Day trading is the act of buying and selling financial instruments within the same day or even several times over the course of the day. Even though it doesn’t seem like it at first, small price movements over the course of the day can turn out to be very lucrative – provided that you know what you are doing.
This particular strategy is not for everyone, as it requires a certain level of skill. That skill is being able to develop a strategy thoroughly and to follow it day after day.
On top of that, not every broker is going to be suited for the high volume of trades that are made from day traders, so it’s really something you have to develop for yourself mostly. But before you think you should give up on it, there are still some brokers out there who have designed strategies specifically for day traders in mind.
Some of these traders you can find on Fidelity and Interactive Brokers, and take advantage of that platforms to the fullest. This is thanks to the professional and advanced versions of the platforms that they have access to.
But on top of some of those luxuries, they have strategies based on the data they get from those features. From those we’ve grabbed some of the most basic strategies that they employ.
Knowledge Is Everything
On top of knowing the ins and outs of trading procedures, day traders also must keep up on the latest stock market news and events that impact stocks. Going into more detail they need to know information like the economic outlook, the Fed’s interest rate plans, and many other things.
Overall, you’ll have plenty of homework to do and it all starts with knowing what stocks you’d be interested in trading. From there it’s a matter of staying informed about those companies as well as the general markets. You’ll also want to be scanning business news and reliable financial websites.
Have Funds Available
It’s obvious you’ll need money for this but the big question is how much money should you set aside? To answer that, determine how much you’re willing to risk on every trade. Successful day traders risk under 1 to 2% of their account per trade. Putting this into practice, lets say you’ve got $40,000 in your trading account and you’ll want to risk 0.5% of your capital per trade. This means that your maximum loss per trade will be $200.
With that in mind, you’ll want to set aside a surplus amount of extra funds that you can trade with and you’re prepared to lose. Even though loss isn’t always guaranteed, doesn’t mean it’ll never happen.
Have Time Available Too
On top of money you’ll also want to have time. Day trading demands that you keep your eyes constantly on trading. In fact, day trading often requires your entire day focused on it. So before you get too far into it, if you don’t think you can set aside time like that, don’t consider this.
The reason you need to do this is because day trading requires you to track the markets and spot opportunities over the course of the day. Since these occur within windows during certain hours, you’ll need to move quickly or lose out on it. So it’s really not something that you can check in the morning and then check an hour before the market closes.
As someone starting out, you don’t want to be spreading yourself out during a session.
At most, focus on a maximum of one or two stocks. Tracking and finding opportunities is something that takes a lot of time than you might think and juggling two or one is simpler to do.
Beyond that, it’s now possible to purchase fractional shares, that is a fraction of a full share. These make smaller growths of course but demand a much smaller investment, allowing you to practice without suffering too hefty of a loss.
But Avoid Penny Stocks
If you’re thinking of starting off small you might be thinking of investing in penny stocks. After all these are low prices and offer great deals right? Not exactly. While penny stocks are certainly cheap, these are things day traders avoid for good reason.
For one, many of these stocks are illiquid – meaning it’s very hard to convert these stocks back into cash. You’ve also got very low chances of making any profit from them.
Furthermore, many stocks that are trading below $5 per share often are removed from the list from major stock exchanges. Unless you see a real opportunity from these stocks, don’t touch them at all.
Timing Is Everything
As we’ve mentioned above, timing is a key part to day trading. But going into more detail about why that comes down to how the stock market works. Orders by investors are placed immediately as soon as markets are opened in the morning. This results in prices changing rapidly within the first few minutes of the day.
A seasoned player will be able to recognize these patterns and be able to pick appropriately to make a profit. That said, newcomers will lack that level of skill and it’ll take them 15 to 20 minutes to finally see what’s happening.
Right after that you’ve got the middle hours where there is less volatility and movement begins picking up once more leading up the closing bell. Though the rush hours offer opportunities, it’s wise for beginners to avoid these. Also note that even during the middle hours, stocks do change in price still as people are buying and selling.
Cut Losses With Limit Orders
The other thing to look into is the types of orders you’ll be using to both enter and exit trades. Are you going to make use of market orders or limit orders? When placing a market order, it’s executed at the best price available at that time – thus no price guarantee.
You can also consider limit orders which guarantees the price of a stock but not the execution of it. In short, limit orders will help you trade with more precision wherein you’ll be setting a price for buying and selling too. Experienced day traders might employ the use of option strategies in order to hedge positions too.
Be Realistic About The Profits You’ll Make
A strategy you develop doesn’t need to win every single time in order to turn a profit.
The reality is that many day traders will win about 50to 60% of their trades every day.
While they do incur losses, their strategy ensures that when they win they’re enough to cover their losses and then some.
How this can work for you is to make sure the risk on each trade is limited to a specific percentage of the account. On top of that, you’ll want your entry and exit methods to be defined and written down.
Keep A Level Head
Regardless of how you’re trading, the stock market for many is a roller coaster of emotions. In day trading, you’ll experience these in higher intensities. As such, you’ll want to be keeping a level head. Recognize that you’ll need to keep greed, hope, and fear at bay while trading. In the end, decisions have to be made swiftly and have to be grounded in logic. That’s hard to do if you’re getting emotional.
Stick To Your Plan
Regardless of the circumstances, successful traders will have a strategy in place. This allows them to move fast, though not necessarily think fast. This is because of that strategy they created. It’s not made on the spot but rather the day before or even weeks in advance. On top of that, they build up the discipline to stick to that specific strategy no matter what.
It’ll be vital for you to stick to that formula closely rather than chasing whatever profits you can find. That’s simply greed at work and we’ve just mentioned how you don’t want your emotions to take advantage of you.