In day trading, a financial instrument is bought and sold several times in a single day. If played correctly, taking advantage of little fluctuations in price might result in substantial gains. However, it might be risky for beginners and anyone who doesn’t stick to a well-planned strategy.
Day trading generates a huge volume of trades; not all brokers can handle it. While others are tailor-made for day traders. If you’re interested in day trading, you should look at our recommended brokers.
Professional or advanced versions of the platforms offered by the online brokers on our shortlist, Interactive Brokers and Webull, allow users to enter and alter complex orders in rapid succession and access real-time streaming quotes.
This article will examine ten different day trading methods suitable for beginners. Then, we’ll talk about knowing when to buy and sell, recognizing simple patterns, and cutting our losses short.
- Knowledge Is Power
Day traders need to know how the day trading process works, but they also need to know what’s happening in the stock market and how that news will effect the stocks they trade. Economic, business, and financial news might include the Federal Reserve System’s interest rate plans, leading indicator announcements, and other developments.
Get your work done. Create a list of the stocks you would like to buy and trade. Study the markets and the stocks of the companies you’ve chosen. Read the newspaper’s business section and save the websites of reputable news organizations you find there.
2. Set Aside Funds
Figure out how much you can afford to lose on each trade, and stick to that amount. Some of the most profitable day traders in the world risk less than 2% of their portfolio on each trade. You can lose no more than $200 on each given trade if you have a $40,000 trading account and are ready to risk 0.5% of your capital on each trade.
Set aside an amount of money you are willing to lose in order to trade with.
3. Set Aside Time
Your time and focus are needed for day trading. Most of your day will have to be sacrificed. If you’re short on time, don’t even think about it.
If you want to make money day trading, you need to be ready to react quickly to market changes and capitalize on opportunities as they emerge at any moment during trading hours. The key is for you to keep your eyes open and react swiftly.
4. Start Small
If you’re just starting out, it’s best to stick to trading just one or two stocks at a time. With fewer stocks to keep tabs on, it’s easier to spot trends and uncover profitable openings. Trading in fractional shares has been increasingly widespread in recent years. Investing sums of any size can be specified in this manner.
This implies that many brokers will allow you to buy a fractional share of Amazon for as little as $25, or less than 1% of a complete Amazon share if the amount is trading at $3,400.
5. Never Invest in Penny Stocks!
You probably want to save money, but penny stocks are not the way to go. These stocks are typically not very liquid, and your prospects of striking it rich by investing in them are low.
Stocks that are trading for less than $5 per share often get delisted from major exchanges and can then only be traded OTC (OTC). Stay away from these until you’ve done your homework and can see a clear opportunity.
6. Time Those Trades
As soon as the markets open for business, many orders made by investors and traders begin to execute, which can cause sudden swings in price. In the opening, a skilled player may be able to spot patterns and time orders to maximize their profits. A better strategy for beginners could be to watch the market for the first fifteen to twenty minutes without making any moves while they get a feel for it.
There tends to be less chaos towards the middle of the day. The pace picks back up as the clock ticks down to the final chime. Even though the busiest times of the day can present excellent chances, beginners are advised to avoid them at first.
7. Cut Losses With Limit Orders
Set your orders for entering and leaving trades. Do you plan on placing limit orders or market orders? With no assurance of a specific price, a market order will be filled at the current best available price. It’s helpful when you don’t care about being filled at a given price but still need to enter or exit the market.
A limit order ensures a specific price but not necessarily a specific execution time.
Due to the fact that you get to choose the price at which your order is executed, limit orders can help you trade with greater precision and assurance. Loss losses can be minimized by using a limit order. Your order won’t be executed and your position will be preserved if the market doesn’t meet your price.
Day traders with more knowledge and expertise may also use options methods to protect their investments.
8. Be Realistic About Profits
Profitability can be achieved with a strategy even if it sometimes fails. It’s possible that even the most successful traders only win half or more of their trades. But they win more than they lose by betting on the winners. Make sure your entry and exit strategies are well-defined and that the amount of money at stake in each trade does not exceed a predetermined percentage of your account.
9. Stay Cool
The stock market can be nerve-wracking at times. One of the keys to success as a day trader is learning to control emotions like greed, hope, and fear. Logic, not emotion, should drive decision-making.
10. Stick to the Plan
The best traders are quick on their feet but don’t need to be quick on their minds. Why? For the simple reason that they have a well-thought-out strategy for trading and the self-control to implement it. Instead of trying to chase profits, it’s better to stick tightly to your recipe. Don’t give in to the strategy of letting your feelings dictate your actions. Day traders have a mantra: “prepare your trade and trade your plan.”
What are the Challenges of Day Trading?
Day trading is complex and difficult due to many elements that require experience and training to overcome.
Know first that you are competing against people whose entire lives revolve on trading. These professionals easily access cutting-edge resources and influential contacts in their field. So, everything is in place to ensure their ultimate success. Joining the herd frequently results in increased profits for the business.
The next thing to remember is that the government will demand a piece of your profits, no matter how meager they may be. Gains from investments held for less than a year are considered short-term and will be taxed at your marginal rate. Your gains will be cancelled out by your losses, which is a positive.
In addition, when your personal money is at stake and you’re losing money on a trade, as a novice day trader you may be vulnerable to emotional and psychological biases that affect your trading. Most of the time, these obstacles can be overcome by experienced, skilled, professional traders with sufficient financial resources.
Deciding What and When to Buy
What to Buy
The goal of day traders is to profit from small, rapid price changes in various assets (stocks, currencies, futures, and options). To accomplish this, they frequently use significant amounts of leveraged capital. The typical day trader considers three factors when determining which security (stock, for example) to purchase:
Liquidity. The ability to buy and sell an asset quickly and, ideally, at a price depends on how liquid it is. Low slippage, or the difference between the expected price of a trade and the actual price, and tight spreads, or the difference between the bid and ask price of a stock, are both benefits of liquidity.
Volatility. This is the range within which a day trader can make a price. Greater loss or profit is possible with higher volatility.
In terms of trading activity, volume is high. It measures the volume of trading activity in a stock over a specified time frame. The term “daily volume” refers to the total amount of money exchanged in a single trading day. There is a lot of excitement about a stock if its volume is high. In many cases, a spike in trading volume precedes a significant change in the stock price.
When to Buy
Finding entry opportunities for trades is the next step after deciding which stocks (or other assets) to trade. Some useful resources for accomplishing this are:
Subscribing to real-time news services: Since breaking news can have a significant impact on the stock market, staying abreast of such stocks is crucial.
Level 2 quotes (also known as ECN quotes) are provided by electronic communication networks (ECNs), which are computerized systems that show the best available bid and ask quotes from numerous market participants and then automatically match and execute orders. Access to the Nasdaq order book in real-time is available through Level 2, a service that requires a membership. There are price quotes for every Nasdaq-listed and OTC Bulletin Board security in the Nasdaq order book provided by market makers.Taken as a whole, they can help you picture how orders play out in the here and now.
Using intraday candlestick charts, one can get a more unfiltered look at the price. About them, more in a bit.
Define and document the exact steps you’ll take to enter a position. Such a generalization as “buy when the uptrend is up” is obviously inadequate. Instead, focus on something more concrete and measurable, such as buying when the price breaks above the upper trendline of a triangle pattern on the two-minute chart during the first two hours of trading. This triangle pattern should have been preceded by an uptrend (at least one higher swing high and higher swing low before it formed).
Once you’ve settled on a set of entry criteria, you should check more charts to determine if the conditions you’ve established hold true on a daily basis. To test if a candlestick chart pattern portends price moves in the direction you expect, try analyzing historical data. If that’s the case, you may have found a way in to your strategy.
The next step is to settle on a strategy for getting out of your trades.
Deciding When to Sell
Both trailing stops and profit goals are viable options for getting out of a profitable trade. Typically, people leave a business when they reach their profit goals. These terms all have to do with cashing in for a profit at a certain price. A few examples of profit goal techniques are:
|Scalping||One of the most common tactics is scalping. Selling is required practically immediately after a trade turns a profit. The price target is the level at which you may expect to profit from the trade.|
|Fading||Shorting stocks following sharp increases in value is known as fading. Based on the suppositions that (1) they have been overbought, (2) early buyers are prepared to take profits, and (3) current buyers would be scared off, this is being done. Although dangerous, this strategy has the potential to be very profitable. The price target in this case is when buyers resume making purchases.|
|Daily Pivots||Profiting on a stock’s daily volatility is the goal of this strategy. You try to buy at the day’s low and sell at the day’s high. In this case, the price target is merely the subsequent reversal indication.|
|Momentum||This strategy typically entails detecting significant trending moves that are supported by high volume or trading on news releases. When there are news releases, one kind of momentum trader will buy and ride the trend until it starts to show signs of reversal. A different kind will reduce the price increase. When volume starts to decline in this case, that is the price target.|
When there is less interest in a stock, as shown by the ECN/Level 2 and volume, you should frequently sell the asset. The profit target should also allow for more money to be made on winning trades than to be lost on failing trades. Your target should be further away if your stop-loss is $0.05 from your entry price.
Define precisely how you will exit your trades before you enter them, just like you did with your entry point. The exit criteria must be precise enough to allow for testing and repetition.
Charts & Patterns for Day Trading
Day traders frequently utilize the following three resources to assist them to identify ideal purchasing opportunities:
1.Patterns on a candlestick chart, such as engulfing candles and dojis
2.more technical evaluation, such as triangles and trendlines
A day trader can search for many candlestick configurations to identify entry points. One of the most consistent patterns is the Doji reversal pattern, which is seen in the chart below.
Additionally, search for indications of the pattern:
If there is an increase in volume on the doji candle or the candles that follow it, this may be a sign that traders are backing the price at this level.
Level 2 activity, which will display all open orders and order sizes, provided previous support at this price level, such as the previous low of day (LOD) or high of day (HOD).
You may assess whether the doji is actually indicating a turnaround and a suitable entry point by using these three confirmation methods.
A profit target for exits is also provided by chart patterns. To determine the price at which to take profits, for an upside breakout, the height of a triangle at its broadest point is added to the breakout point of the triangle.
How to Limit Losses When Day Trading
It’s crucial to specify in detail how you’ll reduce your trade risk. To prevent losses on a position in a securities, use a stop-loss order.
A stop-loss can be set for long trades below the most recent low and for short positions above the most recent high. Volatility may also serve as a foundation.
To give the price some room to vary before moving in the direction you anticipate, you may place a stop-loss order $0.15 away from your entry, for instance, if a stock price is fluctuating roughly $0.05 per minute.
If buying a breakout from a triangle pattern, a stop-loss order might be set up $0.02 below a recent swing low or $0.02 below the pattern itself.
Two further stop-loss orders could be set:
At a price that fits your risk tolerance, place a real stop-loss order. In essence, this level would be equivalent to the most money you might lose losing.
At the point where your entry requirements would be broken, place a mental stop-loss order. You will quickly exit your position if the trade takes an unforeseen turn.
The exit criterion must be precise enough to be tested and repeated, regardless of how you choose to exit out your trades.
Set a Financial Loss Limit
Setting a daily loss cap that you can live with is a good idea. When you hit this point, exit your trade and take the remainder of the day off. Maintain your plan. After all, there is still another trading day tomorrow.
Test Your Strategy
You’ve specified where you’ll put a stop-loss order and how you initiate trades. You can now determine if the possible strategy falls within your risk tolerance. You must change your strategy in some way to lower the risk if it exposes you to an excessive amount of risk.
Testing starts if the strategy is within your risk tolerance. Search through past charts manually for entry points that correspond to yours. Note whether your price target or stop-loss order would have been hit. This manner, paper trade for at least 50 to 100 trades. Check to see if the outcomes meet your expectations and if the strategy would have been successful.
If your strategy is effective, move on to real-time trading with a demo account. Proceed with day trading with real capital if you make profits in a simulated setting over the course of two months or more. Restart if the strategy is unsuccessful.
Finally, keep in mind that you may be much more susceptible to sudden price changes if you trade on margin. Trading on margin is borrowing money from a brokerage company for your investments. If your trade goes against you, you will need to add money to your account at the end of the day. Therefore, while day trading on margin, employing stop-loss orders is essential.
Simple Day Trading techniques
Let’s go over some of the essential techniques that novice day traders can employ now that you are familiar with some of the ins and outs of day trading.
You can employ a number of strategies to aid you in your pursuit of profits once you have mastered these techniques, created your own unique trading styles, and identified your ultimate objectives.
Although some of these techniques were already stated, they are still worth mentioning:
Trend-following: Those who follow the market’s trend will typically buy when prices are rising and sell short when they are falling. This is done under the premise that prices that have been steadily rising or falling will keep doing so.
A rise in prices will eventually reverse and fall, according to the contrarian investment strategy. The contrarian expects the trend to change and buys during a rise or short sells during an upturn.
Scalping is a trading strategy in which a speculator takes advantage of minute price discrepancies caused by the bid-ask spread. This method typically entails fast entering and leaving a position—in a matter of minutes or even seconds.
Trading the news: Investors that employ this strategy will buy when positive news is released or short sell when negative news is released. This can increase volatility, which might increase profits or losses.
Which Trading strategy Is Simplest for a Novice?
Based on the idea that the trend is your friend, following the trend is perhaps the simplest trading strategy for a newbie. Contrarian investing is the practice of market against the crowd. If the market is rising, you short a stock; if it is falling, you buy a stock. For a newbie, this trading strategy could be challenging. Scalping and news trading demand mental alertness and quick decision-making, which, once more, may be challenging for a novice.
Which Trading Strategy Is Easiest for a Beginner?
Most day traders will ultimately lose money, at least based on the facts.
However, your odds of success can increase as you gain experience. Beginning traders should trade accounts with “paper money,” or fake trades before they invest their own capital in order to learn the ropes, test out strategies, and employ the tips above.
Which is better for day trading: technical analysis or fundamental analysis?
For day trading, technical analysis may be more suitable. This is due to the fact that it might assist a trader in recognizing the short-term trading trends and patterns that are crucial for day trading.
Due to its emphasis on valuation, fundamental analysis is more appropriate for long-term investing. An asset’s intrinsic worth, as established by fundamental analysis, may differ from its market price for months or even years. The short-term market response to fundamental data like news or earnings releases is also very unexpected.
Nevertheless, day traders should keep an eye on how the market reacts to such basic data to look for trading chances that may be taken advantage of using technical analysis.
Why Is It Hard to Profit Regularly From Day Trading?
Knowledge, experience, discipline, mental toughness, and trading acumen are just a few of the numerous abilities and qualities needed to succeed at day trading.
Beginners sometimes find it challenging to put fundamental strategies like reducing losses or letting profits run. Additionally, it can be challenging to maintain one’s trading discipline when faced with obstacles like market instability or big losses.
Finally, day trading requires competing against millions of market experts who have access to state-of-the-art technology, a plethora of knowledge and experience, and very deep money. When everyone is attempting to take advantage of inefficiencies in effective markets, it is not a simple undertaking.
Is it advisable to hold a day trading position overnight?
To cut losses on a losing trade or to boost profits on a winning trade, a day trader could want to hold a trading position overnight. If a trader is just trying to avoid taking a loss on a bad trade, then generally speaking, this is not a good strategy.
The possibility of negative news having an impact as well as the need to meet margin requirements and additional borrowing charges are possible risks associated with keeping a day trading position overnight. The risk of keeping a position open overnight can outweigh the likelihood of a successful outcome.
Understanding day trading is challenging. Time, talent, and discipline are all necessary. Many people who attempt it lose money, however the techniques and strategies mentioned above may help you develop a strategy that could be profitable.
Individual and institutional day traders both contribute significantly to the market by maintaining its efficiency and liquidity. You might be able to increase your odds of trading profitably with enough experience, skill development, and regular performance evaluation.