At one point in time, stock trading was done only by people working for financial institutions and trading institutions. With the advent of the internet, online markets, and digital technology, practically anyone can become an investor or trader.
A lot of stock market novices start as day traders because it seems to be a lucrative option. This article gives an overview of how day trading works as well as some tips and tricks for day trading beginners.
What is day trading?
Day trading is the process of buying and selling a security (bonds, stocks, options, etc.) within a single trading day. Day trading is typically seen in stock markets and Forex (foreign exchange) markets. Day traders aim to make money off short-term market fluctuations, especially in highly liquid stocks and currencies.
What’s the catch?
The nature of day trading makes it appear like a “get rich quick” scheme, and many day traders fall prey to this false allure and end up losing a fortune. Day trading inherently involves a lot more risks than normal trading, and only those with a deep understanding of the market and strategies will reap profits – who make the success stories – while others – who we never hear about – barely stay afloat or sink. Remember that, like any other gamble, luck plays a major role in day trading.
Requirements of a day trader
Apart from the in-depth knowledge of the stock market – more than just reading off charts and the news – there are some other characteristics a day trader must possess.
- They are usually well-funded:
Day traders use only risk capital i.e., funds allotted, especially for high-risk high-reward investments. Having a large capital is necessary to take advantage of small intraday price movements.
Day traders depend a lot on the volatility of stocks since this is responsible for the fluctuations. Discipline is needed to make sure they don’t fall prey to emotional instincts and make a bad trade, and more importantly, not to fall prey to greed by violating the day trading rules.
A day trader must be well-versed in a host of strategies that will give them the edge over other traders and make the most out of price movements. Some common strategies include swing trading and arbitrages, and specific methods to buy or sell stocks.
The key idea is this: every strategy has a certain risk level and reward associated with it, and as a trader, you must be aware of the consequences of each strategy before choosing the one that suits your interests.
Day trading strategies
Before you proceed, it is worth emphasizing again that day trading cannot be treated as a hobby or pastime. If you are anyway working for a larger institution, this is your day job, and you have access to more sophisticated resources.
Some of these resources include a trading desk, multiple news sources, and analytical software capable of backtesting, pattern recognition, and other intensive computations.
If you are clueless as to how to begin, these techniques should get you off to a good start.
1. Start small:
As a novice, do not trade more than one or two stocks per session or restrict yourself to trade only for a certain sum of money. That way, it is easier to keep track of the data and trends to help you make the right decision, rather than getting carried away in a flood of numbers.
2. Stay away from penny stocks:
A small company’s share, typically worth less than $5 per share, is called a penny stock. These are usually traded over-the-counter and have a high-risk factor but a high reward as well. Penny stocks are likely to be illiquid, so as a beginner, it is better to invest in relatively safer securities.
3. When to buy stocks:
For every stock, a day trader should look at three parameters before buying:
- Liquidity: The more liquid a stock is, the easier it is to buy or sell the stock.
- Trading volume: This shows how many times the stock is traded in a day: the higher the volume, the more interest people have in that stock.
- Volatility: This is an indication of how much the price of the stock can vary within the day. A higher volatility means chances of a higher profit or loss.
4. When to sell stocks:
There are several established methods that traders use to decide when to sell stocks.
- Profit target: The investor sets a pre-determined value of the stock which will give him a profit, and as soon as the stock’s price touches the number, he will sell the stock
- Scalping: The trader sells the stock as soon as it becomes profitable
- Daily pivots: The trader aims to buy the stock at the low price of the say and sell it at the high price i.e., he wants for the next reversal in the price trend to sell
- Fading: a high-risk method that beginners can avoid, fading is when a trader goes against the conventional market knowledge. The assumption is that market price will make up some of its lost ground as soon as a strong movement occurs
5. Be cool and composed:
Even the most experienced traders sometimes succumb to emotions, and as a new trader, you must remember to always keep calm when trading; use logic and data to make decisions, not greed. Do not try to find loopholes or try to pull a fast one without understanding all the consequences. Rules like the pattern day trader ruleare quite complex to grasp, and it is easy to fall into a trap if you are not aware of all the fine print.
Get a feel of day trading now!
As a beginner, you don’t want to bet your money in the real market right away, and given that day trading is not everyone’s cup of tea, you want to test your strategies in a safe environment. Luckily, there are online virtual stock trading platforms where you can buy and trade stocks using virtual money, thereby getting the hang of what it’s like in the real world. After a decent amount of practice, you can pick up free stock trading on platforms such as Alpaca that will help you build the skill-set you require to become a successful trader. Get started right away!