Day traders enter and exit their positions during the trading day. Beginners need time to gain knowledge of the numerous trading techniques and strategies, such as price analysis and charting tools, that can be implemented to execute a successful day trading.
What is day trading?
Day trading is a trading technique, that aggressive traders use multiple times during the day to make profits from price fluctuations. The objective of day trading is to profit from the near-term price movements in stocks, currencies, futures, etc. Since they don’t hold the positions overnight, it is less stressful to worry about how the market opens the next day.
Day traders employ numerous analysis techniques such as price analysis, technical analysis, and momentum trading. Charting techniques signal the trader about the overbought conditions of a stock thereby recommending exit. Other indicators such as moving averages, Relative Strength Index-RSI, etc. help a trader to reframe the strategy in the positions taken.
How to start day trading?
Day trading is very common in forex markets and stock markets. It is the most trustworthy technique to make several quick profits in a day. One should have a sufficient level of capital and a high level of risk tolerance to go for day trading.
Read more: Complete Day Trading Guide
Before tending to day trade, one should keep the below points in mind.
Brokerage
Brokers offer commission-free online trading accounts for day traders, which is very cost-effective and easy to execute trades. Trading platforms such as TradeStation is an example and one of the most preferred online brokerage platforms, that are user-friendly and quick to perform trades.
Choose an asset
The more volatile your asset is, the more gains you get in a day trading. Analysis of past price movements helps a trader to verify if a stock can make big spikes.
Generally, stocks that move sideways in a narrow price range are not good picks for intra-day trading. Another important thing a trader should consider is the liquidity of a stock. Since the positions are going to be large for day trading, high liquidity stocks should be preferred for quick entry and exits.
Develop a strategy
It is necessary to formulate a suitable strategy before entering a day trade. Framing a strategy includes the determination of capital and your trading goals. Based on the market conditions, the trader should decide how much percent of the capital can be put at risk.
One can do a decent day trading using $100, however, the capital investment determination depends on the strategy the trader planned to use and the broker commission.
Be informed
Financial markets are data-driven and hence one should keep a watch on any news and information, that can change the market sentiment unpredictably. Asset prices react to major events like the central bank’s interest rate announcement and company earning report etc.
Experienced day traders look for price spikes in response to news releases and tend to enter into a position in the volatility.
Fix trading goals
It is essential to have an exit plan, assuming whichever direction the market moves. Capital investment and the size of positions have to be determined according to one’s trading goals.
Make quick decisions
Since day traders attempt to generate quick profits, they need to exit the positions before the market closes. Hence, one should be capable of making decisions as quickly as possible in adverse situations. Tight stop losses and limit orders help avoid losing money in intra-day trading.
Maintain discipline
Since the holding time of the positions is only a few hours, a trader should rule out emotions such as fear and overconfidence, and think logically to make or change any decisions.
Day traders should not panic about any news that may change the direction of the market. Instead, should wait for the technical indicators if they signal exit the position.
Tips for day trading
While long and short-term investors focus more on fundamental analysis of the stocks they prefer, day traders focus on technical analysis and intra-day price chart indicators to fix the right entry and exit points. Day traders look for high volatility in the market because large price fluctuations give immense opportunities for executing the trades successfully.
Assets that move sideways never give attractive trading opportunities as the price fluctuations will be in the narrow range. There is so many trading software available to provide real-time data, advanced charting indicators, and other tools for risk management.
Day trading is not for everyone. Pattern day traders enter into trades multiple times with the aim of utilizing the opportunities markets provide during a week. The beginners need to understand the risks involved in day trading before intending to get it to succeed.
- One should be mentally prepared for huge losses, which is very common in day trading.
- Leverage trading may magnify the losses, leading to winding up in heavy debt.
- It is highly stressful to handle day trading, while huge investment is at risk.
- Day trading never gives consistent success. Making profits one day and losses the other day, makes it confusing to determine the overall profits.
- One needs adequate knowledge of technical analysis and chart reading techniques to execute intra-day trades. Without that, there is a very low chance of success.
- High volume trades usually involve certain types of costs and taxes.
- One should keep a watch on any local news or global events that may easily reverse the underlying trend of the asset.
- Choosing the appropriate asset is very important with high volatility and liquidity. Wrong selection may cause significant losses.
Though we cannot rule out the risks involved, day trading is a wonderful technique that aggressive traders prefer for short-term profits. Below are a few advantages of day trading.
- Rather than short and long-term trading techniques, day trading has more potential, which leads to huge earnings and quick profits.
- Day trading is the most thrilling and lucrative method that even doubles your money in a single day.
- Adverse global market breaking news may affect the stock price during the night and lead to large price movements in either direction when the market opens the following day. But day traders can avoid such overnight stress as they close positions within the day.
- By understanding the dynamics of the market and day trading practices, one can even keep day trading as a primary profession.
- Trading on the go makes day trading convenient and offers independence to work.
Read more: Most Successful Day Trading Tips
How to get into day trading with little money?
The determination of capital investment for day trading usually depends upon the strategy you plan to use. Since many brokers offer 10 times the capital as exposure for your day trade, one can start day trading with as little money as possible that your broker allows. If you are a beginner, starting with small helps to minimize the risk and gradually you can increase capital.
As long as you have funds in your account, the broker allows you to utilize the exposure permitted to cover your trades. The Financial Industry Regulatory Authority – FIRA regulates and sets rules for day trading. When your capital principal is up to $25k, you need to follow the day trading rules to avoid regulatory issues.
One can even start investing with $100 if your broker requires only this $100 as your minimum investment. But the exposure you get from this capital may not give you much gains in intra-day price ticks. Since the commission-based brokerage models
How to make day trading successful?
Though day trading is a very exciting technique, one should indeed have a high level of risk tolerance and regular practice to get it right. Below are a few tips for day traders to become successful.
- Learn the basics of stock trading and the factors influencing short-term price movements.
- Imply both fundamental & technical analysis.
- Trade on news and important events when the markets are more volatile.
- Frame day trading strategies and use risk management tools before initiating positions.
- Practice with demo accounts to get hands-on experience. Making quick decisions in a real-time trade is not easy without prior experience.
- Keep tracking the trade till you exit the position.
- Go with the primary trend as trading in pullbacks may not be always successful.
- Prices move significantly on news. But it is very important to verify if the news is already priced in the stock. Since the market has already responded to the event, one cannot expect a breakout.
Speculators and knowledgeable traders implement enormous technical strategies to succeed in their trades in day trading. The most frequently used trading techniques they follow are:
- Scalping – Buying and selling stocks multiple times in a day for little profit.
- Swing trading – Trading with pre-determined support and resistance levels.
- Arbitrage – Buying in one market and selling in another to take advantage of the price differences.
- Momentum trading – Buying stocks when they break out the trading range and trends up.
- News trading – Trading on market sentiment by betting on upcoming events.
- Range trading – Trading between the short-term price range.
- Breakout trading – Trading in the breakout of the stock prices from support or resistance.
- Pattern trading – Trading more than 4 trades in a week with up to 6% profits. They will have the benefit of more leverage than others.
- Gap trading – Trading in the big jump of the stock prices.
- Spread trading – Buying and selling related stocks simultaneously to take advantage of the price movement in the opposite direction.
- Fading – Involves going short in an uptrend to profit from a pullback.
There are technical indicators that signal buy or sell during the day. Candlestick charts provide the best technical analysis tools. Other indicators are,
- Exponential moving averages
- Relative Strength Index – RSI
- Moving Average Convergence Divergence – MACD
- Volatility
- Volume
- Oscillators
Conclusion
Despite the risks involved in day trading, a skilled and disciplined trader, who understands the financial markets and technical analysis, cannot rule out the potential benefits that can be derived from day trading. When you completely analyze the market and the past price movements of the assets, there is always a chance of winning the trade for beginners.
Pro Tip
Understand the basics of day trading and the risks involved in it. Explore the advantages of day trading and experience with www.tradingcritiques.com. Find the best brokers who offer advantageous options.
