Day trading is simply buying and selling a financial instrument on the same day, or even more than once on the same day. Taking advantage of small price changes can be a good way to make money if you do it right. But it can be dangerous for people who are just starting out or who don’t have a well-thought-out plan.
Not all brokers can handle the large number of trades that day trading brings. On the other hand, some are perfect for people who trade every day.
Here are ten-day trading strategies for people who have never done it before. Then, we’ll talk about when to buy and sell, how to read basic charts and patterns, and how to keep your losses to a minimum.
- Long-term profits can only be made from day trading if traders take it seriously and do their homework.
- Day traders have to work hard, stay focused, be objective, and not let their feelings get in the way.
- Online brokers that are good for day traders are Interactive Brokers and Webull.
- When deciding which stocks to buy, day traders often look at liquidity, volatility, and volume.
- Day traders use volume, trendlines, and triangles, as well as candlestick chart patterns, to find good times to buy.
Basic Tips for Traders Who Are Just Starting Out
Day traders need to learn how to day-trade, know what is going on in the stock market and how it affects stocks. This can include plans for changing interest rates by the Federal Reserve System, news about leading indicators, and other economic, business, and financial news.
So, do your homework. Make a list of the stocks you want to buy. Keep yourself up to date on the chosen companies, their stocks, and the markets in general. Read the business news and save trusted online news sources.
Set Aside Funds for trading
Figure out how much money you are willing to lose on each trade and stick to it. Many successful day traders only risk between 1% and 2% of their accounts on each trade. If you have $40,000 in your trading account and are willing to risk 0.5% of it on each trade, the most you can lose on each trade is $200 (0.5% x $40,000).
Set aside some extra money that you can trade with and are willing to lose.
Allocate a designated time for day-trading
Day trading takes time and your full attention. In fact, you’ll have to give up a lot of time. Don’t think about it if you don’t have much time.
For day trading, a trader has to keep an eye on the markets and be ready to take advantage of any opportunities that come up during trading hours. It’s important to be aware and move quickly.
As a beginner, you should focus on no more than one or two stocks at a time. When you only have a few stocks, it’s easier to keep track of them and find opportunities. More and more people are trading fractional shares these days. This way, you can choose to invest smaller amounts of money.
This means that if Amazon shares are trading for $3,400, you can now buy a fractional share from many brokers for as little as $25, which is less than 1% of a full Amazon share.
Do not trade Penny Stocks
You probably want deals and cheap prices, but don’t buy penny stocks. Most of the time, these stocks are hard to sell, and the chances of winning big with them are usually low.
Many stocks that trade for less than $5 a share are taken off the major stock exchanges and can only be bought and sold over-the-counter (OTC). Stay away from these unless you see a real chance and have done your research.
Plan Your Trades
As soon as the markets open in the morning, many investors start placing orders. This makes prices more volatile. A player with a lot of experience might be able to see patterns at the open and time their orders to make money. For beginners, it may be better to watch the market for the first 15 to 20 minutes before doing anything.
Most of the time, the middle hours are calmer. Then, just before the end bell, things start to move again. Even though there are chances to make money during rush hours, it’s best for beginners to avoid them at first.
Cut Losses With Limit Orders
Choose what kind of orders you’ll use to get into and out of trades. You can use either market orders or limit orders. With no price guarantee, a market order is filled at the best price available at the time. It’s useful when you just want to get in or out of the market and don’t care about getting filled at a certain price.
With a limit order, the price is guaranteed, but not the execution.
You can trade with more accuracy and confidence when you use limit orders because you choose the price at which your order should be filled. With a limit order, your loss from reversals will be less. But if the market doesn’t reach your price, your order won’t be filled, and your position will stay the same.
Do not become overambitious
To be profitable, a plan doesn’t have to work all the time. Many successful traders may only make money on 50–60% of the trades they make. But when they win, they make more money than when they lose. Make sure that the most you can lose on each trade are a certain percentage of your account and that the methods for entering and leaving the trade are clear.
Be relaxed, No Pressures
At times, the stock market can make you nervous. As a day trader, you have to learn to control your greed, hope, and fear. Decisions should be based on facts, not feelings.
Stay with the plan
Traders, who do well are quick to act but take their time to think, Why? Because they’ve thought of a trading plan ahead of time and have the discipline to stick to it. Instead of trying to chase profits, it’s important to stick to your plan. Don’t let your feelings get in the way and make you give up on your plan.
Day traders have a saying: “Plan your trade and trade your plan.“
The Challenge with Day Trading
Day trading requires a lot of practice and knowledge, and it can be hard for a number of reasons.
- You should know that you’re going up against people whose jobs are trading. These people have access to the best tools and know the best people in their field. That means they have everything they need to succeed in the end. If you join the crowd, it usually means that they will make more money.
- You must understand that Uncle Sam will want a piece of your profits, no matter how little they are. Remember that you have to pay taxes at the marginal rate on any short-term gains, which are investments you hold for a year or less. One good thing is that your losses will cancel out any gains you make.
- Also, if you’re just starting out as a day trader, you might be prone to emotional and psychological biases that affect your trading, like when your own money is on the line and you’re losing money. Most of the time, these problems can be solved by experienced, skilled, and wealthy traders.
The Securities and Exchange Commission did a study that showed most traders lose all of their money within a year.
How to Choose What to Buy and When to buy
Choosing what to buy
Day traders try to make money by taking advantage of small price changes in different assets (stocks, currencies, futures, and options). Most of the time, they use a lot of capital to do this. A typical day trader looks for three things when deciding what to buy, like a stock:
Liquidity< You can easily buy and sell a security that is liquid, hopefully, for a good price. Liquidity is a plus with tight spreads, which is the difference between the bid and ask price of a stock, and low slippage, which is the difference between the expected price and the actual price of a trade.
Volatility: This is a way to measure the daily price range, which is the area in which a day trader works. More volatility means there are more ways to make or lose money.
Trading volume: This is a way to count how many times a stock is bought and sold in a certain amount of time. It is usually called “average daily trading volume.” A lot of people are interested in stock if its volume is high. When the number of shares of a stock goes up, it’s often a sign that the price will jump, either up or down.
Choosing when to buy
Once you’ve decided which stocks (or other assets) you want to trade, you’ll need to figure out where to get in. The following can help you do this:
Real-time news services: News affects the stock market, so it’s important to sign up for services that let you know when news that could affect the market breaks.
ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that show the best bid and ask prices from multiple market participants and then automatically match and execute orders. Level 2 is a paid service that gives you access to the Nasdaq order book in real-time.
Every Nasdaq-listed and OTC Bulletin Board stock has a price quote from a market maker in the Nasdaq order book. 4 Together, they can show how orders are being carried out in real-time.
Candlestick charts for the day: Candlesticks are a simple way to look at how prices move.
Define and write down the exact steps you’ll take to get into a position. For example,
“buy when the trend is up”
is not specific enough. Instead, try something more specific and testable:
“buy when the price breaks above the upper trendline of a triangle pattern, as long as the triangle was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on a two-minute chart in the first two hours of trading.”
Once you have a clear set of entry rules, look at more charts to see if your conditions happen every day. For example, you could check to see if a candlestick chart pattern means the price will move in the direction you expect. If so, you might have a way to start a strategy.
Next, you must decide how to get out of your trades.
How to Know When to Sell
There are many ways to get out of a winning position, such as using profit targets or trailing stops. Most people leave when they reach their profit goals. The goal is to make profit at a price level that has already been set. Some common ways to reach a profit goal are:
Different Trading Strategies
Scalping: One of the most common strategies is called “scalping.” It means selling almost as soon as a trade starts to make money. The price target is any number that will make you money on the trade.
Fading: When you “fade,” you sell stocks that have gone up quickly. This is based on the idea that;
- They have already been bought too much,
- Early buyers are ready to cash out, and
- Current buyers may be scared away.
Even though this strategy is risky, it can be very profitable. Here, the price goal is when buyers start to come back.
Daily Turns: This strategy is based on making money from the daily volatility of a stock. You try to buy when prices are low and sell when they are high. Here, the price target is just the next sign that the trend is about to change.
Momentum: Most of the time, this strategy involves trading on news releases or looking for strong trends with high volume. A trader may buy when there’s impressive news and ride on the trend until there’s a reverse position. A new position determines the next line of action.
Often, you will want to sell an asset when the ECN/Level 2 and volume show that fewer people are interested in the stock. The profit goal should also let you make more money when you win trades than when you lose trades. If your stop-loss is $0.05 below where you bought, your goal should be more than $0.05 above where you bought.
Before you enter a trade, you should decide exactly how you will get out of it, just like you did with your entry point. The criteria for leaving must be clear enough so that they can be tested and used again.
Three tools that day traders often use to help them find good times to buy are:
- Patterns on candlestick charts, such as engulfing candles and dojis
- Other technical analyses, such as trendlines and triangles
Photo credit: investopedia.com
Look for signs that confirm the pattern, such as:
- A spike in volume on the doji candle or the two candles that come right after it can show that traders are supporting the price at this level.
- Prior support at this price level, such as the prior low of day (LOD) or high of day (HOD). Level 2 activity, which will show all the open orders and their sizes.
- If you use these three steps to confirm, you may be able to tell if the doji is really pointing to a turn and a possible entry point.
Chart patterns also show where to get out of a trade to make a profit. For example, when a triangle breaks out to the upside, the height of the triangle at its widest point is added to the point where the triangle breaks out. This gives a price at which to take profits.
How to Keep Day Trading Losses to a Minimum with Stop-Loss Orders
It’s important to plan out how you’ll limit the risk of your trades. A stop-loss order is meant to keep a position in security from losing more than a certain amount. 5 A stop-loss can be set below a recent low for long positions and above a recent high for short positions. It can also be based on how risky the stock is.
For example, if the price of a stock moves about $0.05 per minute, you might put a stop-loss order of $0.15 away from your entry to give the price room to change before it moves in the direction you expected.
If you’re buying a breakout from a triangle pattern, you can put a stop-loss order of $0.02 below a recent swing low, or $0.02 below the pattern itself.
Now, what is your trading Plan?
You’ve decided how you’ll enter trades and where you’ll put a stop-loss order. Now you can figure out if the possible strategy fits within your limit for risk. If the strategy puts you at too much risk, you should change it to lower the risk.
If the risk level of the strategy is within your limit, testing can begin. Look through old charts by hand to find entry points that are similar to yours. Note if your stop-loss order or price target would have been hit. You should do this for at least 50 to 100 paper trades. Find out if the strategy would have made money and if the results are what you were hoping for.
If your plan works, you can move on to trading in real-time with a demo account. If you make money in a simulated environment for at least two months, you should try day trading with real money. Then if the plan isn’t working, you should try something else.
Lastly, keep in mind that sharp price changes can hurt you a lot more if you trade on margin. When you trade on margin, you borrow the money you need to invest from a brokerage firm. If your trade goes against you, you have to add money to your account at the end of the day. Stop-loss orders are very important when day trading on margin.
How to trade on a single day
Now that you know some of the ins and outs of day trading, let’s go over some of the most important things you can do as a new trader.
When you’ve mastered these techniques, found your own trading style, and decided what you want to achieve in the end, you can use a number of strategies to help you make money.
Some of these methods have already been talked about, but they are worth going over again:
- Anyone who follows the trend will buy when prices are going up and sell short when they are going down. This is done based on the idea that prices that have been steadily going up or down will keep doing so.
- Contrarian investing is based on the idea that if prices go up, they will turn around and go down. The contrarian buys when prices are going down or short sells when prices are going up in the hopes that the trend will change.
- Scalping is a way for a speculator to make money by taking advantage of small price gaps caused by the bid-ask spread. Most of the time, this technique means getting into and out of a position quickly, within minutes or even seconds.
- Traders who use this strategy will buy when good news comes out and sell short when bad news comes out. This can make the market more volatile, which can make profits or losses bigger.
What is the easiest way for a beginner to start trading?
Based on popular idea that the trend is your friend, following the trend is probably the easiest way for a new trader to start.
Contrarian investing means going against what most people do in the market. When the market is going up, you “short” a stock. When the market is going down, you “long” a stock. For a beginner, this may be a hard way to trade. Scalping and trading the news both require a clear head and the ability to make quick decisions, which can be hard for a beginner.
Which one is better for day trading: technical analysis or fundamental analysis?
For day trading, technical analysis can be a better choice. This is because it can help a trader find the short-term trading patterns and trends that are important for day trading.
Fundamental analysis is best for long-term investment because it looks at how much something is worth. Fundamental analysis can take months or even years to figure out the difference between an asset’s current price and its true value. In the short term, it’s also hard to tell how the market will react to fundamental data like news or earnings reports.
So, day traders should keep an eye on how the market reacts to this kind of fundamental data to find trading opportunities that can be taken advantage of with technical analysis.
The challenge with making money consistently in day trading
To consistently make money from day trading, you need a number of skills and traits, including knowledge, experience, discipline, mental doggedness, and trading savvy.
Beginners don’t always find it easy to do simple things like cut their losses or let their profits run. Also, it’s hard to stick to your trading plan when things go wrong, like when the market is volatile or when you lose a lot of money.
Lastly, day trading means competing with millions of market pros who have access to cutting-edge technology, a lot of experience and expertise, and very deep pockets. It’s not easy to do that when everyone is trying to take advantage of inefficiencies in markets that work well.
It’s not that easy to perfect day trading. It takes time, skill, and discipline. Many people who try it lose money, but the strategies and techniques above could help you come up with a plan that could make you money.
Day traders, both institutional and private, are an important part of the market because they keep things running smoothly and keep the markets liquid. You might be able to improve your chances of making money trading if you have enough experience, keep learning new skills, and evaluate your performance often.