Last Updated on April 1, 2023
Day trading is the act of buying and selling a financial instrument during the same day or multiple times during the day. Using small numbers of movements can be a very lucrative game — if played in the right way. But it can be a dangerous game for newcomers and anyone who does not adhere to a well-thought-out strategy.
However, not all traders are eligible for the high number of trades offered by day traders. But some traders are designed with the seller of the day in mind. You can check out our list of the best daily trading buyers to see which traders are most receptive to those who would like to trade daily.
The online retailers on our list, Fidelity and Interactive Brokers, have professional or advanced versions of their forums that include real-time live streaming quotes, advanced charting tools, and the ability to place and edit complex orders in quick succession.
Below, we will look at the general principles of day trading and move on to determine when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.
Knowledge is power
In addition to knowledge of basic trading processes, day traders need to keep up with the latest stock market news and stock events — Fed interest rate plans, economic outlook, etc.
So do your homework. Make a list of stock wishes you would like to trade and keep yourself informed about selected companies and general markets. Scan business news and visit trusted financial websites.
Set Money aside
Examine the amount of money you plan to invest in each trade. Most successful day traders have less than 1% to 2% of their accounts per trade. If you have a $ 40,000 trading account and are willing to risk 0.5% of your maximum income per trade, your maximum loss per trade is $ 200 (0.5% x $ 40,000).
Set aside the remaining amount of money you can trade and you are ready to lose. Remember, it may or may not happen.
Set Aside Time, Again
Day trading requires your time. That is why it is called day trading. You will need to give up most of your day, actually. Don’t think about it if you have a limited amount of time to spend.
The process requires the trader to track the markets and identify opportunities, which may arise at any time during trading hours. Going fast is the key.
As a beginner, focus on one to two stocks during the session. Tracking and finding opportunities is easy with a few stocks. Recently, it has become commonplace to be able to trade in fractional shares, so you can specify certain amounts, the minimum dollars you wish to invest.
That means that if Amazon shares are trading at $3,400, most retailers will now allow you to buy a partial share for as little as $25, or less than 1% of the full Amazon share.
Avoid Penny Shares
You probably want deals and low prices but avoid penny stocks. These stocks are usually illiquid, and the chances of hitting the jackpot are usually slim.
Most stocks trading below $ 5 per share are listed on the major trading platforms and are only traded over-the-counter (OTC). Unless you see a real opportunity and do your own research, avoid this.
The Time of Those Trades
Most orders placed by investors and traders come into effect as soon as the markets open in the morning, which contributes to price fluctuations. An experienced player can see patterns and choose accordingly to make a profit. But for newborns, it may be best to study the market without making a move in the first 15 to 20 minutes.
The intermediate hours do not usually change slightly, and then the movement begins to rise and to the closing bell. While rushing hours offer opportunities, it is safer for beginners to avoid them at first.
Cut Loss with Limit Orders
Decide what kind of orders you will use to get in and out of the business. Will you use orders in the market or limit orders? When you place a market order, it is used for the best price available at the moment — therefore, there is no price guarantee.
A limited order, on the other hand, guarantees value but not execution. Limited orders help you trade more accurately, where you place your (not unrealistic but usable) price to buy and sell. Sophisticated and experienced day traders may use alternatives to enclose their positions.
See the Truth about Profit
The strategy does not always have to win to make a profit. Most traders win only 50% to 60% of their trade. However, they did more than win the losers than lose the losers. Make sure the risk in each trade is limited to a certain percentage of the account and that the entry and exit routes are clearly defined and documented.
There are times when stock markets test your senses. As a day trader, you need to learn to keep greed, hope, and fear at bay. Decisions should be based on reason and not emotion.
Stick to the Program
Successful traders are quick to jump on the bandwagon, but they do not have to think fast. Why? Because they have developed a trading strategy ahead of time, as well as an instruction to adhere to that strategy.
It is important to follow your formula closely rather than trying to chase profits. Do not let your emotions get the better of you and cause you to abandon your strategy. There is a mantra among the traders of the day: “Plan your trade and trade with your plan.”
Basic Day Trading Strategies
Once you are familiar with some of these strategies, improve your trading styles, and decide what your ultimate goals are, you can use a series of strategies to help you in your quest for profit.
Here are some popular methods you can use. Although some of them are mentioned above, it is worth repeating:
- Tracking trend: Anyone following the trend will buy when prices go up or sell less when they go down. This is done assuming that prices that have been rising or falling gradually will continue to do so.
- The opposite investment: This strategy assumes that inflation will slow down and decline. The contrarian buys in the fall or the short sells in the upswing, with a clear expectation that the trend will change.
- Scalping: This is a style in which the speculator uses a small price gap created by the spread of the bid. This process usually involves getting in and out of the area quickly — within minutes or seconds.
- News Trading: Investors who use this strategy will buy when good news is announced or when there is bad news. This can lead to big changes, which can lead to higher profits or losses.
Day trading is hard to master. It requires time, skill, and discipline. Many attempts fail, but the strategies and guidelines outlined above can help you to create a profitable strategy. With enough practice and consistent performance testing, you can greatly improve your chances of overcoming obstacles.
Although daytime trading has become somewhat controversial, it can be an effective way to make a profit. Day traders, both institutions and individuals, play an important role in the market by keeping markets running smoothly and efficiently. Although day trading is still popular among inexperienced traders, it should be left especially to those who have the skills and resources needed to succeed.