Trading stocks may seem like an exciting way to make money. Stocks are popular securities for day traders. It's a big, active market, with lots of choice for stocks and relatively low, if any, commissions.
The idea of making a quick profit from browsing the stock market to make money is appealing. Well, yes, it is pretty sexy. But, the sad truth is, trading stocks is challenging. Few traders make money, and a lot more lose money.
What Makes Day Trading Difficult?
Day trading stocks rarely makes anyone rich. Don't book the test drive for the Ferrari just yet.
The truth is, in day trading stocks, you are battling with your mental processes. It's not necessarily a lack of trading education that causes a high failure rate in day trading. It's the biases, impulsivity, greed, and fear that drive an inexperienced day trader's behaviour.
You may think you are a calm and rational person, but as soon as your money is at risk, your own frustration and emotional responses may surprise you
We don't want to deter you from having a go at day trading stocks, but there are rules and guidelines to follow so you don't get swallowed up by the market and lose all of your money.
This article is a guide to a safe approach to day trading stocks.
By the end of the article, you will know if day trading stocks is for you, and, if it is, you'll have a straightforward process to follow.
How Can You Day Trade Stocks for a Living?
Succeeding as a Day Trader depends upon many factors
There are thousands of stocks available to trade. Here are suggestions to help you figure out the best stocks to trade and structure your day trading efforts.
- Trade the same stocks
- Look for stocks with good volume
- Find stocks with volatility
- Is the stock in the news?
- Only trade stocks with money you can afford to lose
- Start small
- Don't give up your day job
- Be realistic about profits
- Assess potential losses for stock trades
- Trade at the same time each day
- Day trading patterns and charts When to sell your stock
Trade the Same Stocks
Familiarity breeds consistency in day trading. Watching how stocks move in the market helps you to understand what triggers the price movement.
Notice how economic news affects a stock. Is it range-bound, bouncing from the same low and high consistently? After a while, you'll know the best prices for the stock to enter and exit a trade.
Avoid penny stocks. Buying stock for a small price might seem appealing, but penny stocks rarely give a good return unless you know what you are doing.
Look for Stocks with Good Volume
Stocks are liquid, which makes them popular with day traders. Good liquidity is a crucial factor in choosing a stock to trade. If there is insufficient liquidity, look for another stock.
You can run a stock screener to find a handful of stocks with good volume and volatility and then stick with those for the week.
Find Stocks with Volatility
Volatility means constant price movement, which allows you to trade the price fluctuations many times over. Look for stocks with reasonable volatility. Too much, and you risk your trade being stopped out with sudden whipsawing of prices.
Is the Stock in the news?
If the company is in the media, it will attract interest from investors. If it is negative news, the price may fall as investors sell, and positive news may increase the stock price.
Media coverage adds to the volatility. Make a habit of checking the news for the stocks you are following. It will give you an edge in your day trading. Check out business news and reliable financial websites.
Only Trade Stocks with Money you can Afford to Lose
Never risk the money you need for rent or bills. You will likely lose it. Set aside a fixed amount each day or week to use for trading and stick with this amount. Don't be tempted to add to it if you start racking up losses.
Assuming you have $1000 or less to day trade stocks, you must start small. You will make mistakes and, at first, you will lose money. Trading with small amounts prevents you from becoming emotionally distraught when you have a loss.
We suggest a small risk of, say, 1% of your capital. The rewards may seem small, but it also means the losses are small too. In time, if you have some success, the small gains will compound and build your capital.
Don't Give up your Paid Job
If you have a flurry of success, it's far too easy to think you've cracked the day trading code. You imagine you're a natural at this stocks malarky, the one in a million who picks good stocks from the start. Er, no, let this notion go.
Sometimes, you get lucky. But if you seriously intend to make a living from day trading stocks, you have a long way to go yet. Rein in your enthusiasm and settle for building your account slowly. Once you have built up a years income to replace the day job, only then would it be rational to think about maybe going part-time.
Set Realistic Expectations for $1000 Account Growth
With starting capital of $1000 or less, your gains, if any, will be small.
Try not to look at the monetary gain. Instead, consider the percentage gain. If you grow your account by, say, 1% a day, it doesn't take long for the compounding effect to kick in. We're not saying that 1% gain per day is possible, but this suggestion gives you a more realistic approach to making profits.
Assess Potential Losses for Stock Trades
You must set your position sizes to suit your capital. Before taking a trade, calculate the lot size, so it's proportionate to your capital. By taking lot sizes too large, you are putting your account at risk. With a $1000 account, a risk of 1% of your capital base has little effect if the trade doesn't work out.
At the same time, decide how much you are comfortable losing throughout a trading session. On a $1000 account, you might choose to walk away after, say, three consecutive losses. Or you may set a monetary figure, for instance, say, $50, which represents 5% of your account.
These choices are yours, but you'll save yourself some headaches if you have a clear plan for losses.
Risk to Reward Ratio (RTR)
Many day traders have a poor risk to reward ratio (RTR).
Let's say you have a 1 to 1 RTR. What this means is for every $1 you win, you risk losing $1. That seems fair, yes? OK. How about if you have a 50% winning rate? You're only ever going to be at breakeven, at best.
Now, look at a scenario with the same 50% win rate but with a 3 to 1 RTR. For every $3 you win, you risk $1. Boom! With the same win rate, you just established a strategy for getting ahead. You could even drop the win rate below 50% and still be in profit.
Therefore, to increase your chance of success, pick the best trades and have a high RTR
Trade at The Same Time Each Day
Having a routine for day trading stocks will help with trading consistency. Decide how long you will spend looking for stocks to trade and commit to your trading hours. After that time, walk away.
This approach helps develop mental discipline and avoids the risk of impulsive trading.
The UK stock market opens at 08:00 am and closes at 4:30 pm (EST time 9:30 am to 4:30 pm) In the United States the most popular stock market is NYSE and NASDAQ.
There is more liquidity when the stock market opens and for maybe half an hour before the market closes. Liquidity tends to drop in the middle of the day.
Day Trading Charts and Patterns
By watching the chart for the stocks you plan to trade, you become familiar with the price patterns. Over time, you will notice historical patterns emerging, which gives you an edge in the market.
When to Sell your Stock
Trades will not always go your way. It may look like the newly purchased stock is going nicely into profit. You walk away to make a cup of tea and get a handful of biscuits, and then you return to find your trade now in deficit. Eh, what?
Know when to close a position. It can be challenging for novice traders to understand when to let go, but you must learn and quickly if you want to be consistently profitable.
Managing your risk avoids small losses galumphing into significant dents on your capital. Train yourself to close positions if the trade is going against you. It isn't necessary to wait for the price to hit your stop loss.
Popular Day Trading Strategies
Once you have decided which securities to trade, you need to determine a trading strategy or two. Never attempt to day trade stocks without some form of a strategy. Would you drive your car blindfolded? No, of course, you wouldn't. The stock market will eat you up if you jump in without any idea of what you are doing.
Spend some time learning about strategies and practising how to implement them.
How you execute a strategy is a personal choice. Some traders look for quick, short-term gains. Others, like swing traders, want to hold on for a more significant profit before they exit the trade.
Some traders may hold a stock overnight. But there's always the risk of unexpected news creating a price change, which isn't much use if the trader is in bed asleep.
Before entering a trade, watch the stock's flow of orders lining up to buy or sell the stock. You'll need a broker that allows you to view order flow. You may wish to see the stock fill to a support or resistance area when other traders will begin buying and selling, thus creating a little momentum.
Range Trading (Swing Trading)
Look for a stock that is ranging between a high and a low price. The idea is to buy when the price nears the low and sell when it nears the high.
This high-speed strategy aims to capitalise on short-term changes in market sentiment, exploiting the difference (spread) between the bid and ask price. If a bidder price dropped suddenly, a day trader might buy and then quickly try to resell at the stock's ask price, or higher if possible. You gain from the small spread.
It's a challenging strategy requiring your wits about you, so you know when to enter and exit the market. We don't recommend Spread trading for beginners to day trading stocks.
Fading is when a trader short sells a stock that has risen quickly in price when buying interest is waning. The trader may then close the short position when the stock falls or when buying interest resumes.
Momentum or Trend Following
Here, a trader attempts to ride the wave of price movement with a stock that is on the move, be that up or down. Sometimes, these waves occur following an economic news announcement. Traders buy a rising stock or fade a falling stock in anticipation that momentum will continue.
What if You're Not Ready to Day Trade Stocks?
No problem, you can paper trade until you feel ready to start day trading stocks for real.
You can use a stock market simulator to practice taking stock trades. Paper trading gives you the chance to see how the market works and get used to working with a few chosen stocks. You get a feel for how your broker's trading platform works, and you'll be able to test out how profitable your efforts are.
Most day traders say that trading with a simulator is not the same as trading stocks live. When you know you're money is at risk, it changes the dynamics. But, as a beginner, it's good to make your mistakes when nothing is at risk. When you eventually go live, there is a bit of a learning curve, mostly with your own emotions once you have a few losses.
It takes time to learn how to day trade stocks.
You will make a lot of mistakes and, at times, think you will never be successful as a day trader buying and selling stocks. If it were easy, everyone would be doing it, so hang in there.
Commit to the long game and don't rely on day trading as a way to create income. For a long time, if ever, it won't. Think of the early months, and years, as an apprenticeship.
Commit to Your Trading Education
Nothing you learn about day trading stocks will ever go to waste. You will know what to do and what not to do, and both will shape you as a day trader.
Here are a few tips for learning:
- Buy a training course on day trading stocks – do your research before you buy, and don't spend crazy amounts of money on a course. There are plenty of low-cost or FREE training courses available online
- Read books on day trading stocks - You'll find many, many books available on this subject. Choose books that are readable and not full of gobbledegook and jargon and written by a successful trader, not a wannabe
- Watch videos on day trading stocks – see how other traders respond to the stock market, check out their strategies and mental approach to the markets
- Watch the market every day – you learn more from watching stock movement than you'll learn from anything else. Once you have selected a handful of stocks to work with, commit to studying their patterns and movement.
This one practice alone will significantly add to your knowledge.
Recap for Day Trading Stock with a $1000 (or less)
- Day trading isn't easy. Think of day trading as a job rather than a hobby or a fun game
- Have a trading plan – set yourself up with strategies and a plan for entry and exit points for the stock
- The more you learn and practice, the more chance of success
- Choose a small handful of stocks and become familiar with them
- Keep up to date with financial news – subscribe to real-time financial news channels
- Commit to a trading education – buy books and courses and watch videos on day trading
- Have a high Risk to Reward Ratio (RTR)
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Day trading stocks may not be suitable for all investors as it does involve risk and the possibility of a loss of capital.
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