The Best Trading Strategies for New Day Traders
In finance and investment, day trading is referred to as the quick buying and selling of stocks within a given day. The goal is for the trader or investor to purchase the shares whose values would increase or decrease after a short while. Day trading is a risky investment with day traders hoping for substantial gains from the market but a risk of equally significant losses. These people firmly believe that their day trading methods could add to their long-term profits.
Day traders have their own language and terminologies. From candlestick patterns to chart and momentum strategies, there is a lot that you must learn. It would be beneficial for new investors to join online communities like the Warrior Trading to get regular day trading tips, strategies, and support.
Here’s a quick glimpse of how you can trade stocks rapidly through many buys and sell orders. These five day trading techniques are guaranteed to work, and you can definitely utilize them to make successful cash trading stocks in just a day.
- Momentum Trading
Momentum trading is a strategy that allows an investor to get a hold of a commodity whose price value is increasing.
Here are some of the things that you must focus on in the market if you are to utilize this strategy:
- You must watch out for any unique and significant movement in the price which is usually driven by a catalyst.
- Any movement in stock that falls within 30% to 40%.
- Small stocks which could be traded quickly because of the reduced number of outstanding shares
- Any trends for momentum trading found in communication platforms like StockWits.
Warrior Trading always creates a stop-loss order which is just below the first price decline of the stock to protect investors from substantial losses. The said stop-loss acts like insurance where you can put a sell order for the share at a prearranged price. That way, even if the commodity quote eventually falls to a specific point, an investor will be protected because the shares will be automatically sold
- Scalping Strategy
“At the end of the day, small wins can always contribute to a lot of money.”
That is the philosophy behind the scalping strategy. People using this technique are called scalpers, and they work by setting up a trading target. They then just stick to these prearranged levels. At times, the scalping strategy can be quick that traders could eventually buy and sell stocks in less than a minute.
Scalping is considered one of the best day-trading methods today for investors and traders who are quick to make decisions and can put them into action without any regret or questions. More often than not, scalpers are disciplined enough to sell quickly as soon as they observed any price decline. This dramatically minimizes any potential losses.
If you want to try a great scalping strategy then I recommend trying this one:
- Pullback Trading Strategy
Another day trading strategy that you may try is the pullback trading strategy. For this one, your purpose is to search for any share or ETF that has a well-established trend. After that, you need to monitor its trend until a decrease in price on the trend becomes evident. If a day trader sees a decreasing price movement or “pullback” when the established pattern is upward, that could mean it is time to buy.
Typically, day traders utilize technical charts to understand a stock’s trend better. It is essential to seek for an uptrend that has at least two successive high price movements before any noticeable price decline or pullback. If not filtering the stock, at least look for stocks which have two price declines in a row. There is also no need to panic if the trend suddenly reverses after the buy-in because a trend normally continues in the same trending movement for a long while. Stocks that make the biggest profits are where you can usually find candidates for a pullback.
- Breakout Trading
Another day trading strategy is the breakout. In this method, the trade happens when there is an increase in stock price that is above the previous top resistance price. However, it’s not an easy feat to recognize the resistance, making the buy after a breakout. It is vital that you carefully monitor the trading volume levels and the number of shares that are shifting hands. This is because breakout usually trades on high volume stocks that are highly likely to be sustainable given the new higher price than on breakouts with lesser volume.
On the majority of cases, the stocks retreat just after reaching the resistance level up to a point when a catalyst for a stronger price movement came. There are more buyers and sellers above this specific price which prevents the price from increasing further.
- News Trading
The news could have considerable influence in the movement of stocks. In fact, stocks react rapidly to significant news events. For instance, a missed income number could cause a share price to fall while news of FDA’s approval of a new drug could cause its stock price to rise. Day traders also keep their eyes on the latest happenings and news so they could take advantage of the popularity of day to day stories.
In any case, that bad news is out, you might borrow shares of the stick from your investment firm and sell those loaned shares to compensate for any short stock. Should the price declined, you can just repurchase the shares at a much lower cost and then profit the difference minus the commission payment. So, if there’s good news, take advantage of it and buy the stock immediately then sell them right after the prices rise.
Day Trading Capital Requirements
In general, different markets always require different amounts of capital for an investor to trade. While stocks are considered popular, it is also capital intensive. You will need at least a minimum amount of $25,000 if you want to do day stock trading in the United States. Then, if you’re going to keep your balance above $25,000, you will need to invest more starting at $30,000 or more as recommended. For stock market trading, the stock market provides a 4:1 leverage.
That means that a $30,000 deposit would enable any day trader to use up to $120,000.
For forex, you can start day trading for as little as $500 although it is highly recommended to start with more. Forex’s leverage is up to 50:1 or more in some countries. While 50:1 might look like overkill, using at least 5:1 or 10:1 leverage could allow day traders to take positions of up to five or ten times more than their capital amount.
For futures day trading, you may start with a minimum of $1,000 deposit, but then again, starting with more is still highly recommended. If you are to trade a popular contract like the S&P 500 E-mini, it is recommended that you at least start with around $3,500 or ideally, $7,000 or more.
Always keep in mind that while leverage could actually amplify returns, it could also do the same with losses. In worst case scenarios, it could result in a negative account. That said, always proceed with caution when using leverage and always utilize a stop-loss order in every trade.
What Markets You Should Day Trade
To date, the three most popular day trading markets are stocks, foreign exchange, and futures. While they are different, they are all considered good markets and offer nearly similar profit potential.
Which one to invest in will entirely rely on your personal choice.
If you want to venture into day trading, that would mean that you must buy and sell shares of a company, or different companies, daily.
On the other hand, foreign exchange will require you buy and sell currencies. Right now, the most popular day trading currency is Euro/U.S. If you want to day trade these currencies, you must buy EUR when it is expected to rise about USD or sell EUR when it is likely to fall about USD.
Last but not the least, futures are contracts that match up buyers and sellers at a certain price. The buyer must agree with the asset’s price when the contract expires on a predetermined date in the future. Day traders don’t have to deliver or pay for the asset or commodity. That is because all positions are being opened and closed within the same day. Both profits and losses will be based on the prices the contract has been opened and closed with.
There is no easy way to learn the ins and outs of the trade. Each market has its nuances, and you have to give yourself enough time to learn them. It is highly advisable that you try to learn and master one instead of trying to trade them all. At some point, day traders could branch out and trade all markets, but new traders must only focus on one.
Expected Monthly Income from Day Trading
Day traders have a wide range of income and discussing it almost irrelevant. While there are traders who eventually make hundreds of thousands of dollars every year, there are those who barely make a living out of trading.
If you want to get an indication of what your potential profit could be, it is best to start with practicing your day trading skills in a demo account. Use the same amount of money that you will be investing when you open a live account in the demo account. Wait for about six months to a year so you can get an idea if day trading is a viable option for you.
New traders are highly advised to risk only 1 percent of their account when trading. This would mean that losing would have a very minimal impact on the total capital balance. Day traders can expect to make at least 10 to 30 percent profit a month for risking 1 percent per trade. However, this is not what the actual profit of a trader. Instead, the 10 to 30 percent is just considered a goal that every trader must work hard for to achieve. Also, take note that these figures are all based on smaller account sizes where new traders start.
In essence, the higher the capital trader, the lower the percentage return would be. That is why it is easier to gain higher profits in smaller amounts of capital than to achieve the same profits on large equities.
Again, remember that these figures are only based on sticking with a reliable method and having enough experience in all market conditions. It would probably take around 6 months to a year before a trader could gain this kind of returns per month.
The Hurdles of a Successful Day Trading
Like all other forms of trading, day trading is also plagued with numerous hurdles. Since market conditions differ, a day trader must always find a method that will work for him. Also, a good trading method doesn’t guarantee that a trader will always profit every day. In fact, even with an excellent approach, there are still losing days in every month. Bear in mind that winning every trade is not significant, what matters is winning over the course of weeks and months.
Always find and develop a day trading method that would work in all kinds of market conditions. In essence, this means that you have to avoid systems that are overly difficult, has too many indicators, or needs constant research.
There are also psychological hurdles that day traders have to face. One of these hurdles is the fact that there is no guaranteed paycheck. This could weigh down a trader especially when there are bills to pay, but the trade is not faring well. When not managed, this could turn into a vicious cycle that often leads to more mistakes and bad performances.
Invest in Yourself
Again, there is no easy path to a successful trading career. Often, software and products that offer quick returns overnight have a really short shelf life. These offering may work, but it’s just for a short while and is bound to fail you unless you make the necessary adjustments to the software or product yourself. Instead of getting involved with this kind of trading scheme, it is much better that you spend your money in educating yourself.
Make it a point to read books and articles about trading. If it’s possible to get an experienced trader to mentor you, go for it. Invest in your education and avoid trade signals that you have to pay monthly. That would only make you dependent on someone. As much as possible, invest in yourself from the start. This would make you master the method of your choice and gain enough skills to get the job done on your own.
Give yourself at least six months to a year to really start seeing any sort of profitability and consistency in your investment. If it comes sooner, treat it as a bonus. However, never assume that it will. Day trading stocks frequently require a minimum of at least $25,000, forex needs at least $500, while futures would need a minimum of $3,500.
Furthermore, day trading needs more money than just deposits. Make sure that you have a good computer setup, with at least two monitors, a trading platform, and the data feeds. Remember, don’t waste your money paying for data feeds that is of no use to you. Also, fix income won’t probably be available during the first six months to a year. Make sure that you have enough savings to cover your living expenses.
Try to focus on simple methods that you actually work and practice on. Avoid being dependent on others. When you finally learn the ins and outs of the trade, you will realize that you are better off trading alone as long as you are equipped with the right knowledge. Invest in yourself, in education, and other things that you can benefit from in the weeks, months, and years to come.