The term “day trading” refers to the process of purchasing and selling the same finance instrument in the same day, or repeatedly over the course of a single day. Profiting from small price movements is a lucrative activity when played properly. But, it is risky for novices and any other person who does not follow a carefully-planned strategy.
Which is why we highly recommend that you ready our learn how to day trade article here.
Below, we’ll take an in-depth look at ten-day trading strategies for novice traders. We’ll also consider the best time to buy and sell, the basic chart and patterns, as well as how to minimize losses.
1. Knowledge is Power
In addition to being aware of the day-to-day trading process day traders should stay up-to-date with the latest market news and developments that impact the stock market. This includes information about Federal Reserve System’s interest rate plans, announcements of leading indicators as well as other business, economic and financial announcements.
So, do your homework. Make a to list the companies you’d like trade. Be informed about selected companies, their stock as well as general market. Check out the latest business news and save reliable news websites online.
2. Set Aside Funds
Consider and commit to the amount you’re willing to put at risk every trade. A majority of successful day traders take on lower than 1% or two percent of their account for each trade. If you own an $40k investment account and you’re willing to take a risk of 0.5 percent of your capital per trade, the maximum amount you can lose for each trade would be $200 (0.5 percent of $40,000).
Earmark an amount of surplus funds that you can trade and are willing to risk.
3. Set Aside Time
Day trading demands your attention and time. You’ll have to sacrifice a large portion of your time. You shouldn’t think about it if are short on time.
Day trading requires traders to monitor the markets and recognize opportunities that may be discovered at any point throughout trading times. Being alert and moving swiftly are essential.
4. Start Small
For beginners, concentrate on 1 to 2 stocks at the course of a session. The process of identifying opportunities and tracking them is much easier when you only have one or two stocks. Recently, it’s been more commonplace for traders to exchange parts of shares. You can select smaller amounts of dollars that you want to invest.
This means that , if Amazon shares have been currently trading at $3400 some brokers are permit you to buy fractional shares at an amount that could be as low as $25 or less than one percent of the value of an Amazon share.
5. Do not buy penny Stocks
There’s a good chance you’re looking for bargains and low costs, but you should stay clear of Penny stocks. These stocks are usually not liquid and the odds of winning in them are typically low.
Many stocks trading below $5 per share get removed from the major stock exchanges and can only be traded through the over-the-counter (OTC). If you are not sure of a good chance and have conducted the necessary research, stay away from these.
6. Time These Trades
The majority of orders put out by traders and investors start to be executed as soon as the markets begin to open in the morning, which can cause the volatility of prices. An experienced player might be able recognize patterns in the open market and also time-based orders to generate profit. For newbies it is best to observe the market and not make any trades for the first 15-20 minutes.
In the middle of the day, it is generally less turbulent. Then , things pick up towards the end of the hour. While the rush hour offers opportunities, it’s better for those who are new to the sport to stay clear of these the beginning.
7. Reduce Losses Through Limit Orders
Determine the type of order you’ll use to open and close trades. Are you using markets orders as well as limits orders? Market orders are placed at the most affordable price that is available at the moment without any guarantee of price. It is useful when you want to enter or exit the market and don’t have any concerns about being filled at a certain price.
Limit orders guarantee price , but not performance. 1 Limit orders allow you to trade with greater precision and confidence since you determine prices at which an order will be executed. A limit order could reduce your losses in reverses. If the market does not match the amount you’re paying for the order won’t be filled , and you’ll retain your position.
Experienced and sophisticated day traders can make recourse to option methods to protect their positions.
8. Be realistic about profit.
The strategy does not have to be successful all the time in order to earn a profit. Some successful traders profit on 50-60 percent in their trading. They make more profit on their winners than on their losing traders. Be sure that the risk of financial loss for each trade is restricted to a specified amount of your account, and the entry and exit procedures are clear.
9. Stay Cool
There are moments that the stock market can test your nerves. If you are a day trader, you have to be able to keep your greed, hopes and anxiety at bay. Your decisions should be guided by reason and not emotion.
10. Stay with the Plan
Successful traders must move quickly however they don’t need to think quickly. Why? Because they’ve created an advance trading strategy and have the discipline to adhere to it. It’s crucial to stick to the rules of your trading strategy closely and not trying to make money. Don’t let your emotions take over you and cause you to give up on your plan. Remember a rule of day traders Plan your trade and then trade the plan you have created.
What makes Day Trading Difficult?
Day trading is a great deal of practice and experience, and there are a variety of elements that can make it difficult.
Be aware that you’ll be competing with professionals who’s careers revolve around trading. They have access to the most advanced technology and contacts within the business. They’re also set to be successful at the end of the day. If you hop on this bandwagon generally will result in more profit for them.
Also, remember that Then, realize that Uncle Sam will be seeking a portion of your earnings however small. Be aware that you’ll need to pay tax on any gains in the short term –investments which you hold for a year or less your marginal tax rate. A benefit is that losses will compensate for any profits.
As a beginner day trader, you could be vulnerable to mental and emotional biases that impact your trading, for instance, if your personal capital is at stake as you lose money when you trade. Professional traders who are skilled and experienced with deep pockets are typically in a position to overcome these difficulties.
A study done by the Securities and Exchange Commission revealed that traders generally have to lose 100% of their money within the course of a calendar year.
Deciding what and when to buy
What to Buy?
Day traders attempt to earn profits by leveraging tiny price movements in specific assets (stocks currency, currencies, futures as well as options). They typically utilize massive quantities of capital in order to do that. In deciding which stock to purchase–a stock, for instance–a typical day trader is looking at three aspects:
- Liquidity. Liquidity permits you to purchase and sell it quickly and hopefully at a reasonable price. Liquidity can be a benefit with small spreads that is, the gap between the price of the bid and price prices of a security and also for those with the low slippage which is an amount that is different between predicted price of trading and the actual value.
- Volatility. It is a measurement of the daily price-range–the interval within which a trader works. Greater volatility implies greater opportunity for loss or profit.
- Trading volume. It is the amount of times stocks are bought and sold during a particular period of time. It’s often referred to in the context of the average daily volume of trading. A large volume is a sign of a great deal of attention to a stock. A rise in a stock’s volume can be an indicator of a price rise upwards or downwards.
When to Purchase
Once you’ve identified what securities (or different assets) you’d like to trade, you’ll need to determine the entry points to trade. The tools that can help you accomplish this include:
- News services that are real-time: News moves stocks therefore it’s crucial to join services that notify you when possible market-moving news breaks.
- Level 2 ECN quotes ECNs, also known as electronic communication networks are systems that use computers to provide the most competitive bid and ask prices from various market participants. They later automatically match and then execute orders. Level 2 is a subscription-based program that gives you real-time access to Nasdaq’s order book. Nasdaq orders book. Order book. Nasdaq orders book contains prices of the market maker in each Nasdaq listed and OTC Bulletin Board security. In combination, these will give you an idea of how orders are executed in real-time.
- Intraday chart of candlesticks: Candlesticks give a rough insight into price movement. More details on these charts will follow later.
Write down the precise conditions under the event you decide to enter into the position. For example, buying during an uptrends isn’t sufficiently specific. Instead, consider an alternative that’s more exact and measurable: buy when price is below the higher line of an triangular pattern in which the triangle has been preceded by an upward trend (at at least at a higher higher swing high and a higher swing low prior to the triangle being was formed) on the chart for two minutes during the early hours of trading.
After you have established a set of entry requirements look at other charts to determine whether your entry conditions are generated every day. For example, you can determine if patterns on the chart that are candlesticks indicate that price is moving in the direction you expect. If yes, then you’ve found an opportunity to start an investment strategy.
The next step is to figure out how to close your trading.
Deciding the right time to sell
There are a variety of options to exit a winning trade such as trailing stops, profit targets. Profit goals are the most popular way to exit. They are a way of taking profits at a certain price. The most common strategies for achieving profit targets include:
The Scalping strategy is among of the strategies that is most sought-after. It is a method of selling fast when a trade is profitable. The price goal is whatever number indicates that you’ll earn profit from the transaction.
Fading: Fading involves shorting after rapid moves upward. This is based on belief that (1) they’re already overpriced, (2) early buyers are willing to make profits and (3) the existing buyers might be frightened away. While risky, this approach could be very profitable. This time, the price goal is the moment when buyers start to move into the market again.
Daily Pivots This strategy entails taking advantage of a stock’s volatility throughout the day. The goal is to buy the stock at the lowest of the day and then sell at the peak that day. This time, the price target is in the event of the reversal.
Momentum: This strategy typically includes trading news release, or finding significant trending patterns that are that are backed by large volumes. A type of trader who uses momentum will purchase on news releases and then ride the trend until it shows indications of the reverse. Another kind of momentum trader will diminish the price rise. The price target is the point at which volume starts to decline.
In most instances it is recommended selling an investment once there is a decrease in interest in the stock , as shown by the ECN/Level 2 and volume. The profit goal should permit more money to be made from profitable trades than in losing trades. When your stop loss is $0.05 or less from the entry price the goal should be greater than $0.05 from the target.
Similar to the entry points, determine the exact way you intend to close your trades prior to when you begin to trade. The criteria for exit must be clear enough that it can be replicated and tested.
Day Charts and Patterns for Trading
The three most common tools that used by day traders to determine the most suitable buying points include:
- Charts of candlesticks, which include dojis that engulf candles as well as dojis
- Other analysis that is technical, like triangles and trendlines
There are a variety of candlestick patterns that day traders could look for to identify the best entry points. If properly followed the doji reversal patterns (highlighted in yellow on this chart) is among the most reliable patterns.
Also, look out for indicators that prove the pattern:
- A significant volume increase on the candle doji or the candles that follow it could indicate that traders are in support of that price point.
- Support prior to this price, such as the previous low of day (LOD) or the highest of the day (HOD)
- Level 2 activity that will display all open orders as well as the order sizes.
If you follow these three steps to confirm You can decide whether the doji is in fact indicating a turnaround and the possibility of an entry point.
Chart patterns can also be used to provide potential profit levels to exit. For example, the length of a triangle’s broadest point is then added to the point at which the triangle is breakout the triangle (for an upside breakout) and provides a figure where you can make profits.
The Best Way to Reduce Losses in Day Trading
It’s crucial to know how you’ll manage your trade risk. Stop loss orders are intended to reduce losses on an investment in a security. For long positions, a stop loss can be placed at the recent low, and for short positions that are above the recent high.It could also be calculated based on the volatility.
If, for instance, the price of a stock is fluctuating around $0.05 per minute, you can place a stop loss order $0.15 further away from the entry in order to give the price some room to fluctuate prior to it moving in the direction you expect it to move.
If you have the triangle , a stop loss order may be placed $0.02 below a swing low, if you are purchasing a breakout, as well as $0.02 beneath the triangle.
You can also create two stop-loss order:
- Make a stop-loss purchase at a level that is suitable for your risk tolerance. This will be the largest amount that you could lose.
- Create a mental stop-loss plan at the point that your entry criteria will be breached. Should the transaction take a sudden change, you’ll have to immediately close your position.
Whatever way you decide to end your trades, your requirements for exit should be clear enough to be repeatable and testable.
Set a Financial Loss Limit
It’s a good idea to establish the maximum amount of loss for each day that you are able to manage. If you get to this point end your trade and take the remainder days off. Follow through with your plan. Remember, tomorrow will be an additional (trading) time.
Test Your Strategy
You’ve decided how you will make trades and where you’ll make a stop-loss purchase. Now, you’re able to determine whether your strategy is within your risk limits. If your strategy exposes you to risk that is too high it is necessary to modify the strategy in a way to lower the risk.
If the plan is within your risk tolerance Then testing can begin. Go through charts manually to locate entries that correspond to your own. Check whether your stop-loss orders or price target was met. You can trade paper for at least 50-100 trades. Find out if the strategy would be profitable, and if the results are in line with your expectations.
If the strategy you have chosen is successful then you can trade on an account demo in real-time. If you earn gains over two months or more an environment that simulates, continue by day trading using real money. If your strategy doesn’t work begin again.
Keep in mind that If you are trading with margins, you may be more susceptible to sudden price fluctuations. The term “margin” refers to borrowing your money to invest from a brokerage firm. It is required to fund your accounts at close of the day in case your trade fails to benefit you. Thus, the use of stop-loss orders is vital when trading using margin.
Basic Day Trading Techniques
After you’ve learned a few of the details that day traders must know, we’ll go over some of the principal strategies new day traders can employ.
Once you’ve learned these strategies and have developed your unique trading style and established what your ultimate objectives are, you’ll be able to employ a variety of strategies that will assist you to achieve gains.
Although some of these methods were discussed previously but they are worthwhile to look further:
- The trend is following: Anyone who follows the trend will invest when prices rise or short sell when they fall. This is based in the belief that prices that are fluctuating or rising steadily will continue to rise or fall.
- The contrarian investment: This strategy assumes that a price increase is reversed, and they will fall. The contrarian invests in the fall, or sells short in a rising price, in the belief that trends will shift.
- “Scalping: This is a technique where an investor exploits the small price gaps that are created by the spread between bid and ask. This method typically involves the entry and exit of an investment quickly, sometimes within minutes or perhaps seconds.
- News trading: Investors using this strategy will buy when positive news is released or short-sell when there is bad news. This could lead to higher fluctuations, which could cause greater profit or loss.
Which is the best trading strategy for Beginners?
The trend is likely the best trader’s strategy for newbies that is based on the idea that trends are your partner. Contrarian investing is the act of being against the trend. You can short a stock if markets are rising, or purchase it when the market is declining. This can be a tricky trading strategy for an aspiring trader. Trading news and scaling requires a keen mind and quick decision-making which, could be a challenge for those who are just beginning.
Is Fundamental Analysis more appropriate for day trading?
The use of technical analysis is more suitable for trading during the day. It’s because it allows traders identify trending patterns and patterns of trading in the short term which are crucial to day-trading.
Fundamental analysis is more suitable for investing over the long term, since it concentrates on valuation. The gap between the actual value of an asset in relation to its true value determined by fundamental analysis can last for months, but not for years. The market reaction to fundamental information such as earnings or news reports can also be uncertain in the short-term.
However, the market’s reactions to these fundamental data must be closely monitored by day traders in search of trading opportunities that could be tapped using analysis of technical data.
What is the reason it is so difficult to make consistent income from Day Trading?
Making money consistently from day trading requires a combination of many skills and attributes–knowledge, experience, discipline, mental fortitude, and trading acumen.
It’s sometimes difficult for newbies to put into practice basic strategies , such as cutting down on losses and letting the profits flow. Furthermore, it can be difficult to keep a trading routine when faced with challenges such as market volatility , or large losses.
Then, day trading is competing with millions of market experts with access to the latest technology, an abundance of knowledge and experience, and extremely rich pockets. This isn’t an simple task when everyone is trying to take advantage of market inefficiencies.
Can a Trading Account Be held overnight?
A day trader might want to keep a position in trading for a period of time to minimize the risk of losing money on a bad trade, or to make more profits from winning trades. It is generally not an ideal option when the trader is simply trying to prevent the loss of a failed trade.
The risks associated with the holding of a day trading position overnight could include having to meet the requirements for margin as well as additional borrowing costs and the possible impact from negative events. The potential risk of taking a position for a long period of time is greater than the chance of a positive outcome.
A huge part of learning to day trade is learning how to read charts and understand technical analysis.