The appeal of earning money on the stock market has caused a lot of new investors to give day trading a try. As long as you do it correctly, day trading can be a worthwhile career. But for beginners, it’s quite challenging, particularly for those who don’t have the right strategies. In fact, even a seasoned day trader can experience losses and rough patches.
But what is day trading, and how do you get started? Here’s a complete guide to day trading that a complete beginner can take advantage of.
What Is Day Trading and How Does It Work?
Day trading refers to a trading style involving opening and, at the same time closing, positions on the same day, which can also be referred to as buying and selling stocks. For instance, if you open a position at 9 in the morning and close it by 3 PM on the same day, you’ve finished a day trade. But if you close the position the following day, then that is not considered a day trade.
An active trader or a day trader usually uses a trading strategy and technical analysis to make a considerable profit in a short span of time. Often, the trader is using margin to boost buying power.
Day trading works by capitalizing on a short-term cost movement in stocks through active purchasing and selling of shares. A day trader seeks volatility or short-term cost movement in the market. And without volatility, there will be no opportunity.
Basically, the more a stock moves, the higher profit a day trade can lose or earn in one trade. With that in mind, it’s crucial that a day trader should exercise risk management skills to keep a loser while allowing a winner to run.
You can imagine a day trader as a manager of risks. Traders take a risk in putting capital in order to earn more money, but if you don’t manage the risks correctly, you will struggle to make money consistently.
Often, a successful trader has a prearranged entry and exit point before starting a day trading.
7 Day Trading Tips That Every Beginner Needs to Know
Now that you have an idea about what day trading is and how it works, here are some tips to help you get started and become successful in this venture:
- Understand The Stock Market
The stock market is one of the most complex systems today. While investing is a simple process, especially if you’re doing it in the long run, day trading is a completely different thing that needs a more comprehensive understanding of the market along with its movements.
A day trade uses a complete technical investigation in a determination to use the previous performance of financial assets as a means to identify in which the asset’s value is headed in the short term. Thus, if you want to become a successful day trader, it’s crucial that you spend time researching as well as practicing charting.
Aside from charting, the majority of successful traders have a thorough understanding of the market psychology is important as well. After all, they are not bothered about the company’s intrinsic value because they don’t have plans to hold it for a long time for its price to reach its basic value. Rather, a day trader cares about the news and how participants are more likely to reach such news. The capability to predict the market reaction will take years of experience in the stock market to accomplish.
- Begin Small
As a novice, you might want to focus on one or two stocks first. Actually, with just a few stocks, tracking and looking for opportunities is a lot easier. Lately, it becomes increasingly common to trade a fractional share so that you can determine certain and smaller amounts you want to invest.
- Don’t Go for Penny Stocks
When looking for low prices and deals, it’s important that you avoid penny stock. Often, this stock is illiquid, which means that it can’t be sold and exchanged for cash with ease without substantial losses in value.
Some stocks trading below five dollars a share are typically delisted from the major stock exchanges. What’s more, you can only trade them over-the-counter. Unless you perceive genuine opportunities and have done thorough research, stay away from these stocks.
- Be Realistic in Terms of Profits
As a trader, keep in mind that strategies don’t have to win at all times to become lucrative. Actually, some trades win 50-60 percent of their trades. But they earn more on their front-runners compared to what they lose on their failures. So, you need to ensure that the risk on every trade is restricted to a certain percentage of your account, and your entry and exit techniques are defined clearly.
- Save Funds
On every trade you’re trying to make, be sure to carefully weigh how much capital you are willing to lose or risk. Believe it or not, a lot of successful day traders only risk 1-2% of their accounts for every trade. So, for instance, if you have a USD$20,000 trading account and you’re willing to risk 0.5% of your capital on every trade, then your max loss for each trade is USD$100.
- Remain Calm
There are times that the stock market will test your patience. If you want to become a successful day trader, you have to learn to keep fear, greed and hope at bay. Your decisions should be ruled by logic instead of your emotions.
- Stick To Your Plan
Successful day traders need to move fast, but they do not need to think quickly. It is because they have come up with trading strategies in advance together with the chastisement to stick to those strategies. It’s crucial that you follow the formula instead of chasing profits. Don’t let your emotions cloud your mind and leave your strategies behind. Actually, there is a common mantra among day traders, ‘Plan the trade and trade the plan.’
On the other hand, if you want to obtain ideas on how seasoned traders plan their strategy, you can take advantage of the different copy trading platforms.
What Are the Needed Tools to Be a Successful Day Trader?
In order for you to trade effectively, day trading needs you to have a set of tools as well as services such as the following:
- Laptop or Computer
You need to have a computer or laptop with a fast processor and enough memory. The majority of charting and trading software needs advanced processors and memory. There is a tendency that you may be jumping between broker websites and companies, as well as you charting software screens as you assess the trade. Though it’s not a necessity, having two monitors is preferred.
- Day Trading Charting Software
The majority of brokers offer several software options that day traders can utilize to trade and monitor the price chart of a certain financial asset. When choosing a trading software, opt for one that will allow you to pull up the price chart easily with an option to see a tick and time chart.
Various software is made for different kinds of day traders. Traders need software that lets them trade quickly. The tool you use should allow both charting and trading.
- Internet Access
Aside from having an advanced laptop or computer, you will also need a fast Internet connection. If it can’t load pages promptly, you may have a hard time day trading. When day trading, thousands of data points are simultaneously streaming to your laptop every second as the asset price moves. If you experience data backlogs, you won’t be able to see current prices.
Having backup Internet access is also crucial, and the most convenient way to do it is through smartphones.
If you want to become a day trader, you need a company that can help you with your trade or a broker. However, this will greatly depend on the preferences of the trader. Some major banks give brokerage services, but the commissions are usually high, and they don’t give a customized solution to a day trader. Thus, smaller yet controlled brokers are advisable for day traders.
In case you are planning to use certain trading software, make sure to look for a broker that allows day traders to utilize that software. This helps you narrow down your options allowing you to choose the right one easily. Remember, it’s important for beginner traders to have a mentor so that someone will guide them through the process.
Day trading comes with more risks compared to long-term investments. But with risks come great potential rewards. If you want to earn a high income in a short period, day trading can be one of the best solutions. Remember, a knowledgeable and educated day trader is an unstoppable lucrative force. So, make sure to research more about this venture to guarantee success.
Robert Shaun is a copy trading expert. He has been in the industry for over a decade. He always shares his insights and projections through online guest posting. Robert is happily married with three children. He loves watching movies and playing tennis during his free time.