Day trading strategies for beginners
Day trading is the act of buying and selling a financial instrument in the same day or even multiple times over the course of the day. The idea is that you can benefit by the price movement if things are going in the right direction. Surely this is a very good way of making money but in the same way can also be a dangerous and risky game for those who are new and don’t have a precise strategy. Let’s take a look with the support of our experts at some of the general day trading principles that should guide us in deciding when to buy and when to sell and how to reduce losses.
1) Knowledge is Power
Surely to be a successful day trader you need to know the basic trading procedures, but in addition to that a day trader will have to keep up with the latest stock market news that can affect stocks prices. In a nutshell the trader will have to do his homework. It is important to make a list of stocks you would like to potentially trade and also keep yourself well informed about the companies and the markets that can affect their prices. You can do that by taking a look at business newspaper and also look at reputable financial websites.
2) Set an Amount Aside
It is very important to set up how much capital you are willing to risk on every trade. Normally popular day traders risk less than 1% – 2% of their account per trade. So for example if you have a trading account of £40,000 and you are willing to take a risk per trade of 0.5% it means that your maximum loss will be in the region of £200 per trade. It is important to only trade money that you are prepared to lose.
3) Set Aside Time, Too
Day Trading will take most of your day. If you have only few hours to dedicate than this is not the right trading method for you. The reason is that a trader will need to spend time looking at the markets and spot the opportunities and this means that you have to be trading for long hours waiting for the right moment to come. Moving fast is really important for the success of day trading.
4) Start Small
As you move your first steps into the day trading world it is important that you do not run. Start small as there will always be time to increase later on: buy a few stocks and keep everything small so it is controllable.
5) Avoid Penny Stocks
Make sure you stay away from penny stocks. The problem with those is that they are illiquid which means that you will have very little chances of success.
6) Time Those Trades
As you get more experience you can start to make some trades very early in the morning as soon as the markets open. As a newbie it is however advisable to read the market without rushing into making a move in the first 15-20 minutes. The middle hours are normally less volatile and than the markets start to pick up considerably towards the closing bell. Although the rush hours do offer lots of opportunities to begin with it is safer to avoid those.
7) Cut Losses With Limit Orders
It is important to know when to enter and when to exit trades. Will you use market orders or limit orders? When you make a move as market order this is executed at the best price that is available at that time: it means that there isn’t a price guarantee. With a limit order you have the price that is guaranteed but you are not guaranteed on the execution. Surely limit orders will allow you to trade with more precision however you would need to make sure the prices you set for both buying and selling will be realistic.
8) Be Realistic About Profits
You don’t need a strategy that is winning all the time in order for you to be profitable. The majority of traders, even the best ones, only win 50-60% of their trades. The main thing though is that they win more money than they lose when they lose. The risk on each trade should also be limited to a specific number in the account and there has to be a specific plan for entry and exit methods.
9) Stay Cool…
There are situation when you need to stay calm and keep your nerves under control. As a day trader you need to learn to keep your feet on the ground and always make decisions governed by logic and not emotion.
10) And Stick to the Plan
Surely it is important that traders move fast but they don’t have to rush and think fast. Every action should be regulated by a trading strategy decided in advance and also good traders have the necessary discipline to stick to that strategy. Make sure you are following your formula closely and don’t just go and try to chase profits. There is a good saying that goes: ‘Plan your trades, then trade your plan’.
Now that you know all the basic principles of day trading let’s look into more day trading details:
Deciding What and When to Buy When Day Trading
Day traders normally look to exploit minute price movements in individual assets like stocks, currencies, futures and options. By doing so they are leveraging big amounts of capital. When deciding where to focus a typical day trader will look for 3 things:
- Liquidity: the liquidity will generally allow the trader to enter and exit a stock at a good price.
- Volatility: this is the measure of the expected daily price range. This is the range in which a day trader normally operates. The more volatility you have the greater will be the profit or the loss.
- Trading volume: This is a measure of how many times a stock is bought and sold in a decided period, normally within a day. If you have a big increase in volume than you have a lot of interest in the stock. Normally an increase in the volume in a stock is linked with a price jump, either up or down.
Once you have decided which stocks you are going to go for, than you need to establish the entry points: this represents the moment when you are going to invest. In order to do this accurately you can use some tools like:
- Real-time news services: you can get real news on stocks moves. It is important to subscribe to the right services.
- ECN/Level 2 quotes: ECNs are computer-based systems that display the best available bid and ask quotes from multiple market participants. They then go ahead and automatically match and execute orders.
- Intraday candlestick charts: Candlesticks do give a raw analysis of price action.
It is important to define and write down the conditions that if met will result in you entering a position. You would need to be as precise as possible as you will than need to follow this strategy without changing your mind. This will also help you to stay calm and avoid acting on the back of stress. One you have set up the conditions and entry rules take a look at the market to see if you find those. If you find an opportunity that match what you are trying to do than this is a potential entry point for a strategy. You will than need to assess when you will exit those trades.
Deciding When to Sell
There are many different ways to exit a winning positions which also include trailing stops and profit targets. Profit targets are the most used as they will allow you to take a profit at a predefined level. It is important that you always have a strategy to exit the market as if you don’t do that you might well become too greedy: this can result in seeing your profit disappear due to the market starting to reverse.
The Bottom Line
Day trading is tough to master and it will require lots of time as you will need to acquire the skills and also the discipline needed. There are many that fails in the process but if you follow the right techniques and guidelines you can create a profitable strategy. If you than follow this strategy consistently and also do lots of practise you can beat the odds and become a successful day trading!