- Day trading is the act of buying and selling a stock within the same day.
- The key is to buy low and sell high – if you can do this successfully, you can make a lot of money
- Picking a strategy, choosing a broker and opening an account are some of the earliest steps for trading.
- Setting a stop loss, taking regular profits and using limit orders are vital for successful day trading
- Rules like PDT & Margin rules are a must for day traders to be aware of scalping, momentum trading and news trading are a few strategies day traders use.
Day trading can be a great way to make money, but it’s not without its fair share of intricacies. In this day trading beginner level guide, we will walk you through everything you need to know about day trading, including what it is, the risks involved, and how you can get started. We’ll also provide some tips on how to stay safe while practicing it. Whether you’re just getting started or are looking for a refresher, this guide has everything you need to get started on the right foot!
Day trading – What it actually is
Day trading is the act of buying and selling a stock within the same day. This can be done for a variety of reasons, but most often it is done in order to make a quick profit off of the stock’s movement. In order to day trade successfully, you need to have a good understanding of the stock market and how it works. You also need to be able to make quick decisions and have a firm grasp on your finances.
While day trading can be a great way to make money, it’s important to remember that it is also a risky endeavor. Traders are often working with large sums of money, and they can easily lose money if they don’t know what they’re doing.
How it works
When you day trade, you’re essentially buying a stock at one price and selling it at another. If the stock goes up in value, you make a profit. If it goes down, you lose money. The key to day trading is to buy low and sell high – if you can do this successfully, you can make a lot of money!
There are a few different ways to day trade, but the most common is to use what’s called a stop-loss order. This is an order that tells your broker to sell your stock if it drops below a certain price. For example, let’s say you buy a stock for $100 per share. You might set a stop-loss order for $90 per share, which means that if the stock drops below $90, your broker will automatically sell it. This is a good way to limit your losses if the stock market starts to turn against you.
Day trading products
There are a few different products that day traders can trade.
- Stocks: A stock is a share in the ownership of a company. Day traders can buy and sell stocks on the stock market.
- Options: An option is a contract that gives the holder the right to buy or sell a security at a certain price within a certain time period. Day traders can trade options on the stock market.
- Futures: A future is a contract that obliges the holder to buy or sell a security at a certain price at a certain time in the future. Day traders can trade futures on the futures market.
- Currencies: A currency is money that is used in one country to buy goods and services in another country. Day traders can trade currencies on the foreign exchange market.
What you need to know before you start
Before you start day trading, there are a few things that you need to know.
- You need to understand the risks: Day trading is a risky activity, and day traders need to be aware of the risks involved before they start.
- You need to have a plan: It is important for day traders to have a plan when they perform day trading. This can help them stay disciplined and avoid making impulsive decisions.
- You need to be patient: Day trading can be a slow process, and day traders need to be patient in order to make money.
- You need to be prepared for losses: Day traders do not always make money when day trading. As a day trader, you need to be prepared for the possibility of losses.
Step-by-step process to get started with day trading
Here’s how beginners can get started
- Pick a strategy: As a beginner, you will want to start with a simple strategy like scalping or momentum trading.
- Choose a broker: You will need to choose a broker that offers day trading services.
- Open an account: Once you have chosen a broker, you will need to open an account with them.
- Fund your account: You will need to deposit money into your account before you can start trading.
- Place your trades: Once you have funded your account, you can start placing trades.
- Monitor your positions: It is important to monitor your positions so that you can exit them when they reach your desired profit level.
- Exit your position: Once you have made the desired amount of profit, you will need to exit your position.
Role of technical analysis
Technical analysts operate with a unique approach. The premise of technical analysis is that past price movement may be used to predict the market’s future behavior.
The goal of a technical analyst is not to discover the true worth of an asset. Instead, they analyses past trade data in search of potential openings. This may be done with the use of several charting tools, such as price action and volume analysis, chart patterns, and technical indicators. The analysis’s purpose is to determine the relative health of a certain market.
However, technical analysis may be used for more than only anticipating price changes in the future. It may also serve as a helpful risk management framework. Technical analysis offers a framework for studying the structure of the market, which makes trade management more systematic and quantifiable. Measuring risk is the first stage in risk management. Because of this, not all technical analyzers work exclusively in the trading industry. Technical analysis might simply serve as a risk management foundation for them.
The discipline of technical analysis may be applied to any financial market, and it’s frequently utilised by Stock/cryptocurrency traders.
Important points to consider
In order to maximize the results of day trading, day traders need to adhere to the following fundamental aspects:
- Set a stop-loss: A stop-loss is an order that you place with your broker to sell a stock if it reaches a certain price. This is important because it helps you limit your losses if the stock market starts to fall.
- Take profits regularly: It is important to take profits regularly so that you can lock in your gains and protect yourself from a sudden market reversal.
- Use limit orders: Limit orders are orders that you place with your broker to buy or sell a stock at a specific price. This is important because it allows you to control how much you pay for a stock.
One important rule to remember when day trading is the PDT rule. This rule states that you can only make three day trades in a five day period if you have less than $25,000 in your account. If you violate this rule, you will be banned from day trading for 90 days. As such, it is important to always keep track of your trades and make sure that you do not exceed the PDT limit.
Margin rule for day trading
Another important rule to remember is the margin rule. This rule states that you can only trade with a margin of 50% if you have less than $25,000 in your account. If you violate this rule, you will be banned from day trading for 90 days. As such, it is important to always keep track of your trades and make sure that you do not exceed the margin limit.
Using Moving Averages as support and resistance
A moving average may be used to filter out the random fluctuations in a price graph. Check the trend of the moving average to get a feel for the general direction the price is heading. If it’s tilted upward, prices are generally going up (or have been lately), and if it’s tilted downward, prices are generally going down; if it’s tilted sideways, prices are probably in a range.
You may use a moving average as support or resistance, too. A 50-day, 100-day, or 200-day moving average may serve as support during an uptrend. Because the average provides a kind of floor (support), the price tends to rise after bouncing off it. If the market is in a downturn, the moving average may operate as resistance, or a ceiling, below which the price is likely to decline further.
This kind of adherence to the moving average by the price is not guaranteed. There’s a chance the price may either touch it lightly or halt and turn back before it ever reaches it.
As a rule of thumb, an upward trend is indicated when price is above a moving average. As long as the price is below the moving average, the trend is downward. Nonetheless, moving averages (MAs) may have varying periods of time , thus one MA may signal an upward trend while another MA signals a downward trend.
Commonly used day trading strategies
- Breakout (pullback): The goal of a breakout strategy is to enter a trade after the price has successfully broken out of a trading range. The genuine breakout is the indication to initiate the trade and benefit from the subsequent market action.
- Momentum trading: Another strategy whereby a day trader seeks to profit from stocks that are experiencing strong momentum. A day trader can do this by buying stocks that are on the rise and selling them as soon as they start to fall.
- Trendline: One way to see an upward or downward trend in a chart is with the use of a line drawn through the data. Traders use trendlines, which are created on price charts, to identify price movements. They utilize this data to their advantage when deciding whether to purchase or sell with the trend.
- Range trading: Another one of the most widely practiced day trading strategies whereby a day trader seeks to profit from stocks that are trading within a certain range. For this, a day trader can buy stocks when they are at the bottom of the range and sell them when they are at the top of the range.
Day Trading Examples
You as a day trader are following the trend the stock of ABC Company. ABC is trading at $10.00 per share. You buy 100 shares at $10.00 per share. The stock price rises to $10.50 per share. You sell your shares at $10.50 per share. Your profit is $0.50 per share, or $50 total.
You as a day trader are performing sentiment analysis of the stock of MNO Corporation. MNO is trading at $30.00 per share. A positive news event is announced and the stock price starts to rise.
You buy 100 shares at $30.50 per share. The stock price continues to rise and reaches $31.00 per share. You sell your shares at $31.00 per share. Your profit is $0.50 per share, or $50 total.
You as a day trader are range trading the stock of GHI Corporation. GHI is trading between $40.00 and $41.00 per share. The stock price falls to $40.50 per share. You buy 100 shares at $40.50 per share. The stock price rises to $41.00 per share. You sell your shares at $41.00 per share. Your profit is $0.50 per share, or $50 total.
Day trading tips for success
Do your research
Day traders need familiarity with both day trading methods and the most recent news and events affecting equities. In this context, “economic, business, and financial news” might refer to anything from the Federal Reserve System’s interest rate plans to the release of leading indicator statements.
To that end, prepare yourself. Create a list of the stocks you’d want to buy and sell. Learn as much as you can about the markets, stocks, and businesses you’ve chosen. Read the business section of the newspaper and book mark reputable internet news sites.
When you are first starting out, it is important to trade with small amounts of money. This will help you to learn the ropes without putting your entire account at risk.
Use your funds wisely
Figure out how much you can afford to lose on each deal, and stick to that amount. There are many successful day traders who risk less than 2% of their funds on each deal. A trader with a $40,000 account balance who is ready to risk 0.5% of their money on each deal stands to lose a maximum of $200 (0.5% x $40,000).
Set aside an additional sum of money you can afford to lose while trading.
Make a Schedule
Your time and focus are needed for day trading. You’ll have to give up a significant portion of your day. If your free time is restricted, you shouldn’t even think about it.
In order to be successful in day trading, one must be able to keep up with the markets at all times and seize chances when they come. Constant vigilance and a lightning reaction time are essential.
Trade at the Right Time
When markets open for business, a lot of orders from investors and traders start being filled right away, which may cause sudden swings in price. An experienced player may be able to benefit from the open by seeing trends and strategically placing orders. However, during the first fifteen to twenty minutes, it may be best for newcomers to just observe the market and take notes.
The middle of the day is often the calmest time of day. Towards the end of the day, though, activity levels rise again. Although possibilities do arise at peak traffic times, newbies are advised to avoid them at first.
Set stop losses
A stop loss is an order that automatically exits your position when it reaches a certain price. This can help you to limit your losses if the market moves against you.
Manage your risk
Be sure to manage your risk by not risking more than you are comfortable with losing.
Follow your plan
Once you have a trading plan in place, be sure to stick to it. This will help you to stay disciplined and avoid making impulsive decisions.
Useful tools for day traders
There are a few different tools that you can use to become a profitable day trader
- A stock screener: A stock screener is a tool that allows you to filter stocks based on certain criteria. This can be useful for finding stocks that are suitable for day trade.
- A news scanner: A news scanner is a tool that allows you to find news stories that are relevant to the stocks you’re interested in. This can be useful for finding out about upcoming events that could affect the price of a stock.
- A charting platform: A charting platform is a tool that allows you to view charts and analysis tools. This can be useful for technical analysis and making informed decisions about when to buy and sell stocks.
Day traders need to be able to control their emotions and not let them get in the way of making good trading decisions.
Some common psychological pitfalls that day traders need to be aware of include fear, greed, and revenge. Fear can cause a day trader to sell a stock too early or hold on to a losing position for too long. Greed can cause a day trader to take too much risk or hold on to a winning position for too long. Revenge can cause a day trader to make irrational decisions in an attempt to get back at the market.
It’s important for you to have a solid plan and stick to it. This plan should include entry and exit points, risk management, and position sizing. day traders need to be disciplined and not let emotions get in the way of making trading decisions.
Why is day trading controversial?
While day trading can be a lucrative way to make money, it is also a controversial activity. There are two main reasons why day trading is controversial. Firstly, it is often associated with high-frequency trading which has been linked to market manipulation and insider trading. Secondly, it can be very risky and many people have lost money doing it.
Despite the risks, there are many people who are drawn to day trade because of the potential for high profits. If you are thinking about day trade, it is important to understand the risks involved and make sure that you are prepared for them.
- Losing money: One of the biggest risks involved in day trading is the possibility of losing money. This can happen if you make a bad trade, or if the stock market unexpectedly crashes.
- FOMO: Another risk involved is the fear of missing out on opportunities. This can happen if you don’t act quickly enough, or if you’re not monitoring the market closely enough.
- Overextending yourself: A third risk involved in day trading is overextending yourself. This can happen if you try to trade with too much money, or if you don’t have enough experience.
- Getting scammed: There are many scams associated with day trading, so you need to be careful when choosing a broker or platform.
When day trading can fail
- Not having a plan: One of the main reasons why day trading can fail is because people don’t have a plan. It’s important to have a solid plan that includes entry and exit points, risk management, and position sizing.
- Not following your plan: Certain people don’t follow their plan. It’s important to be disciplined and stick to your plan.
- Not managing your risk: Some people don’t manage their risk. This can lead to taking too much risk or not enough risk.
- Not having enough capital: Not having enough capital can lead to failure. This can in turn lead to being overextended and not having enough money to cover your losses.
- Not knowing when to quit: Some people don’t know when to quit. This can lead to holding on to a losing position for too long, or taking too much risk in an attempt to make up for losses.
List of platforms famous for day trading
- Interactive Brokers: Interactive Brokers is a popular day trading platform as it offers commission-free trading on stocks, options, futures, and forex. It also has low account minimums and no platform fees.
- TD Ameritrade: TD Ameritrade is another famous day trading platform which also offers $0 commission trades on stocks and ETFs. Moreover, it has a robust platform with advanced charting and analysis tools.
- Robinhood: Robinhood is also a renowned day trading platform for commission-free trading on stocks and ETFs. It also has a simple platform that is easy to use.
- E*TRADE: E*TRADE offers commission-free trading on stocks, options, and ETFs. Its advanced charting and analysis tools are also high in quality.
How beginners can practice day trading
There are a few different ways that you can practice day trading.
- You can use a simulator: A simulator is a program that allows you to trade without actually using real money. This is a great way to practice day trading, as it allows you to test out your strategies without risking any of your own money.
- You can use paper trading: Paper trading is another way to practice day trading without using real money. This involves buying and selling stocks on paper, so that you can get a feel for how the market works without actually investing any money.
- You can start small: Another way to practice day trading is to start small. This means only investing a small amount of money, so that you can get a feel for how the market works without risking too much.
How much money do you need for day trading?
It is generally recommended that you start with at least $500 if you want to day trade stocks. This is because you will need to have enough money to cover the costs of buying and selling stocks, as well as any fees that your broker charges.
How much money can you make as a day trader?
There is no easy answer to this question, as the amount of money that you can make day trading will depend on factors such as your trading strategy and risk tolerance. However, if you are able to successfully buy low and sell high, then you could potentially make a lot of money as a day trader.
Famous Day Traders
- George Soros: George Soros is a famous day trader who made billions of dollars by betting against the British pound in 1992.
- Paul Tudor Jones: Paul Tudor Jones is another famous day trader who made millions of dollars by correctly predicting the 1987 stock market crash.
- Bruce Kovner: Bruce Kovner is a third famous day trader who made billions of dollars by trading commodities.
These are just a few examples of the many famous day traders out there. While it is possible to make a lot of money as a day trader, it is also very risky. So, be sure to do your research and practice before putting any real money on the line.
Is day trading right for you?
The only way to know if day trading is right for you is to try it out and see how it goes. However, there are a few things that you should keep in mind before starting:
- It takes time to learn: Day trading is not something that you can learn overnight. It takes time and practice to master the different strategies and techniques involved.
- It is risky: Day trading is a risky activity, and you need to be aware of the risks involved before you start.
- You need to have capital: You will need to have enough money to cover the costs of buying and selling stocks, as well as any fees that your broker charges.
If you are willing to put in the time and effort, and if you have the capital, then day trading could be right for you.
FREQUENTLY ASKED QUESTIONS
What is day trading?
It is a type of investing where traders buy and sell stocks within the same day. Day traders typically make multiple trades throughout the day and aim to profit from short-term price changes.
How do I become a day trader?
To become a day trader, you will need to open an account with a broker that offers access to the financial markets. You will also need to have some capital to start with as well as a trading plan. Additionally, to be a successful day trader, it is important to educate yourself about the market and practice with a demo account before putting real money at risk.
What are the associated risks?
The risks of day trading include losing money, missing out on potential profits, and getting stressed out. Additionally, day trading can be risky for beginners who don’t have a lot of experience in the market.
How much money do I need to start it?
The amount of money you need to start day trading will depend on your broker and the type of account you open. Some brokers require a minimum deposit while others don’t. Be sure to check with your broker to see what their requirements are.
Can I day trade with a small account?
Yes, you can with a small account. However, it is important to remember that the smaller your account, the greater the percentage of your account you will need to risk on each trade. This can lead to quick losses if you are not careful.
What is the best time of day to day trade?
There is no one “best” time of day. Some people prefer to trade in the morning while others prefer to trade later in the day. Ultimately, it will depend on your personal preference and schedule.
What is a stop loss?
A stop loss is an order that automatically exits your position when it reaches a certain price. This can help you to limit your losses if the market moves against you and help you improve your chances of being a successful day trader.
How do I manage risk when day trading?
Be sure to manage your risk by not risking more than you are comfortable with losing. Additionally, follow your trading plan and stick to your risk management strategy in order to avoid making impulsive decisions that could lead to losses.
What is the best day trading strategy for beginners?
There is no one “best” one. However, some strategies that may be worth considering to be a successful day trader include scalping, news trading, and range trading. Ultimately, it will depend on your personal preference and the type of market you are trading.
Can I day trade without a broker?
No, you cannot. Day trading requires access to the financial markets, which can only be obtained through a broker.
How do I find stocks to day trade?
There are a few different ways to find stocks for this purpose. You can use a stock screener to filter for stocks that meet certain criteria, such as being highly volatile or having high volume. You can also look for stocks that are making newsworthy moves or that are trading near important support or resistance levels.
What is the best day trading software?
There is no one “best” day trading software. However, there are many different software platforms available that can be used for day trading. Some popular choices include MetaTrader 4, TradeStation, and NinjaTrader.
What are some securities and exchange commission rules for day trading?
The securities and exchange commission has a few different rules that day traders should be aware of. These include the pattern day trader rule, which requires day traders to have at least $25,000 in their account if they want to make more than three day trades in a five-day period. There is also the tick rule, which prohibits trades on securities that are not listed on the exchange where the trade is taking place. Finally, the uptick rule prohibits short selling on stocks that are already in decline.
Day trading can be a great way to make money, but it is also risky. Be sure to educate yourself before getting started and always trade with caution. Use stop losses to limit your losses and follow a solid risk management strategy. Finally, don’t forget to have a good day trading strategy in place before you start trading. Thanks for reading!