Day trading is both profitable and tricky at the same time. Buying and selling currencies within the same day, often multiple times during a day can be lucrative to forex traders. However, if you don’t get it right, you run the risk of losing much. If you are new to forex trading, it is better to do some groundwork and build some strategies before you jump right into day trading.
Key Points to Remember
- Day trading is not something to be taken lightly. A lot of hard work and research needs to go in if you wish to master it
- Day trading is not a hobby – it is a job and so you should be diligent, focused, unbiased, and logical while trading
- Don’t let your emotions decide your choices. That is a sure-shot way to lose more than you would gain from day trading.
Trading in the stock market has always been a profession that is a mix of challenges and opportunities. Among the various forms, it can take, one that has been seen as particularly demanding yet evokes aspiring freshers is day trading.
If you are looking for tips and strategies for day trading, you’ve come to the right place. Read on to find some information on how to go about buying and selling without losing your capital and more. What’s more, you’ll learn few day trading strategies, how to evaluate basic charts and patterns, and, more importantly, how to earn profits and limit losses.
The Basics of Day Trading
Day trading is the process of buying and selling stocks during the course of one day. In other words, the trades are done and the positions are settled the very same day.
Day trading, being a speculative process of buying and selling, is a challenging task. You need to be exceptionally well informed about the ins and outs of the stock market which requires a lot of hard work and research. As the buys and sells are made within a matter of minutes or even seconds, day traders need to constantly update themselves and be alert to the market movements in a very short window.
The main idea is to take advantage of the fluctuations over a short-term period and convert that into a profit. So, it is a job that you need to be focused and logical, while trading, without your emotions taking over.
What do You Want to Trade in - Futures, Forex or the Stock Market?
You can day trade in the stock, forex and futures market.
- In the futures market, a contract between a buyer and a seller is made to conduct a particular trade at a pre-determined date and price. To trade in futures you require a minimum amount of $1,000 in your account.
- Forex is another popular market where you can day trade in a number of global currencies such as USD, AUD, GBP and EUR. To open an account you need a minimum amount of $50.
- Another popular market where you can day trade is the stock market. Here, you buy and sell shares of a company. Day trading stocks requires a minimum amount of $25,000 in your account.
Day Trading Strategies for Beginners
If you are looking to join the market as a day trader or looking to hone your skills as a beginning trader, arming your toolkit with the best ideas is a must to do well.
Here, we review the top 10 day trading strategies that beginners could benefit from.
1. Knowledge is key
Every job needs high levels of knowledge to succeed. It is even more relevant for a high-pressure job that requires you to interpret technical charts, follow market developments and take decisions all day long. Trading itself demands a thorough understanding of the concepts and the dependencies that affect them.
As a day trader, you are required to have a sound knowledge of market functioning, macro-level developments and the performance of companies. The busy trader is also expected to follow the day to day action on the bourses and to be on top of events and movements impacting stock prices.
Whether it is news about a company’s financial results or interest rate change or an economic forecast, being knowledgeable is essential. It helps to be an expert on the companies you are following and keeping yourself updated on all developments on their front. Keep a close watch on business news on TV, leading financial news sites, print and, of course, the grapevine.
In the process, learn continuously from your own mistakes. Sometimes, keeping journals and notes and using those as self-learning material can be a great source of first-hand knowledge.
2. Allocation of funds
Before stepping into the trading ring, you should have worked out the amount of funds you can allocate as your working capital. Day trading, unlike swing and, especially, trend trading, requires you to have cash ready to settle the day’s positions.
Also, as a beginning trader, you will have to show prudence and judgment in allocating funds for each trade. Be aware of the inherent risk in every trade and have a thumb rule of sticking to a maximum exposure of 1% to 2% per trade. Trade with the realisation that there could be a loss and be ready with a buffer to cover any eventualities.
3. Allocation of time
Day trading, as the name suggests, will demand your entire day off you. This is not a job for part-timers or those who cannot give it undivided attention. Every minute counts as a day trader is expected to be tracking the market and monitoring the movements in stock prices to pick up a preferred stock at its lowest. Then, he must keep a close watch to ensure the exit too is timed to perfection.
In a work profile where the day begins and ends on a clean slate, finding and allocating time for the job is non-negotiable. Alertness and speed are important qualities and neither is possible if a day trader is not strict and disciplined in allocating time to his trading.
Check Out: Day Trading Tips for Beginners
4. Make modest starts
There is a real risk of a beginner making wrong calls in the fast-paced and complex world of day trading. It is always wise to start modestly and work one’s way up. Having too much of an exposure initially can also carry unwanted concerns that you would not want to burden yourself with.
Start with a couple of stocks or, if comfortable, with no more than five. Also, try to keep the concurrent positions to a minimum number. It becomes easier to track their performances during the day. Where possible, go for fractional shares as this reduces the exposure and risk manifold.
5. Focus on timing
Getting the timing right is critical for any day trader as the window of trading is just that day’s session. This means that the margin of errors will also have to be kept to a minimum as, unlike, longer duration trading there is little time to recover.
Timing your entry is key and identifying the right time to enter a position is just as important as selecting the right stock. Though the forex market trades 24-hours a day, five days a week, the first couple of hours after the markets open, and the last hour before the market closes is the best window to trade. Watch out for the early morning, opening time as there is usually volatility then. Likewise, the minutes just before the closing bell too. Unlike an experienced trader, beginners will have to be more cautious during these times. It is best for a new trader to look at the low volume hours like the midway point in the day.
Another strategy is to trade during the same hours every day.
6. Decide on the best investment options
Day traders have to constantly look for bargain picks and have to continuously monitor price movements to buy low and sell high. But it is important to not pick up stocks just because they are cheap.
Low price picks can be risky too. So, resist the temptation of going in for penny stocks. These may look attractive with their sub $5 per share cost but these are rarely safe or lucrative. Liquidity can be a big concern as they do not find takers easily. Also, the possibility of penny stocks getting delisted is all too real.
7. Order strategies
During the course of the day’s trading, you are constantly placing bets on stocks you think will fetch you a profit with price movement that favours your call. With each entry and exit order, there is an element of risk that every day trader has to face. Unless there is a systemic solution to mitigating risks, a beginner has serious exposure to potential losses. One of the tools that come in handy here is a limit order.
Using a market order means the stock will be purchase at whatever is the prevalent price. However, if you were to take the limit order route, the purchase will happen only at the price you have set. For beginning traders, the limit order strategy ensures that the trading is under control and will not spring surprises.
Read Also: 10 Steps to Becoming a Day Trader
8. Be patient and realistic (Have an optimal risk to reward ratio)
The fact is trading is difficult and day trading, many times over. It is important to be realistic in your expectation of profits when you are starting off. Even experienced day traders have, roughly, a 60% success rate on their day’s trades. So, having restrained goals initially is more likely to pay off and save a beginner from the frustration of dealing with losses.
Patience is important and it is best to rein in your ambitions in the initial phase of your career. Even after getting established, focus more on the overall profits rather than the number of trades you called wrong. The secret is to make sure that the calls that are correct make more money than the losses on those that miss.
9. Persist with the plan
Day trading can look like a mechanical task where there is very little time to think through. The fast pace is certainly a reality but this can be managed well if you have a clear plan, a well thought out strategy to find a method in the madness. Rather than allow momentary decisions made emotionally, day trading is about clinically executing the plan decided upon.
10. Retain composure
Day trading can be stressful and the stress can crop up all day long as you look for the right moment a preferred stock can be picked up at its lowest. Similarly, any adverse movement in the stock is bound to get the trader in you worried enough to impact other decisions. Finally, the stress of seeing the buy off into a sell at a profit, trade after trade, day after day can take its toll.
That is why it is vital to learn how to retain your composure at all times. Have confidence in your plan and your decisions. This can come with experience but it is always important to think with your head instead of your heart when trading.
Day trading is not an easy art to master. However, if you put in time, skill, and discipline, it can be learned.
Many beginners who try day trading fails because they don’t give the tips and techniques mentioned above to create a strategy.
Most get into the market quite unprepared, expecting to make profits with a trade or two. But the market is not a magic land where you swish a wand and achieve the result you wish in day trading. Instead, it requires diligent practice and consistent performance evaluation, along with a lot of dedication to succeed in day trading.
When you put the above-mentioned tips into practice, you’ll be on your way to becoming a success at day trading.
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