Day trading works by purchasing and selling financial instruments on the same day or several times throughout a day. Getting the most benefit from small changes in price can be quite profitable when done in a smart way. However, it might be a risky game for newcomers or anyone who is not aware of this well-thought strategy. All trading brokers are not suitable for higher trading volume prepared by the traders. Let us have a look at day trading options and then decide when to buy, sell and how to limit the losses.

This blogpost discusses some tips to become a successful day trader.

  • Knowledge is the ultimate power – Apart from in-depth knowledge on basic trading, day traders should remain updated on the latest news and events of the stock market, economic outlook, Fed’s plans on the interest rate and so on. Create a list of stocks you would do trading with and stay informed on the current markets and chosen companies.
  • Keep aside some funds for future – You will have to evaluate the amount of capital you like to risk on the trading signals process. Many day traders risk less than 1 to 2% of the account for each trade. Keep aside the surplus amount you had like to trade with and be prepared to lose it possibly in the long run.
  • Invest sufficient time for day trading – Day trading means investing your time in it and spending almost the entire day for it. The method requires a trader who will maintain a track of the present market and detect for the opportunities that may arise anytime during the trading time. Though moving quickly is the vital key, make sure you do not go for it if you have only limited time.
  • Begin with a few stocks – A beginner should focus on one to two stocks at the most during the trading session. Keeping a track and looking for opportunities is much easier than starting with a few stocks only. At present, it is quite common to do trading with fractional shares so that you may think of investing small amounts into it.
  • Do not invest in penny stocks – You might be looking for attractive deals and lower prices however, avoid investing in penny stocks. This is because such stocks are generally illiquid and may get delisted from major stock exchanges. Stay away from them unless you find a great option and have conducted thorough research work on them.
  • The right time for the trading – Many orders that are placed by the traders and investors start executing once the markets open thus contributing to price volatility. A smart investor can understand the patterns well and thus, choose sensibly for making huge profits. But for the newcomers, it will be better to know the market properly before making any move for the first 15 minutes. The middle hours are generally less volatile and then the movement starts again towards the closing bell. Though there are varied opportunities at peak hours, it is much safer for beginners to avoid them initially.
  • Reduce losses with limited orders – You need to decide the kind of orders to use for entering and exiting the trades. Know if you would like to use market orders or restrict orders. When placing a market order, it will be given at the best available price for that time. On the other hand, a limit order will guarantee the price but not its execution. With limit orders, you can trade with better precision and set the price accordingly for the buyers and sellers.
  • Be realistic for making huge profits – A marketing strategy should be a win-win situation all the time for making it profitable. The traders can earn more on the winners than lose on the losers. Make sure there is a limited risk on each trade for a specific percentage of the account. Also, the entry, as well as exit methods, have been defined clearly and written down.
  • Remain cool all the time – There are certain situations when your patience will be tested at the stock market. Being a day trader, you must know how to avoid hope, greed, and fear as decisions must be taken by logic only. This is the way to make a profit from trading else, you will end up losing almost everything in it.
  • Stick to your plan – Successful traders need to move extremely fast as they have already developed an effective trading strategy in advance. It is essential that you follow the formula than trying to make profits. Always make planning for your trade beforehand and then follow it accordingly.

What makes day trading a difficult option for the beginners?

Day trading requires a lot of knowledge and patience with several factors that can make it a big challenge for beginners.

Firstly, you need to know that you are going against professionals whose careers are completely on the technical trading signals. These people have complete access to the best connections and technology in the sector and even when they fail, they are meant to succeed in the end.

Being a new investor, you might be prone to psychological and emotional biases. Professional traders may cut them from the trading strategies, but when it is about your own capital, it has to be a different story for you.

Decide what and when to purchase

Day traders try to make money with the help of different assets. Some of these include – currencies, stocks, options, and futures that leverage a small amount of capital for them. A day trader has to consider these things when making a purchase:

  • Liquidity: Liquidity enables to enter and exit a stock market at a good price.
  • Volatility: Volatility is a calculation of the expected daily price range in which a day trader operates. More volatility denotes greater profit or loss.
  • Trading volume: This is the measure of the number of times a stock is purchased and sold in a given time. The higher degree of volume denotes lots of interest in the stock.

Once you are aware of the type of stocks you require, make sure you know how to detect entry points and when to make the investment. Some tools that might help you to do this are the following:

  • Real-time news services: Current news move stocks and so, it is extremely essential to subscribe to the services that denote when probably market-moving news will come out.
  • Electronic communication networks: Electronic communication networks or ECNs are computer-based systems that ask for the quotes from several market participants, display the most favorable bid and then automatically match as well as execute orders. 
  • Intraday candlestick charts: Candlesticks offer a detailed analysis of the price action.

Decide when to sell

There are different ways to exit a winning position along with profit targets and trailing stops. Profit targets are a common exit method that allows you to make a profit at a pre-determined level.

Mostly, you have to exit an asset when there is less interest rate in the stock as denoted by ECN and volume. The profit target should enable greater profit on winning trades than lost in the trading.

Unlike entry point, you will have to explain clearly how you want to exit your trades before entering into them. The exit criteria should be specific enough for being repeated several times.

How to stop losses with day trading

stop-loss order has been made to limit losses associated with day trading. In the case of long positions, a stop loss may be placed just below a recent low or for short positions, only above a recent high. It may even be based on volatility. You will have to define properly how you can control risk on the trades. One effective strategy is, to begin with, two stop losses discussed below:

  1. A physical stop-loss order that is placed at a certain price level will be suitable for your risk tolerance. This is the money you will have to lose.
  2. A mental stop-loss set at a certain point where your entry criteria will be violated. This indicates if the trade makes an unanticipated turn, you will have to exit the position immediately.

When you decide to exit the trades, your criteria must be specific to be testable. It is extremely important to set a maximum loss for each day you may withstand, financially as well as mentally. Make sure you stick to the planning made and your perimeters. After all, tomorrow will be another best trading signals day for you.

After you define how to enter trades and where to place a stop loss, you will be able to evaluate where the probable strategy fits within your risk limit. If the strategy exposes extreme risk, you will have to change the strategy in some way to lessen the risk associated with it.

If the strategy falls within your risk limit, then testing starts. You will have to go through historical charts manually to search for your entries where your target or stop loss is hit. Do paper trade this way for at least 50 to 100 trades that will enable you to know if the strategy is profitable and fulfill your requirements. If it does, move ahead to trading the strategy in a demo account. In case it turns profitable within the course of two months or more, you may proceed ahead with day trading strategy along with your capital.

Finally, if you do trading on margin which is about borrowing investment funds from a brokerage firm, then you are highly vulnerable to sharp movements in price. Margin allows increasing trading results due to profits and losses in case trading goes against you. Hence, using stop losses is vital when you conduct day trading on margin.

Basic day trading strategies

After you have learned some techniques, created your personal trading styles, and determined what your end objectives are, you may use a series of strategies to help you in making huge profits. Below are some popular techniques to use:

  • Follow the latest trend: Anyone who follows the current trend will purchase when the prices rise or short sell as they drop. This is usually done based on the assumption that prices that have been rising or falling steadily will continue to happen.
  • Contrarian investing: This effective strategy is related to the rise in prices that will reverse and then drop. The contrarian buys during the fall or short-sells during the rise with the utmost hope that the trend will change soon.
  • Scalping: In this case, a speculator exploits small price gaps that have been made by the bid-ask spread. This technique generally involves entering and exiting a position quickly within minutes or seconds.
  • Trading on the news: Investors who use this strategy will purchase when there is some good news or short sell when they hear bad news. This may be the reason for higher volatility which can cause huge profits or losses.

Day trading is quite difficult to master and requires necessary skills and sufficient time on your part. Many people have already failed but the techniques discussed above by the Technical Trading Signals team may help in developing a profitable strategy for your need. With consistent performance assessment and sufficient practice, you can improve the chances of beating the odds to a great extent and make huge profits from the trading business.

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