The idea of turning a quick profit on the money markets is enchanting, but day trading is no Get-Rich-Quick scheme. It is riskier than other “buy and hold” trading practices. If you are keen on trying out day trading, first you must understand what it is. Day trading for beginners can be hard sometimes, but don’t worry!
In this article, we will be demystifying day trading. You will learn the definition of day trading and how to find success in the money markets. Without further ado, let us get into it.
Hey! Before reading about day trading we recommend you read this article about how to start trading.
Definition of Terms
To help you understand day trading, let me familiarize you with some terms:
- Trend: The directional movement of a security.
- Support: A line that connects three or more data points. Usually, support lines indicate that a downtrend is imminent.
- Resistance: A line that connects three or more data points. Usually, resistance lines are signals for upcoming uptrends.
- Spread: It is the difference between “bid” and “ask” prices.
- Volatility: It is a state of extreme up and down movements.
- Volume: In the stock market, volume is the number of shares traded over a specific period.
What is Day Trading?
Day trading is the practice of buying and selling financial assets within the same day. Day traders take advantage of small price moves to earn a profit. If played correctly, day trading can be lucrative. Without the right strategy, day trading can be a dangerous game.
Not all brokers are equipped to handle the high volumes that are associated with day traders. Some brokers design their services around the needs of day traders. Choosing the right broker is key to your success as a day trader.
Which Markets Offer Day Traders the Greatest Potential for Profit?
All markets offer sufficient profit potential. It all comes down to how much money you are willing to invest in the money markets. I would advise against trying all markets at the same time. This strategy will divide your attention and ultimately overwhelm you.
Pick a single market where you can focus your learning. Once you master trading on one market, adapting to other markets becomes easier. Patience is key.
Below are some common money markets and what they require from day traders:
- The Forex Market: In this market, you are trading currency pairs such as the EUR/USD, GBP/JPY, and more. The forex market requires the least amount of capital. Depending on your broker, you can trade with as little as $10. However, I recommend starting with at least $100.
- The Futures Market: Requires $1,000 to get started. In this market, a wide assortment of futures is available to you. Futures are often based on indexes or commodities like gold, crude oil, or S&P 500.
- The Stock Market: It is capital intensive. Investing in this market requires at least $25,000.
Which Securities Are Appropriate For Day Trading Beginners?
After choosing your preferred market, you will have to select the appropriate securities for day trading. Below are some of the characteristics that you should be looking for in a security:
- Good Volume: Day traders are attracted to stocks because they are liquid. This feature allows traders to buy and sell securities in high volumes. Forex markets are also highly liquid.
- Some Volatility (Not Too Much): Volatility means that the prices of an asset fluctuate frequently. Volatility is the feature that makes day trading a lucrative undertaking.
- Familiarity: You want to understand how a security trades and what factors trigger their moves. How will an earnings report affect the price of a company’s stocks?
- Newsworthiness: News stories can get people interested in buying and selling securities. Such an event can help create volatility and liquidity. Many day traders follow news stories to learn how they can trade certain securities.
Now you know what day trading is, you have selected your preferred market, and you understand how to identify tradable securities. What else do you need to know before you start day trading?
Before You Start Day Trading
There is an endless list of tips and tricks that can help you maximize your profits, but here are a few ground rules to keep in mind:
- Always Trade with Money You Can Afford to Lose: I recommend setting aside a certain amount for your day trading. Only trade with disposable income. Do not trade with your rent or mortgage. Trading is a high-risk activity.
- Always Start Small: As a beginner, the start of your journey will involve losing money and making mistakes. Keep a tight rein on your losses as you gain experience.
- Do Not Quit Your Day Job: In a sustainable market, you may run into a winning streak and entertain the thought of quitting your day job. You need to test your day trading strategy on a rough market and see whether it is sustainable or not. Does the strategy deliver on a recession? Once your profits are consistent, you can assess whether you want to trade full time. Before then, keep your day job.
Day Trading Rules
First thing you need to know is that this only applies to traders using margin (leverage) accounts and trading on the US Markets. We’ve written a whole article all about the Pattern Day Trader (PDT) Rule, and it’s a must before you start day trading!
Tools for Day Trading
Below are the few basic tools that you will need to day trade:
A Laptop or Computer: You need a computer that has a fast processor and sufficient memory to support your trading program. You do not need a flagship model computer, at the same time, you also do not want to cheap out. Software and computers change constantly. Check with your broker and upgrade to a computer that can run their trading platforms without crushing. Have two computer monitors is recommended but not required.
Reliable Internet Connection: A mid-range internet package should be sufficient to facilitate your day-trading.
A Broker: The broker facilitates your trades. In exchange for the broker’s services, they charge you a commission or fee on your trades or transactions. High broker fees can hurt your bottom line. As a day trader, you want a low-fee broker. However, the lowest fee broker isn’t always the best. You want sufficient customer support and reliance. Check our 500.TRADE Review!
A Trading Platform: Once you select your broker, download and try out the different types of trading platforms that they offer. Try to find a platform that supports your trading style or strategy.
The Best Times of the Day to Trade
As a day trader, you are looking for volatility and volume. Out of all the markets appropriate for day trading, the stock market offers these features with the most frequency. You can enjoy volatility and volume in the stock market as soon as it opens at about 9.30 a.m. to around noon ET (Eastern Time). The stock market also shows similar characteristics in the last hour before closing at 4 p.m. ET.
What is the best time for profitability? A 2018 analysis by the Jefferies Group revealed that 25% of the average daily trading volume (ADV) was executed within the last half-hour of regular trading hours. About 5.5% of the trades took place in the first half-hour.
Day trading is about opening many positions in a day. You may have to make a hundred or a few hundred trades before the closing bell.
>>>> Learn more: What Is The Best Time to Trade
Risk Management in Day Trading
In day trading, risk management is essential. Risk management involves limiting your potential downside. When considering risk, think of the following aspects of trading:
- Position Sizing: How much money are you willing to lose when a trade does not go your way?
- Portfolio Percentage: What portion of your entire portfolio will suffer should your position go bad?
- Losses: How much loss are you willing to endure before you close a position?
- Selling: As the trade goes your way, how much profit is enough before you sell?
Even with the perfect strategy, not all trades will go your way. You must plan for when to close a particular position. You can implement a mechanical strategy where you sell once the position accumulates a profit of a certain percentage or it could be manual where you base your trading on how the market performs on a specific day.
Proper risk management practices minimize loss and preserve your capital for future trades. Many traders find it hard to accept a loss yet it is a normal part of the game. As you gain experience, you must learn how to realize losses and how to deal with them.
Popular Day Trading Strategies
To maximize your chances of trading, you will need a proper strategy. Below are some common day trading strategies:
- Range or Swing Trading: In this strategy, you look out for securities that tend to bounce between high and low prices. We call such securities Range-Bound securities. The strategy is to buy when the prices approach the low and sell when the prices approach a high.
- Spread Trading: This strategy aims to profit from temporary changes in sentiment. It exploits the differences in “bid” and “ask” (spread) prices of a security. For example, whenever the bid price drops, the day trader buys to resell the asset at the “ask” price or higher.
- Fading: Involves short-selling stocks or currencies that rise too quickly. The trader then loses the positions when the prices fall.
- Momentum or Trend Following: This strategy involves riding waves and trends. Due to earning reports or other news events, stock prices may rise or fall. Day traders will buy a rising stock and short or fade a falling stock.
Check out this article for more trading strategies.
How to execute these strategies depends almost entirely on you, the trader. Some traders are content with making a penny a share while others prefer larger profits. Before trading with real money, I recommend practicing with virtual funds on a demo account. Try different strategies. Find a strategy that works for you. Keep on practicing on your demo account until you can yield profitable trades consistently. It is at this point that you can graduate to a live account.
Is Day Trading Right For You?
Day trading is one way to approach money markets. At MyTrade, we are passionate about trader education. Below are some articles that will help you on your journey as a new trader: