The act of buying and selling a financial instrument on the same day, or perhaps several times throughout the day, is known as day trading. If done properly, taking advantage of slight price changes can be a profitable game. However, it can be risky for novices and anyone else who doesn't follow a well-thought-out plan.
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10 day trading methods for novices are discussed below. Then, we'll talk about fundamental charts and patterns, when to buy and sell, and how to cut losses.
1. The power of knowledge
Day traders need to be up to date on the most recent stock market news and events that have an impact on stocks in addition to being familiar with day trading methods. This can include announcements about leading indicators, interest rate plans from the Federal Reserve System, and other economic, commercial, and financial news.
Do your homework, then. Create a list of the stocks you want to trade. Maintain knowledge of the chosen businesses, their stocks, and general markets. Examine business news, and bookmark reputable websites for news.
2. Put Money Aside
Determine the capital you're willing to risk on each deal and make a commitment to it. Many prosperous day traders place trades with a risk of 1% to 2% or less of their account balance. Your maximum loss per trade will be $200 (0.5% x $40,000) if you have a trading account worth $40,000 and are ready to risk 0.5% of your capital on each transaction.
Set aside an excess of money that you can trade with and are willing to lose.
3. Dedicate Time
Your time and attention are needed for day trading. Actually, you'll have to sacrifice the majority of your day. If you only have a short amount of time, don't think about it.
A trader who engages in day trading must monitor the markets and look for chances that might present themselves at any time throughout trading hours. The goal is to move fast and with awareness.
4. Begin Small
As a newbie, limit your attention to no more than one or two stocks at a time. With fewer stocks, it is simpler to track and identify opportunities. Trading fractional shares has becoming increasingly popular recently. This gives you the option to invest smaller sums of money.
As a result, several brokers now allow you to buy a fractional share for as little as $25, or less than 1% of a whole Amazon share, if Amazon shares are currently trading at $3,400.
5. Avoid Penny Stocks
You're undoubtedly searching for bargains and inexpensive costs, but avoid penny stocks. These equities are frequently illiquid, and your prospects of striking it rich with them are frequently slim.
Many equities that trade for less than $5 per share are taken off the main stock exchanges' lists and can only be traded over-the-counter (OTC). Avoid these unless there is a genuine chance and you have done your homework.
6. Time Those Trades
Price volatility is a result of the large number of orders made by traders and investors that start to execute as soon as the markets open in the morning. At the open, an experienced player might be able to spot trends and time orders to benefit. But for newcomers, it could be preferable to observe the market for the first 15 to 20 minutes before acting.
Typically, the middle of the day is less volatile. Then, as the closing bell approaches, activity starts to build back up. Although possibilities can be found during rush hours, it's safer for newbies to steer clear of them at first.
7. Limit Orders That Reduce Losses
Choose the orders you'll use to place and execute trades. Are you going to utilize limit orders or market orders? With no price guarantee, a market order is filled at the current best price. When you don't care about getting filled at a particular price and simply want to enter or exit the market, it can be helpful.
While the price of a limit order is guaranteed, execution is not. Because you determine the price at which your order should be filled, limit orders can help you trade more precisely and confidently. Limit orders allow you to reduce your loss on reverses. However, your order won't be filled and you'll keep your position if the market doesn't reach your price.
8. Be Strictly Profit-Minded
To be profitable, a strategy does not need to be successful every time. Only 50% to 60% of the trades that successful traders win are likely to be profitable. They gain more from their winners than they do from their losers, though. Make certain that the financial risk associated with each trade is restricted to a predetermined portion of your account and that the entry and exit strategies are well-defined.
9. Remain Calm
The stock market can occasionally make you nervous. You must learn to control your greed, hope, and fear as a day trader. Decisions ought to be made based on reason, not feeling.
10. Adhere to the Strategy
Although they must move quickly, successful traders do not need to think quickly. Why? because they have the discipline to stick to their trading plan and a predetermined trading strategy. Instead of attempting to chase earnings, it's crucial to firmly adhere to your recipe. Don't let your feelings overpower you and cause you to change your tactics. Recall the day trader's credo: "Plan your trade, trade your plan."
What Complicates Day Trading?
Day trading requires a lot of experience and knowledge, and there are a number of things that might make it difficult.
First of all, be aware that you're dealing against traders who are pros. These people have access to the most cutting-edge equipment and contacts in the business. They are therefore in a position to succeed in the end. Jumping on the bandwagon usually results in greater income for them.
Next, realize that Uncle Sam will demand a portion of your revenues, regardless of how small. Keep in mind that you will be required to pay taxes at the marginal rate on any short-term gains—investments you keep for one year or less. The fact that your losses will equal your earnings is a benefit.
Additionally, as a novice day trader, you can be more susceptible to emotional and psychological biases that have an impact on your trading, such as when your own money is at stake and you're experiencing a loss on a transaction. Professional traders with extensive experience and resources can typically overcome these obstacles.
Deciding What and When to Buy
What to Buy
Day traders attempt to profit by taking advantage of little price changes in specific assets (stocks, currencies, futures, and options). To do this, they frequently use significant capital hedging. A typical day trader considers three factors before buying something, such a stock, for example:
Liquidity. A liquid security enables you to acquire and sell it quickly and, ideally, profitably. A benefit of liquidity is low slippage and tight spreads, or the difference between the bid and ask price of a stock and the expected price of a deal, respectively.
Volatility. This gauges the daily price range, which is the area in which day traders work. Increased possibility for gain or loss translates into greater volatility.
Trading volume. This is a measurement of how frequently a stock is purchased and sold during a specific period of time. The average daily trade volume is how people usually refer to it. There is a lot of interest in a stock when volume is high. An surge in a stock's volume frequently signals an impending price spike, either upward or downward.
When to Buy
You must choose entry points for your trades after you are familiar with the stocks (or other assets) you wish to trade. To do this, you can use the following tools:
Real-time news services: Since news has the power to affect stock prices, it's critical to sign up for services that can notify you when potentially market-moving news occurs.
Electronic communication networks, also known as ECNs, are computer-based platforms that show the best bid and ask prices from a variety of market participants before automatically matching and carrying out orders. A subscription-based service called Level 2 gives users immediate access to the Nasdaq order book. Every security that is listed on the Nasdaq or the OTC Bulletin Board has price quotes from market makers in the Nasdaq order book.
They work together to offer you an idea of how orders are carried out in real time.
Intraday candlestick charts: Candlesticks offer a straightforward interpretation of price movement. Later, more on these.
Determine and document the precise terms under which you will accept a position. For instance, the phrase "purchase during an uptick" is too general. Instead, try something more definite and testable, like buying when the price breaks above the upper trendline of a triangle pattern on the two-minute chart during the first two hours of trading, provided the triangle was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed).
When you have a set of entry criteria in place, check additional charts to determine if your conditions are generated every day. For instance, check to see if a candlestick chart pattern indicates that the price will move in the direction you expect. If so, you may have a strategy's starting point.