Day trading is one of the most popular trading styles. Here are some top facts about day trading and how to get started.
Day Trading Facts to Know for Long Term Success
Stock market trading can be profitable but also carries certain risks. People who are new to trading may have an assumption that they can earn a lot of money by trading in stocks. Furthermore, day trading has earned an inordinate amount of hype over the past few years.
Technological developments like, mobile connections, high-speed broadband, and online trading houses have made it easier for an average individual investor to start trading. Many people are trying their luck with day trading. They trade throughout the day to see if they can profit from volatility and market swings. But, before beginning to trade stocks, it is important to understand what day trading is, and what the best strategies are to minimize risks and be in the game for the long haul.
Understanding Day Trading
Investopedia defines day trading as buying and selling financial instruments within a single trading day. Meaning, closing out positions at the end of each day and starting out afresh the next day. This can occur in any market place but it is quite common in the foreign exchange (forex) market and the stock market.
Day traders buy and sell many stocks, multiple times within the same day to take advantage of small market movements. An important aspect to recognize is that initial profits in day trading will often be followed by losses. In fact, it’s easy to get enthralled by the idea of investing in stocks and converting them into quick profits. But it is very important to understand that day trading may not make a person rich initially. According to the US Securities and Exchange Commission (SEC), day traders typically experience financial losses in their early trading months.
Starting Day Trading – What You Need to Know
Before you begin to day trade on any market, there are several factors to consider. Compared to the typical buy and hold strategy, the single-day trading practice requires putting in a lot more time and effort. In investing, the trader holds the stock for a longer period of time. Hence, daily movements have very little impact on the overall picture.
Investors generally purchase a stock that they regard as stable and hold it for a longer period (maybe years) to find out whether those companies are making favorable returns. When the returns are sufficiently favorable for their stock prices to increase, investors trade them to make a profit. But, for day trading, the prime focus will be on related factors that can affect daily market behavior.
Here are some prime factors that affect online stock trading:
Liquidity – The liquidity factor in a market relates to how easily and quickly positions can be entered and exited. For day traders, liquidity is an important factor as chances are that they will be engaged in multiple trades within a single day.
Volatility – Volatility of a security means how rapidly the price fluctuates. If there is high volatility expected during initial hours, the movements can create a lot of openings for short term profits.
Trading volume – Trading volume is a measurement of how many times the stock has been traded within a given period of time. For day traders, this is also known as ‘average daily trading volume.’ High volume trading is a sign that the stock is good and more people prefer to own these stocks.
Incorporate an Explicit Strategy
Many traders believe that a complicated strategy is key to succeed in day trading. But, following a straightforward approach that focuses on the basics of simple day trading can yield good results. Creating a business strategy, being diligent, focused, and disciplined are vital to day trading.
Before starting to trade, it is important to develop the outlook of the day trader and take note of the following aspects:
Doing Basic Research – To succeed as a day trader, stay updated with the latest happenings that have an impact on the stock market. Such as federal interest rate, economic outlook, and other financial indicators. Maintain a list of stocks that you plan to trade and perform comprehensive research on those firms before starting to trade.
Lastly, have a clear understanding of the SEC rules that are applicable for day traders. To qualify as a pattern day trader, a minimum of $25,000 is required at all times in your trading account. You can only trade in margin accounts if you make four or more day trades in 5 market days.
Learn Trading Jargon – If you are new to day trading, chances are that you will encounter numerous trading terms such as – candlestick, reversal, breakout, false breakout, short trade, trend line, tick chart, price action, impulse wave, support areas and more. Learn some of the common trading terminologies before you start trading.
Create a Trading Plan and Budget – Before investing a single dollar, a trader needs to have some basic idea on how they will make a profit and this can be analyzed by creating a trading plan. A trading plan will include details about what, when, and how you will enter a trade. Additional rules can be added over time as required. Also, traders need to set aside the amount of capital they plan to invest in each trade. For successful traders, this should be no more than 1 to 2 percent of their overall trading account.
Create a Day Trading Routine – Create a specific routine for the trading day. This includes starting and quitting trading at the same time each day, checking for scheduled economic data releases that may impact the market, and reviewing all trading done. Have a checklist to verify that each trade done aligns with the specific trading plan.
Start Trading with a Few Stocks– Beginners may get confused with the many trading strategies available. So, start the trading process with one or two stocks, find out how they perform, and by experimenting with different strategies, a trader’s success rate may increase. Also, traders must focus on one market or even one specific instrument and become a master in it. This in turn will help produce more consistent results.
Broker Account – To trade stocks, one must have a broker account. When choosing a brokerage firm, it is important to consider certain key aspects like, the reputation of the firm, services offered, costs and fees (associated with the account), and whether the account allows for fast market access and trade execution on days that you require.
Recognize Stock Patterns – Generally, the trade patterns are stronger during the starting hours and before the closing bell. These busy times in the market typically create price volatility, which could increase your profits. However, keep a close watch for the first few days to identify trading trends. Until you understand the trading patterns, it’s best to choose to trade at midday when the activity slows down. There is no single best trading strategy for stocks, so analyzing profitable patterns can help you identify lucrative day trading opportunities.
Utilize a Stop Loss Order – Reduce losses by placing a stop-loss order that allows you to get out of a trade if the price of the stock does not move in the expected direction. It is a specific point wherein the trader admits that they are wrong in the trading pattern. Implementing a stop-loss also allows a trader to evaluate their position size accurately and the number of shares they will take on a single trade.
Choosing the right stock to buy and When to Buy – Day traders normally deal with currencies, stocks futures, and options. Choose the right type of asset by evaluating factors like – volatility, liquidity, and trading volume. To maximize profit as a day trader, it is important to identify stocks that are moving. Once you have analyzed a potential stock and determined that it is a good buy, you need to know when to buy the stock. Moreover, analyze the time-sensitive conditions that apply to your potential trades.
Deciding When to Sell – Day traders use different day trading strategies like scalping, momentum, profit targeting, selling, pivot points, etc. to know when to sell for optimal profit. Regarded as one of the most popular strategies, scalping involves selling more or less immediately after a trade becomes profitable. Momentum involves trading on news releases or finding strong trending moves. Daily pivots involve profiting from a stock’s daily volatility. Profit targeting or selling strategy is used when the profit on a transaction meets a predetermined threshold. In simple terms, traders should sell an asset as soon as they notice its value is decreasing.
All in all, as there are many factors that make the process challenging; day-trading requires a whole lot of practice, discipline, and technical know-how. Keep in mind that in online trading, you should never ever get carried away by the sheer thrill of investing more capital than you have. Make sure to begin trading only when you reach a stable financial position.
With TradeZero, you have the right online stock broker or dealer to assist you in your online stock trading journey in an efficient manner. Give us a call at 954-944-3885 and get started!