In addition to knowledge of day trading procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This can include the Federal Reserve System's interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you'd like to trade. Keep yourself informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
Assess and commit to the amount of capital you're willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000).
Earmark a surplus amount of funds you can trade with and are prepared to lose.
Day trading requires your time and attention. In fact, you'll need to give up most of your day. Don’t consider it if you have limited time to spare.
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon shares are trading at $3,400, many brokers will now let you purchase a fractional share for an amount that can be as low as $25, or less than 1% of a full Amazon share.
You're probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these.
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, though, it may be better to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile. Then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
Decide what type of orders you'll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available at the time, with no price guarantee. It's useful when you just want in or out of the market and don't care about getting filled at a specific price.
A limit order guarantees price but not the execution.
Limit orders can help you trade with more precision and confidence because you set the price at which your order should be executed. A limit order can cut your loss on reversals. However, if the market doesn't reach your price, your order won't be filled and you'll maintain your position.
More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.
A strategy doesn't need to succeed all the time to be profitable. Many successful traders may only make profits on 50% to 60% of their trades. However, they make more on their winners than they lose on their losers. Make sure the financial risk on each trade is limited to a specific percentage of your account and that entry and exit methods are clearly defined.
There are times when the stock market tests your nerves. As a day trader, you need to learn to keep greed, hope, and fear at bay. Decisions should be governed by logic and not emotion.
10. Stick to the Plan
Fundamental Analysis Training in HyderabadSuccessful traders have to move fast, but they don't have to think fast. Why? Because they've developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula closely rather than try to chase profits. Don't let your emotions get the best of you and make you abandon your strategy. Bear in mind a mantra of day traders: plan your trade and trade your plan.
Day trading takes a lot of practice and know-how and there are several factors that can make it challenging.
First, know that you're going up against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry. That means they're set up to succeed in the end. If you jump on the bandwagon, it usually means more profits for them.
Next, understand that Uncle Sam will want a cut of your profits, no matter how slim. Remember that you'll have to pay taxes on any short-term gains—investments that you hold for one year or less—at the marginal rate. An upside is that your losses will offset any gains.
Also, as a beginning day trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your own capital is involved and you're losing money on a trade. Experienced, skilled professional traders with deep pockets are usually able to surmount these challenges.
A study by the Securities and Exchange Commission revealed that traders usually lose 100% of their funds within a year.
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:
Liquidity. A security that's liquid allows you to buy and sell it easily, and, hopefully, at a good price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
Volatility. This is a measure of the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.
Trading volume. This is a measure of the number of times a stock is bought and sold in a given time period. It's commonly known as the average daily trading volume. A high degree of volume indicates a lot of interest in a stock. An increase in a stock's volume is often a harbinger of a price jump, either up or down.
Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:
Real-time news services: News moves stocks, so it's important to subscribe to services that alert you when potentially market-moving news breaks.
ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book. The Nasdaq order book has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.
Intraday candlestick charts: Candlesticks provide a raw analysis of price action. More on these later.
Define and write down the specific conditions in which you'll enter a position. For instance, buy during uptrend isn't specific enough. Instead, try something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.
Once you have a specific set of entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.