The 2018 Day Trading Beginners Guide
When trading on the stock market, you will need to use a broker. The broker is the one who carries out the actual trade in the market. Consequently, it is important that you think carefully before choosing which broker to use.
Here are some important factors to consider when choosing a broker:
- Execution Speed – It is important that the broker acts fast. This is to help you lock down prices. If the broker is slow, the prices will have changed by the time they make the trade and can see you lose out on great opportunities.
- Costs – If you plan on being an active trader, it is important that you keep your costs low as much as possible. Therefore, choose a broker who is not expensive.
- Regulatory Compliance – Find a broker who is licensed to trade and complies with industry regulations. Such a broker is obliged to look after your best interests.
- Good Customer Service – The broker should be responsive to your needs and be available when you need them. This is because you are going to need assistance at some point when it comes to Internet trading.
- Spreads, Margins, and Leverage – You need to have viable spreads. You also need to have good leverage and margins.
What is Day Trading?
Day trading or day stock trading refers to when a trader opens and closes a sale on the same day. However, there are some cases where the trader might hold the stocks for more than one day. The trader can have either a long or short position. A long position is when the trader directly buys the trade, and a short position is when the trader borrows shares and promises to sell them at a set price. The main aim of a day trader is to take advantage of the market’s movement in a day and avoid overnight risks that might affect the market.
Day trading earned a negative connotation at the start of the 1990s. This was when a lot of people started trading online with the hope of becoming overnight successes. They were trading without applying any of the concepts of stock market trading. These traders were of the opinions that they could make money even if they didn’t have the foundational knowledge or experience of trading.
The thing about trading is that once you learn the basic concepts about it and how the market works, then it is not that difficult to trade.
Day Trading for Beginners
Day trading rules and how to practice day trading
As a newbie in the market, you might feel like you are in over your head when you are first starting out. You might think that you need to be fast and aggressive if you want to get high returns in the market. Nevertheless, this is not necessarily true, by being patient and being able to assess risk and reward scenarios objectively, you will be able to trade. What you need to do is to invest time in learning the basic concepts of how the market operates. This will keep you well ahead of other traders and help you craft your trading style.
- Knowledge is power
It is essential that you carry out due diligence in the market. You have to know the latest happenings in the world and about what is going on in the market. This includes such things as how interest rates are affected by FED, future economic happenings among many other things. Once you have decided which stocks you would like to invest in, stay informed about what is going on in that company. You can do this by reading financial websites and the business section of most newspapers.
- Set an amount aside
Trading is a risky affair. Therefore, you need to decide how much risk you can take. A lot of people normally decide to risk 1-2% of their investment per trade. Let’s assume that you have $ 40, 000 in your portfolio and you decide to take a 0.5% risk on your trades. This means that you can lose up to $200 for each trade that you perform (That is 0.05% of $40,000). Consequently, you need to have a set percentage that you are willing to lose. This may or may not happen.
- Invest time
Trading takes up a lot of time. You need to create time in your schedule to trade. This is because you need to keep track of what is happening in the market, as well as find opportunities that you can invest in. You need to act fast if you want to maximize your trading opportunity.
- Start small
It is best that you just start with a few stocks. You can focus on one or two stocks per trading session. This will make it easier for you to spot any opportunities that you might come across.
- Stay away from penny stocks
Even though this involves dealing with a small amount of investment, it is not a good idea to deal with them given how hard they are to liquidate. This minimizes the chances that you will make it big in this market.
- Time trades
Activity in the market usually starts as soon as the market is opened. During this time, stock prices fluctuate a lot. If you are a seasoned trader, you can take advantage of this window to make a move. However, if you are just starting out in the market; give yourself 15-20 minutes after the market opens to study the market before you make your move. This is because it can be hard to time when the best time to buy or sell is. You are better off making a move when the market is not so busy since there is a lot of volatility at peaks times. This is the time after the market opens and just before it closes.
- Cut losses with limit orders
You need to have a strategy for entering and leaving the market. You can make use of market orders, or you can opt for limit orders. When you opt for a market order, the trade will be carried out at the best possible price. This does not guarantee you of any price. When it comes to limit orders, you will set a specific price in which you will make a move.
- Have realistic expectations
As a trader, you will not have 100% wins all the time. On average, most traders have a 50-60% win rate. A strategy does not have to win for you to make a gain. What makes these traders successful is that they can cash out more on their wins as compared to their losses. Just make sure that you have a strategy on how and when to enter and leave a market. You also need to limit your risk to a certain percentage in your account.
Don’t get emotional there are times when your emotions can affect your logical reasoning. Learn to temper your emotions and control your greed, fear and anxiety levels since the ongoing in the market can greatly affect you.
- Have a trading strategy
You need to map out a strategy that you are going to use when trading. This will help you know what to do however the market changes. This will prevent you from having to think on your feet all the time as the market changes. The essential thing is for you to try as much as possible to stick with your plan consistently. Avoid getting sidetracked by your greed.
What and When to Buy When Day Trading
Most day traders make a profit by taking advantage of small opportunities and maximizing price movements that happen in the market on individual assets, such as stocks, futures, currencies, and futures. They must borrow a large amount of money to do this.
There are three main factors that a day trader considers when choosing which stock to deal with:
- Liquidity – This factor makes it possible for you to enter and exit the market fast while making a good profit.
- Stability – The more the price of a stock fluctuates, the greater the gains or losses that you can make. The stability of the stock depends on how the price will vary in a single day.
- Trading volume – This refers to the number of times a particular stock is bought and sold within a given time frame. This can be within one trading day. This is referred to as the daily trading volume. A high volume of trades means that a lot of people are interested in the stock. If the trading volume spikes, it means that the prices are bound to either go up or down.
Once you have identified what type of stock you are going after, the next thing you need to know are the stock market update and when to make a move. There are various things that can help you know the ideal time when you need to buy or sell.
- Real-Time News: What is happening in the news will affect prices of stock. Therefore, you must always be in the know about current events, subscribe to a news service.
- ECN/Level 2 Quotes: This is a computer-based system which matches different participants in the market based on the best price that they bid and are willing to accept. The system automatically matches up buyers and sellers. You can subscribe to Level 2, to get real-time access to the Nasdaq order book which has price quotations from different traders registered in the Nasdaq and OTC Bulletin Boards. Using these two options together will give you a realistic picture of what is happening in the market.
- Intraday Candlestick Charts: if you would like to know raw information concerning prices and their analysis, you can get this from Candlesticks.
You need to be very particular about when you will make a move. Just stating that you will make a purchase when there’s an uptrend is too general. Something specific is when you say is that I will make a purchase when the price goes above the trend line of a triangle pattern, where the triangle came after an uptrend on a 2-minute chart after the first 2 minutes of trading. This is something that is much more specific and can be tested.
Once you have come up with a specific rule of how you will enter the market, then you need to keep an eye on the market to see if the conditions have been met. The market is quite volatile therefore your market conditions can be met at any time. If this happens, then you will find an ideal point for you to enter the market.
When to Leave the Market
There are different ways to leave a market. This includes reaching your profit target and trailing stops. The most common way to leave the market is through price targets.
Here are some approaches you can use when it comes to price strategies:
In this strategy, you sell as soon as you have made a profit. This happens as soon as the trade has made a gain.
This is a risky strategy that is worth it. This includes shorting a stock as soon as the price goes up. The presumption is that too many people are buying the stock and this might cause other investors to sell out and this could subsequently lower the price.
- Daily Pivots
This strategy is buying when the price is low and selling when the price is high within a trading day. You sell the moment you notice that the price has started to reverse.
This kind of trading is based on current news events as they affect stock prices. What happens is that the trader will buy a stock based on the news release and rid that trend until the price starts reversing. You exit the market when the price starts going down.
In most situations, traders leave the market when the interest on the stock starts going down based on the trading volume and the ECN. The profit target should make it possible for you to make more when you are winning and to lose out less.
How to Limit Losses When Day Trading
One of the ways you can reduce your losses is by using a stop order loss. When shorting, you can pick a recent high, and for long positions, it will be a recent low. You can even have two stop orders in place.
The first stop loss can be set at a set price point based on how much risk you can afford to attack. You only risk what you can afford to lose.
You can also have a psychological stop loss in case the entry point in the market is not met. In case the market turns unexpectedly, you can leave the market.
Day trading can be challenging, and it takes time and discipline. A lot of traders are not successful. However, the strategies discussed above can help you successfully trade.