Day Trading Trading Basics — Questions and Answers
Question 1: What defines day trading?
- Trading for an entire day
- Buying and selling financial instruments within the same trading day, closing all positions before market close (Correct answer)
- Trading only during daytime hours
- Trading once per day
Correct answer: Buying and selling financial instruments within the same trading day, closing all positions before market close
Day traders open and close positions within the same trading session, avoiding overnight risk and seeking to profit from intraday price movements.
Question 2: What is the Pattern Day Trader (PDT) rule in the US?
- A rule about trading patterns on charts
- A FINRA rule requiring $25,000 minimum equity for accounts making 4+ day trades in 5 business days (Correct answer)
- A rule about trading only on certain days
- A tax regulation
Correct answer: A FINRA rule requiring $25,000 minimum equity for accounts making 4+ day trades in 5 business days
FINRA's PDT rule classifies traders who execute 4 or more day trades within 5 business days as pattern day traders, requiring a $25,000 minimum account balance.
Question 3: What is a market order?
- An order that creates a market
- An order to buy or sell immediately at the best available current price (Correct answer)
- An order placed at the market close
- A premarket order
Correct answer: An order to buy or sell immediately at the best available current price
Market orders execute immediately at the current best available price. They guarantee execution but not the exact price, which can vary in fast-moving markets.
Question 4: What is slippage in day trading?
- A mistake in clicking
- The difference between the expected price of a trade and the actual price at which it executes (Correct answer)
- Sliding on a wet floor
- A type of chart pattern
Correct answer: The difference between the expected price of a trade and the actual price at which it executes
Slippage occurs in fast-moving markets when orders are filled at a different price than expected, which can be positive or negative.
Question 5: What is volume in day trading?
- How loud the trading floor is
- The number of shares or contracts traded in a given time period, indicating market activity and liquidity (Correct answer)
- The size of your monitor
- The amount of money in your account
Correct answer: The number of shares or contracts traded in a given time period, indicating market activity and liquidity
Volume measures trading activity. High volume indicates strong interest and liquidity, making it easier to enter and exit positions at desired prices.
Question 6: What is a limit order?
- An order with limited time
- An order to buy or sell at a specific price or better, which may not execute if the price is not reached (Correct answer)
- An order that limits your losses
- The maximum order size allowed
Correct answer: An order to buy or sell at a specific price or better, which may not execute if the price is not reached
Limit orders specify the maximum price for buying or minimum price for selling. They guarantee price but not execution — the order only fills if the market reaches your price.
Day Trading Trading Basics
What defines day trading?