Day trading is the act of buying and selling a financial instrument on the same day, sometimes multiple times throughout the day. If done correctly, profiting from minor price movements may be a lucrative game. For newbie’s or anyone who does not follow a well-thought-out plan, however, it can be a risky game.
When you’re new to day trading, there’s a lot to learn, just like when you’re new to any other career. You’ll need to pick what to trade and how much capital you’ll need, as well as purchase the right equipment and software, figure out when to trade, and, of course, manage your risk.
Day traders are active investors who profit from price swings in a specific asset using intraday strategies. Day trading, which requires a high level of self-discipline and objectivity, frequently employs technical analysis.
Here are some pointers to help you get started on your journey on the right path.
How to Choose a Day Trading Market
Profits can be made in any market. As a result, it frequently comes down to how much money you’ll need to get started. Do not attempt to master all markets at the same time. This will divert your focus, making it more difficult to earn money.
Choose one market to concentrate your research on. It’s easier to adjust to learning various marketplaces once you’ve figured out how to make money in one. So, please be patient.
You might already have a target market in mind, but here’s a quick rundown of the backdrop. It all boils down to personal preference, as well as financial constraints.
- Trading currencies such as the euro and the US dollar (EUR/USD) on the foreign exchange market takes the least amount of capital. You can get started with as little as $100, but it’s best to start with more.
- To begin trading some futures markets, you may only need $1,000. There is also a diverse selection of futures to trade. These are frequently predicated on the movements of commodities or indices such as crude oil, gold, or the S& P 500.
- Day trading equities take at least $25,000 in the capital, making it a more risky choice.
The Basics of Day Trading
Day trading is the act of buying and selling a security in a single trading day. While it can happen in any market, the most typical are the foreign exchange (forex) and stock markets.
Day traders are typically well-educated and well-funded. They profit from modest price swings in highly liquid equities or currencies by using high leverage and short-term trading tactics.
The reasons that cause short-term market volatility are well-known among day traders. A frequent method is to trade based on news. Economic statistics, business revenues, and interest rates are all influenced by market psychology and expectations. When those expectations aren’t met or exceeded, markets react with quick, large shifts, which may be quite profitable for day traders.
Day traders employ a variety of intraday methods. These are some of the strategies:
· Range trading: this approach primarily employs support and resistance levels to identify buy and sell choices.
· News-based trading: this strategy takes advantage of trading opportunities that arise as a result of increased volatility following important news events.
· High-frequency trading (HFT): these tactics take advantage of modest or short-term market inefficiencies using sophisticated algorithms.
What Is It That Makes Day Trading So Difficult?
Day trading needs a large level of knowledge and experience, and several elements might make the process difficult.
To begin, realize that you’ll be battling against professionals whose livelihoods are based on trading. These people have access to cutting-edge technology and industry connections, ensuring that they will succeed someday, even if they fail. They will make more money if you join the bandwagon.
Uncle Sam, no matter how small, will demand a piece of your profits. Keep in mind that any short-term gains—or assets held for one year or less—will be taxed at a marginal rate. A word of caution: any losses will cancel out any gains.
You may be vulnerable to emotional and psychological prejudices as an individual investor. Professional traders are usually able to eliminate them from their trading tactics, but it’s a different story when it’s your own money on the line.
Day Trading Strategies for Beginners
You can employ a variety of methods to aid you in your hunt for earnings once you’ve mastered some of these techniques, created your particular trading styles, and determined your end goals.
Here are a few popular methods to consider. Although some of them have already been mentioned, they are worth revisiting:
- Following the trend: Those that follow the trend buy when prices are increasing and sell when prices are falling. This is predicated on the assumption that prices that have been steadily rising or falling in the past would continue to do so in the future.
- Contrarian investing: This technique anticipates that the price gain will be reversed and prices will fall. With the express expectation of the trend turning, the contrarian buys in the drop and short sells in the rise.
- Scalping: This is a trading strategy in which a speculator takes advantage of minor price differences caused by the bid-ask spread. This method usually entails quickly entering and exiting a position—within minutes or even seconds.
- Trading the news: Using this strategy, investors will buy when good news is announced and short sell when bad news is announced. This can result in increased volatility, resulting in higher profits or losses.
It is difficult to perfect day trading. It necessitates patience, skill, and self-discipline. Many people who attempt it fail, but the ideas and criteria stated above can help you design a successful strategy. You can considerably improve your chances of beating the odds with enough practice and continuous performance evaluation.
What Is the Easiest Trading Strategy for a Beginner?
The assumption that “the trend is your friend” makes following the trend the most straightforward trading approach for a newbie. Going against the market herd, such as selling short when the market is rising or purchasing when the market is falling, can be tough for a novice to implement. Scalping and trading the news necessitate quick decision-making and trading, which can be tough for a novice.
Manage the Risks of Day Trading
Before you move any further, you must understand how to manage risk. Risk should be managed in two ways for day traders: trade risk and daily risk.
· Trade Risk
The amount of money you’re willing to risk on each deal is known as trade risk. Each trade should ideally risk no more than 1% of your whole money. This is done by selecting an entry point and then establishing a stop loss, which will allow you to exit the trade if it begins to go too far against you.
The size of a position you take also affects risk, so understand how to calculate the right position size for stocks, FX, and futures. Taking into account your position size, entry price, and stop-loss price, no single transaction should put you at risk of losing more than 1% of your capital.
- Daily Risk
You don’t want a single transaction to ruin your week or month, just like you don’t want a single trade to wreck your account (thus the 1% rule). As a result, establish a daily loss cap.
One option is to set it at 3% of your whole capital. If you’re just risking 1% on each trade, you’d have to lose three or more deals (without any winners) to lose 3%. That shouldn’t happen very often if you have a good strategy in place. Stop trading for the day if you’ve reached your daily limit.
Set a daily loss limit equivalent to your typical winning day once you’ve become regularly profitable. If you regularly make $500 on winning days, you can lose $500 on losing days. Stop trading if you lose more than that. The logic is that we want to keep daily losses small so that a normal winning day may easily make up for them.
When Should You Day Trade?
Whether you’re a novice or a seasoned veteran, your life depends on consistency as a day trader. Trading at the same time each day is one approach to achieve consistency.
While someday traders trade for the entire regular session (for example, the U.S. stock market is open from 9:30 a.m. to 4:00 p.m. EST), the majority simply trade for a portion of the day. Day traders frequently trade for only two to three hours every day. Here are the hours you should concentrate on:
- The first one to two hours after the open and the last hour before the close are the optimum times for day trading equities. You should practice trading between the hours of 9:30 a.m. and 11:30 a.m. EST because this is the most volatile time of the day, with the largest price swings and profit potential. The last hour of the day—3 p.m. to 4 p.m.—also sees some significant movement. Trade the early session if you merely intend to trade for an hour or two.
- If you’re looking to day trade futures, the open is a fantastic moment to do it. Trading activity in active futures occurs around the clock, therefore strong day trading chances often begin earlier than in the stock market. Between 8:30 a.m. and 11 a.m. EST, focus on trading. The official closing of futures markets vary, but the last hour of trading generally offers significant changes to profit from.
- During the week, the currency market is open 24 hours a day. The most widely traded day trading pair is the EUR/USD. Between the hours of 1 a.m. and noon EST, when the London markets are open, this currency pair sees higher trading volumes. The hours of 7 a.m. to 10 a.m. EST normally generate the most dramatic price movements because both the London and New York markets are open.
Choose a market that interests you and that you can afford to trade. Then equip yourself with the necessary hardware and software. Choose a time of day when you will trade and trade exclusively at that time.
Examine your risk by examining each trade and each day. Then, over and over again, rehearse your strategy. To trade profitably, you do not need to know everything. You must be able to implement at least one profitable plan.
Before attempting to learn other strategies, concentrate on winning with one. Use a demo account to hone your skills, but keep in mind that it’s not the same as real trading. When you transition to trading with real money, you should expect a rocky ride for several months. To calm your anxiety, concentrate on precision and execution.