You’ve seen the flashy ads, heard the success stories, and now you’re ready to turn your spare change into a mountain of gold. Well, it’s not all sunshine and rainbows in the land of buy low, sell high. But don’t worry, we’re here to guide you through the labyrinth of online trading. We’ll show you the strategies that can help you overcome the common challenges and dilemmas, and make money along the way.
Day Trading
Day trading, the act of buying and selling a financial instrument within the same day, can be a lucrative game if played correctly. It’s like a high-stakes game of chess, where taking advantage of small price moves can lead to a checkmate. But beware, it can be dangerous for beginners and anyone else who doesn’t adhere to a well-thought-out strategy.
Not all brokers are suited for the high volume of trades day trading generates. Some fit perfectly with day traders, like Interactive Brokers and Webull, which have professional or advanced versions of their platforms that feature real-time streaming quotes, advanced charting tools, and the ability to enter and modify complex orders in quick succession.
Strategizing Your Moves: Day Trading Strategies for Beginners
Now, let’s take a look at some day trading strategies for beginners. These strategies will help you understand when to buy and sell, how to read basic charts and patterns, and how to limit losses. But remember, in addition to knowledge of day trading procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This can include the Federal Reserve System’s interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you’d like to trade. Keep yourself informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
1. Managing Your Risk: Capital Commitment
Assess and commit to the amount of capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000).
Earmark a surplus amount of funds you can trade with and are prepared to lose. Remember, day trading requires your time and attention. In fact, you’ll need to give up most of your day. Don’t consider it if you have limited time to spare.
2. Staying Alert: Tracking the Markets
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key. As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to trade fractional shares, which lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon shares are trading at $3,400, many brokers will now let you purchase a fractional share for an amount that can be as low as $25, or less than 1% of a full Amazon share.
3. Avoiding Pitfalls: Steering Clear of Penny Stocks
You’re probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak. Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these.
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, though, it may be better to read the market without making any moves for the first 15 to 20 minutes.
4. Entry and Exit Strategies
Decide what type of orders you’ll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available at the time, with no price guarantee. It’s useful when you just want in or out of the market and don’t care about getting filled at a specific price.
A limit order guarantees price but not the execution. Limit orders can help you trade with more precision and confidence because you set the price at which your order should be executed. A limit order can cut your loss on reversals. However, if the market doesn’t reach your price, your order won’t be filled and you’ll maintain your position.
5. Staying Disciplined: Keeping Emotions at Bay
There are times when the stock market tests your nerves. As a day trader, you need to learn to keep greed, hope, and fear at bay. Decisions should be governed by logic and not emotion. Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula closely rather than try to chase profits. Don’t let your emotions get the best of you and make you abandon your strategy. Bear in mind a mantra of day traders: plan your trade and trade your plan.
Day trading takes a lot of practice and know-how and there are several factors that can make it challenging. First, know that you’re going up against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry. That means they’re set up to succeed in the end. If you jump on the bandwagon, it usually means more profits for them.
6. Limiting Your Losses: Stop-Loss Orders
There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Some common profit target strategies are: In many cases, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop-loss is $0.05 away from your entry price, your target should be more than $0.05 away.
Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.
7. Staying in Control: Setting a Maximum Loss
It’s smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day. You’ve defined how you enter trades and where you’ll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.
If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.
The Reality of Day Trading
Day trading is difficult to master. It requires time, skill, and discipline. Many who try it lose money, but the strategies and techniques described above may help you create a potentially profitable strategy. Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. With enough experience, skill-building, and consistent performance evaluation, you may be able to improve your chances of trading profitably.