Day trading refers to market positions which are held only for a short time. Typically, the trader opens and closes a position the same day. But positions can be held for a period of time as well. The position can be either long (buying outright) or short (“borrowing” shares, then offering to sell at a certain price).
A day trader or intraday trader is looking to take advantage of volatility during the day trading. It’s also looking to reduce “overnight risk” caused by events such as bad earnings after close.
Day trading is considered by some to be one of the most challenging styles of trading. That’s why it’s important to jumpstart your journey with proven day trading strategies. Success in day trading requires constant technical precision, emotional restraint, and mental focus.
These are not easy traits to initially exhibit, much less master. Consequently, newer traders can feel discouraged with their ability to perform. They may also fail to do the crucial things necessary to succeed in this field. The key components and day trading strategies for achieving ongoing success are thinking differently, planning, and continued education.
Basically, day trading can be a lucrative game if played correctly. But it can be a dangerous game for beginners or who don’t adhere to a well-thought out method. In this article, we will focus on strategies and tips on how to best day trade.
10 Day Trading Strategies for Beginners
Look for scenarios where supply and demand are drastically imbalanced, and use these as your entry points.
The financial markets are like anything else in life. If supply is near exhaustion and there are still willing buyers, price is about to go higher. If there is excess supply and no willing buyers, price will go down. Thus, you have to identify these turning points on a price chart. With that, you can do the same by studying historical examples.
Beginners should always set day trading price targets before jumping in.
If you’re buying a long position, decide in advance how much profit is acceptable. Same as a stop-loss level if the trade turns against you. Then, stick by your decisions.
This limits your potential loss and keeps you from being overly greedy if price spikes to a weak level. Except for a strong market, it’s acceptable to set a new profit goal and stop-loss level once you reach your initial target.
Insist on a risk-reward ratio of at least 3:1 when setting your day trading targets.
One of the most important lessons in stock trading for beginners is to understand a proper risk-reward ratio. This allows you to lose small and win big. Also, it allows you to come out ahead even if you have losses on many of your trades. In fact, once you gain some experience, risk-reward ratios of as high as 5:1 or even higher may be attainable.
Day trading requires patience, so be a patient trader.
Absurd though it may seem, successful day traders often don’t trade every day. They may be in the market, at their computer, but if they don’t see any opportunities that meet their criteria they will not execute a trade that day.
That’s a lot better than going against your own best judgment out of an impatient desire to “just do something.”
Day trading also requires discipline, especially for beginners.
Beginners need to set a trading plan and stick to it. They should execute live stock trades in the market under the guidance of a senior instructor until right decisions become second nature. If you’re trading on your own, impulsive behavior can be your worst enemy. Greed can keep you in a position for too long and fear can cause you to bail out too soon. Don’t expect to get rich on a single trade.
Don’t be afraid to push the “order” button and execute your trades.
Novice day traders often face “paralysis by analysis” because they get wrapped up in watching the candles. Also, it’s because the Level 2 columns on their screen and can’t act quickly when opportunity presents itself.
If you’re disciplined and work your plan, actually placing the order should be automatic. If you’re wrong, your stops will get you out without major damage.
Only day trade with money you can afford to lose.
Successful traders have a “little bucket” of risk capital and a “big bucket” of money they’re saving for retirement or another long-term goal. Big bucket money tends to be invested more conservatively and in longer-duration positions. It’s not absolutely illicit to use this money occasionally for a day trade. But the odds should be very high in your favor.
Never risk too much capital on one trade.
Set a percentage of your total day trading budget. That might be anywhere from 2 percent to 10 percent, depending on how much money you have. Plus, don’t allow the size of your position to exceed it. Otherwise, you may miss out on an even better opportunity in the market.
Don’t limit day trading to stocks.
Forex, futures and options are three asset classes that display volatility and liquidity just like stocks. That’s what makes all of them ideal for day trading. Often one of them will also present appealing opportunities on a day when the stock market is going nowhere.
Don’t second-guess yourself, but learn from experience.
Every day trader has losses. Therefore, don’t kick yourself when the occasional trade doesn’t go your way especially if you’re a beginner. However, confirm that you followed your established day trading rules and didn’t get in or out at the wrong time.
10 Basic Day Trading Tips
Knowledge is power
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks. That includes the Fed’s plans for interest rates, the economic outlook, etc.
Do your homework. Make a wish list of stocks you’d like to trade and keep yourself informed about the selected companies and general markets. Scan business newspapers and visit reliable financial websites.
Set an amount aside
Assess how much capital you’re willing to risk on each trade. Most successful day traders risk less than 1–2 percent of their account per trade.
If you have a $40,000 trading account and are willing to risk 0.5 percent of your capital on each trade, your maximum loss per trade is $200 (0.005 x $40,000). Set aside a surplus amount of funds that you can trade with and are prepared to lose.
Set aside time
Day trading requires your time – most of your day, in fact. Don’t consider it if you have limited hours to spare. It requires a trader to track the markets and spot opportunities, which can arise any time during trading hours. Moving fast is a key.
As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier.
Avoid penny stocks
Of course, you’re looking for deals and low prices, but stay away from penny stocks. These stocks are illiquid, and chances of hitting a jackpot are often bleak.
Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning. A seasoned player may be able to recognize patterns and pick appropriately to make profits.
But as a newbie, it’s better to just read the market without making any moves for the first 15-20 minutes. The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
Cut losses with limit orders
Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it’s executed at the best price available at the time. Thus, there is no “price guarantee.”
A limit order, meanwhile, does guarantee the price, but not the execution. Limit orders help you trade with more precision, wherein you set your price for buying as well as selling. It’s not unrealistic but executable.
Be realistic about profits
A strategy doesn’t need to win all the time to be profitable. Many traders only win 50-60 percent of their trades. Basically, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account. Make sure as well that entry and exit methods are clearly defined and written down.
There are times when the stock markets test your nerves. As a day trader, you need to learn to keep greed, hope and fear at bay. Decisions should run through logic and not emotion.
Stick to the plan
Successful traders have to move fast, but they don’t have to think fast. Why? That’s because they’ve developed a trading strategy in advance, along with the discipline to stick to that strategy.
It’s important to follow your formula closely rather than try to chase profits. There’s a mantra among day traders: “Plan your trades, and then trade your plan.”
Day trading is indeed difficult to master, requiring time, skill and discipline. Many of those who try it fail. However, the strategies and tips described above can help you create a profitable technique. Also, with enough practice and consistent performance evaluation can you greatly improve your chances of beating the odds.
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