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What Is the Tax Rate on Day Trading?

Day trading can be much more profitable than long term investing providing that you learn how to do it correctly. There are even some tax advantages. Just what is the tax rate on day trading and what are the other advantages? Here we present a snap shot of trading equities within the market day, how this system works, and what you need to know to be a profitable day trader. We start with day trading fees and taxes and how to arrange to have your tax status be the most beneficial for day trading.

Day Trading Fees and Taxes

The top value of day trading comes from the fact that stock market and Forex movements are not gradual. Prices jump up and down and the profits that a long term investor seeks over the years can, in fact, be made within a few well-chosen trading sessions. Aside from making bad trades, the biggest risk in day trading is that your fees and taxes will override your profits! If you make no effort to deal with this, all of your profits will be taxed at the short term capital gains rate of 25% and your capital losses will be capped at $3,000.

But there is a way to deal with this problem for day traders who work more than 30 hours a week and average at least 4 or 5 daily intraday trades. You can keep track of all losses as well as gains and apply to the IRS for a trader tax status. You need to do this in advance of the tax year and realize that the IRS may or may not grant you this status. If you receive trader tax status, you can deduct trading losses as well as all home and office expenses related to your trading business as well. The key is to make your “mark to market” election prior to April 15 of the previous tax year. There is one important tax-related matter, however. You need to sell all trading assets at the current price on the last day of the trading year and purchase them again at the start of the next year. You will want a competent tax accountant to help you do this.

Can You Really Make a Living Day Trading?

Now that you have plowed through the tax issue, you are wondering can you really make a living day trading. It is true that many take up day trading lured by the promise of quick profits only to see their hard-earned assets bleed away due to poor trades, lots of fees, and taxes. But, there are folks who make a great living day trading. The keys are knowledge and discipline. You need to learn how to set up your day trading as a business so that you can deduct fees, commissions, and losses from your gains. And, you need to learn to make only trades that hold a great deal of promise while always setting up a stop loss strategy. This requires that you treat your day trading as a full time job and always make sure to pay attention and get out of the market before the end of the day.

Day Trading Investment Strategies

Knowledge is power in whatever you do and this applies to day trading as well. Successful traders use real time news services, electronic communication networks, and analytic tools like Japanese Candlesticks. The best traders limit their trades to ensure profits. This means always setting stop loss limits on trades and exiting trades when a good profit has been made. Too many new day traders try to ride a promising trade to huge profits and end up losing what they could have easily gained. The most important part of successful day trading is to set aside sufficient time to do research and to trade and not to worry about market action that occurs while you are getting a good night’s sleep or well-deserved rest.

What Is the Tax Rate on Day Trading trade station
Trade Station

Stake Day Trading

Stake is an excellent mobile or desktop trading application that lets Australians trade stocks in US markets with no brokerage fees. For access to more than three thousand five hundred US stocks as well as exchange traded funds, many traders find this to be their best trading option. However, Stake does not offer specific trading advice that takes into account your individual investment goals, risk appetite, or financial situation. It is a low-cost way to get access to a wide range of equities in the USA but not a guaranteed way to make profits. That part is up to you!

what is the tax rate on day trading strategy
Forex Day Trading Strategy

Top 5 Indicators for Day Trading

The point of day trading is to identify and take advantage of changes in equity prices. The top 5 indicators for day trading success are the following:

  • Volume
  • Volatility
  • Trend
  • Momentum
  • Fundamentals vs Market Sentiment

Traders use tools such as Bollinger bands to identify volatile markets or individual stocks or currency pairs. The point is to trade on the outer edges of the band of volatility to take advantage of price swings within the band.

Volatility is what leads to profitable day trades. Traders often do best when they wait for periods of volatility to enter their trades.

Trend trading is typically a safe way to make money in day trading. Traders enter and leave trades with small, incremental profits and avoid the risk of too many losses.

Momentum refers to the tendency of the market to follow a trend as more and more investors jump in. Day traders make their money by entering and leaving these markets at the right times.

Market prices eventually return to what fundamentals support. Day traders make their profits by realizing when prices will diverge from or return to fundamental values.

Common Day Trading Stocks

Once a trader has set his or her strategy to take advantage of market changes, he or she needs to choose specific stocks or ETFs to trade. The common day trading stocks are those that offer high volume, volatility, and predictability for the attentive trader.

The best options are typically ETFs that track the S&P 500 or other major indices. Many traders use stock screening tools to pick those that currently show promise due to their volatility, volume, and trend. The key to success in day trading often lies in picking the right stock or index to trade even before applying a trading strategy.

Candlestick Pattern for Day Trading

The most common candlestick pattern for day trading is the Doji. This trading signal indicates an uncertain market that is ready to break out in either direction. It is the job of the day trader to decide which direction to trade. Many day traders use stock options at this point in order to limit their risk and lock in potential profits. Option trading strategies such as the long straddle allow a day trader to lock in profits for both up and down market simultaneously.

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