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In the past, the only people who could actively trade in the stock market were those working in brokerages, trading houses, and other large financial institutions.
With the arrival of online trading, the opportunity to participate in day trading has become more affordable and convenient for individual traders.
What is day trading? What are the tools and requirements you need to trade? Can you learn day trading by yourself? How do you start day trading? Are there any strategies and tips to become successful in day trading?
This article explores day trading, how it works, what you must know before trading, and some strategies to use when day trading.
This article also provides trading tips for beginners, including limiting losses and managing risks.
The Basics of Day Trading: What Is Day Trading?
When you engage in day trading, you buy and sell securities throughout the day, within hours, minutes, or seconds. This fast pace makes day trading different from traditional long-term investing, which involves buying security and holding on to it for days, months, or years.
How Does Day Trading Work?
Day trading works by capitalising on short-term stock price movements through actively buying and selling shares.
Day traders seek volatility in the market. There’s no opportunity without short-term volatility or price movement. The more a stock moves, the more a trader can profit or lose in a single trade.
What Is Day Trading’s Buying Power?
Buying power is the total funds available to you for trading securities. Your fund equals the money held in your account plus the available margin.
What’s the First Rule of Day Trading?
One of the first rules of day trading is that you shouldn’t hold on to a position when the market closes for the day. So whether your trade wins or loses, you have to sell it.
Many day traders also make it a rule not to hold a losing position overnight, even when the purpose is to recoup all or part of their losses.
Is Day Trading Difficult?
Successful day trading can be a fast-paced activity that requires experience, skill, proficiency, and an understanding of market psychology.
How you handle these factors can determine how challenging day trading will be for you.
Day Trading Success Rate
Depending on the source, the success rate for making money consistently from day trading is around 5% to 20%.
How Much Can You Make Day Trading?
When you start your day trading journey, it makes a huge difference whether your starting capital is $1,000, $10,000, or $50,000.
For example, you open an account with $10,000, and the broker’s intraday margin lets you trade with a one-to-five leverage. You can trade intraday with $50,000 ($10,000 x 5 = $50,000).
Suppose you buy Company A’s shares at $100 per share. You can purchase up to 500 shares ($50,000 ÷ $100 = 500) instead of only 100 ($10,000 ÷ $100 = 100).
If those shares’ value increases, and you sell them within the day, your profit can be significantly larger if you have $50,000 than if you only bought $10,000 worth of shares.
Day Trading Millionaires
There are many self-proclaimed trading millionaires out there. Some can give you sound trading advice, but some may not.
You must learn to differentiate between actual results and marketing tactics. Before enrolling in trading courses that these traders offer, evaluate whether their proclaimed profits are legitimate.
If you play board games that use fake money, the concept is similar to paper trading. This type of trading lets you place trades without the pressure of using real money, so you don’t lose anything of value.
Paper trading is an excellent way for beginner traders to practise day trading, especially in the stock market.
You can test your strategies, practise risk management, and learn what kind of trader you are without the high stakes of real trading in a fast-paced environment.
If you’re trading, you must have an account with a broker who can execute your trades on the market.
Meanwhile, if you’re into trading to earn money, the broker you choose is a crucial investment decision. Some points to look into when choosing a broker are:
- Costs: Day trading involves multiple daily transactions, so you’ll want a broker with lower fees and commission rates per trade.
- Customer support: If you opt for online brokers, choose one with strong customer support and fast response times.
- Execution speed: Day trading involves a high volume of trades in a day, so execution speed is crucial to getting the price you need at the right time.
- Margin, spreads, and leverage: As a day trader, having competitive spreads, low margins, and high leverage offers can give you better profit opportunities.
- Regulatory compliance: Dealing with illegal brokers will get you into more trouble than it’s worth. So, ensure you choose a regulated broker since it has a legal obligation to protect your financial interests.
Day traders who rely on technical indicators to make decisions depend more on software and tools than news.
If you’re interested in day trading, it helps if your broker provides you with the following tools and features:
- Automatic pattern recognition: Identifies patterns like flags or channels indicating a buy and sell signal.
- Backtesting: Applies strategies to past trades to demonstrate how these methods would have performed. Backtesting can help traders understand how particular trading techniques can perform in the future.
- Broker integration: Helps execute trades automatically through direct links to brokerages. This integration can remove emotional distractions so traders can streamline the execution process.
- Genetic and neural applications: Utilise neural networks (algorithms mimicking how a human brain operates) and genetic algorithms (processes of natural selection) so traders can predict future price movements.
- Multiple news sources: Provide additional information through online news feeds and radio news alerts to let traders react quickly. The faster you react, the more potential day trading profits you can make.
Taurex provides educational materials through webinars, video tutorials, and insightful articles to help you learn more about trading and improve your trades.
When day trading with different stocks and making fast decisions, you can get emotionally invested and no longer follow your strategy.
To make better decisions, follow these day trading tips:
- Control your fear: Any stock, even the best-performing ones, can crash and cause you to lose money.
This situation can cause fear for any investor, leading them to liquidate their holdings to prevent further losses.
As a day trader, you must recognise that these emotions are a natural reaction you should not ignore. Acknowledging fear instead of dismissing it can help you act rationally and maintain focus.
- Know when to get out: When you are in a winning position, knowing when to exit before the market reverses and wipes out your gains is not easy.
Many traders struggle with controlling their greed for higher profits, but you must overcome it and stick to your plan.
Taxes: What Are the Costs and Taxes Associated With Day Trading?
The taxes and other costs associated with day trading can vary depending on the broker you choose, the product you use, and the market you prefer to trade.
For example, the broker will charge a commission if you’re day trading shares. Meanwhile, if you’re trading via spread betting, the market can charge you through the spread.
When it comes to taxes, profits from trading are subject to capital gains tax imposed on earnings from the sale or exchange of assets, but spread bets are tax-free.
What Are the Best Day Trading Markets?
Choosing a day trading market comes down to what you are interested in, what amount you can afford, and how much time you are willing to spend trading. Popular day trading markets include shares, indices, and forex.
When trading stocks in the equities market, it is a common practice to close out positions at the day’s end to avoid what’s known as a gapping risk.
This risk occurs when overnight influences like late-night news cause a company’s share price to open substantially higher or lower than the previous trading day’s close.
Trading indices is similar to trading shares because when you trade indices, you are speculating on the performance of several stocks in a group instead of only one company.
Another similarity is that the market’s opening and closing hours restrict the time you can trade shares and indices.
The Financial Times Stock Exchange 100 index (FTSE 100) comprises the 100 largest companies on the London Stock Exchange (LSE) based on market capitalisation.
In other words, trading indices can open up a large portion of the stock market for you to trade.
The foreign exchange or forex market is another popular choice for individuals who want to start their day trading careers.
There is a wide selection of currency pairs to trade, and the market has high liquidity, meaning it’s easy to buy and sell currencies.
Why Is Day Trading Controversial?
Day trading’s profit potential is much-discussed among traders, especially with online scams that lure beginners and amateur traders with promises of significant and quick returns.
Many financial advisors and professional money managers recommend staying away from day trading because, according to them, the reward doesn’t justify the risk in most cases.
Additionally, economists and financial experts argue that active trading strategies often underperform and accumulate more taxes and fees over time compared to basic passive index strategies.
It’s possible to profit from day trading. However, it has an inherently low success rate due to the significant risks involved and higher skill requirements.
What Can You Trade?
Standard and lucrative day trading markets today include:
- Binary options: This market is the most predictable and straightforward since it lets you know the timing and returns on successful trades in advance.
With the downside limited to the trade size and the potential payout known in advance, binaries aren’t too challenging to understand.
- Commodities: This market includes tangible natural resources like oil, natural gas, food, metals, and minerals.
- Cryptocurrencies: The crypto market has digital or virtual currencies like Bitcoin, Litecoin, or Ethereum.
An upside to trading cryptos is that it has almost zero entry barriers, so you can enter anytime, whether you’re a bullish or bearish trader.
- Forex: The foreign exchange market is the world’s most popular and liquid. The immense volume of forex trading makes this market attractive for day traders.
Forex has no central market, allowing traders to place trades 24 hours a day. This market presents a great starting point for entry-level or aspiring traders with full-time jobs.
- Futures: This market represents the future prices of a commodity or security.
- Stocks: This market includes physical stocks in individual companies, futures, regular and leveraged ETFs (exchange-traded funds), and stock options.
Intraday stock trading offers a different opportunity than a traditional buy-and-hold strategy. For example, spread betting allows traders to profit from falling stock prices.
Deciding What and When to Buy
Day traders who want to know when and what to buy should follow these considerations:
What to Buy
Day traders make money by taking advantage of subtle price movements in securities like stocks, currencies, options, and futures.
When deciding what securities to buy, a day trader usually looks for three things:
- Liquidity: Refers to how liquid an asset is, meaning how easily you can buy and sell it at a reasonable price.
Some assets have a tight spread, or the difference between a stock’s bid and asking price. While some have low slippage, meaning the difference between a trade’s expected and actual price. Traders prefer high liquidity for these trades.
- Trading volume: Measures the number of times a stock gets bought and sold within a given period.
High trading volume indicates a significant interest in a stock. For example, an increase in a stock’s volume often suggests an upcoming price jump.
- Volatility: Measures the daily price range in which a day trader prefers to operate. A higher volatility means a greater profit or loss potential.
When to Buy
Once you know what stocks or other assets to trade, you should identify your trades’ entry points. Tools that can help you with this task include:
- Real-time news services: News can influence stock movement, so you must subscribe to a service that alerts you to potential market-moving news as they occur.
- ECN or Level 2 quotes: ECNs (electronic communication networks) are computer-based systems that display the best bid and ask quotes from multiple market players. ECNs also automatically match and execute orders.
Meanwhile, Level 2 is a service that provides real-time access to the NASDAQ order book. This book contains price quotes from market makers in every OTC (over-the-counter) bulletin board and NASDAQ-listed security.
- Intraday candlestick charts: Candlesticks provide a raw analysis of price action.
One should determine the specific conditions indicating when you’ll enter a position. For example, when a stock’s price breaks above a predetermined trendline during the first three hours of the trading day, you can consider buying that stock.
Deciding When to Sell
The following strategies can help you determine when to exit a winning position:
- Daily pivot: Takes advantage of a stock’s daily volatility to profit by buying securities at the day’s low price and selling them at the day’s high.
- Fading: Involves shorting stocks or selling high and then buying low when prices fall after fast upward movements.
- Momentum: Relies on news releases or strong trending and high-volume movement. The price target is when volume starts decreasing.
- Scalping: Involves selling immediately after a trade becomes profitable, usually within seconds or minutes.
Day Trading With Cash vs Margin
Below are the differences between a cash and margin account for day trading:
Using a cash account for day trading means you are using only the funds available in your trading account. If you have $10,000, that is the only amount you can trade using cash.
You can trade as much money as possible, provided you can settle your funds. However, trading with unsettled funds can suspend your account.
With a margin account, you can borrow funds from your broker to use as a margin or leverage to increase your buying power.
If your broker offers you one-to-five leverage, you can increase your trading potential to $50,000 ($10,000 x 5 = $50,000).
Your broker can also limit your day trades if your account contains less than $25,000. For example, you can only place three trades in five business days or only have twice the buying power if your account is under $25,000.
Once granted leverage, you can buy more shares than the funds in your account can afford. However, you can also lose more than you have since you are trading on borrowed funds.
What Are the Day Traders’ Margin Requirements?
The Financial Industry Regulatory Authority (FINRA) rules state that the minimum equity requirement for an individual designated as a pattern day trader (PDT) is $25,000.
The client must deposit this amount into their account and maintain that quantity before doing any day-trading activities.
Day Trading Rules for Margin Accounts
The pattern day trader (PDT) rule is the main rule that applies explicitly to day traders. PDT involves the following ideas:
- The PDT rule applies to margin accounts only.
- Day trading four times within five days labels you as a PDT.
- You must maintain $25,000 in your account to day trade if you are a PDT.
- PDT accounts have four times the buying power for day trading.
- Traders with less than $25,000 in their accounts cannot make more than three trades in five days.
Based on these elements, if you only have $10,000 in your account, you can only day trade three times within a rolling five-day period.
Ways Around the PDT Rule
One way to trade without having the PDT rule apply to your account is to open one with an offshore broker.
Another method is to consider the day trading futures market, which isn’t required to follow the PDT rule, so you can keep day trading even if you have less than $25,000.
Key Takeaways About Day Trading
When day trading, take note of the following takeaways:
- Day traders usually decide what stocks to trade based on liquidity, volatility, and trading volume.
- Day trading can be profitable for those in it for the long term or if traders do their research and take trading seriously.
- Day traders must be objective and focused while keeping their emotions in check when working.
- Day traders can use tools like trendlines, candlestick chart patterns, triangles, and volume to identify entry points.
What Skills Should You Have as a Day Trader?
A beginner day trader must have basic research and analysis skills to have a solid foundation in utilising technical analysis, selecting the right tools, and managing risk.
If you’re starting to day trade, you must also learn how to create a day trading plan and select the stocks you want to trade.
Regardless of what background you come from, you must also learn to be self-sufficient. As a day trader, you must have the drive to create a new income source and generate profit quickly.
Day Trading Requirements and Tools
To be a successful day trader, you or your broker must have the following tools:
Day traders require fast execution speed. A few seconds can distinguish between riding and missing a trend or breakout.
Serious day traders need a broker that can provide direct market access (DMA).
However, not all brokers have DMA. Many only act as middlemen between your order and the market and route that order on your behalf.
If you want to cut out the middleman, consider trading with a broker that offers DMA.
This way, you can take advantage of liquidity and trade the asset instantly instead of hoping that the stock trades at your preferred price long enough for the broker to complete the order.
Day traders usually trade multiple times daily, so commissions can determine whether you will have a profitable or losing month.
Day trading brokers typically offer two pricing structures depending on your position sizing:
- Per share: This structure is widely used among proprietary trading firms and day trading brokers. Their rates hover around $0.005 per share traded.
- Per trade: This commission structure involves paying a fee for each transaction you place, usually around $5.00 per trade.
A stock scanner is a tool or service that scans the market constantly and streams real-time results.
The right stock scanner can help day traders who trade on short time frames ranging from minutes to as long as weeks and still update results in real-time.
A reliable charting platform can help traders visualise price action that can help make trading decisions.
Not many charting platforms meet active traders’ demands, so these traders often look into third-party charting software.
Getting Started: Can You Learn Day Trading on Your Own? Should You Start Day Trading?
Here are some tips once you decide that you want to start day trading:
- Be sure to enter day trading with sufficient knowledge of the trading environment and a good idea of your goals, capital, and risk tolerance.
You can learn on your own by reading books and watching videos or attending workshops and training sessions.
- Put in the time to practise and improve your strategies to see if they’ll work.
- Focus on a few stocks and start with a small amount instead of buying multiple stocks immediately and spreading your trades too thin.
- Keep your emotions in check and maintain a cool head during your trades. Trading while you’re emotional can cause you to deviate from your plan.
Can Anyone Learn Day Trading?
Think of day trading as similar to doing business or working on a job.
Are you passionate about day trading and willing to work beyond what is expected of you? If so, you can learn and make a living from day trading as if you’re running a business.
You invest time and money in your education to land a high-paying job or succeed in business. The same goes for day trading.
Fortunately, anyone legally allowed to trade can learn and engage in this activity. Even when you do not have a huge capital, you can start small or use a demo account to practise.
Books for Beginners
If you are looking for books on day trading to further your knowledge, consider these resources:
- A Beginner’s Guide to Day Trading Online by Toni Turner: Recommended for beginners
- Technical Analysis of Financial Markets by John J. Murphy: Recommended for learning about trading strategies
- Trading in the Zone by Mark Douglas: Good for learning about trading psychology
- The Truth About Day Trading Stocks by Josh DiPietro: Excellent source for learning risks
How to Practise Day Trading
There are free day trading strategies, guides, and tips online. You can use them to practise and determine which ones work for you.
If you’re a day trading beginner, you should also understand the basic terminologies first.
You can also take trading courses as a starting point to learn how to day trade. Afterwards, you can open a demo account with a trading platform to test your day trading strategy under simulated stock market conditions.
How Long Does Learning How to Day Trade Take?
Experts and experienced traders recommend six months to a year of hard work to become consistent with day trading.
What You Need Before You Can Start Day Trading
Before you trade with real money, you must consider the following tips:
Understand the Factors Impacting Day Trading
One key factor to consider before you trade is that this activity can require plenty of practice compared to investing or the usual buy-and-hold strategy.
With investing, you focus on long-term market movements instead of daily price movements.
On the other hand, day trading involves focusing on factors affecting intraday market behaviour. These factors include liquidity, volatility, and trading volume.
Choose How to Day Trade
Popular securities to day trade include derivatives like options and futures. If you are in the United Kingdom, spread betting is one of the standard trading choices.
These products do not require you to own the asset you’re trading. You can open and close positions faster than when you invest and own the asset.
Create a Day Trading Plan
Before you day trade, you should outline your trading objectives and be realistic about your profit targets.
Day trading has a steep learning curve, so take time to study and practise. Don’t expect to make lots of money immediately.
Consider what methodology you will use to enter and exit the market. If you prefer fundamental analysis, you will likely rely on breaking news, company reports, and macroeconomic data announcements for your day trades.
If you prefer technical analysis, you will mainly focus on technical indicators, chart patterns, and historical data.
Learn How to Manage Day Trading Risk
One crucial step in preparing your trades is to use a risk management strategy like limits and stops to help prevent or minimise potential losses.
Successful traders do not always need to be correct. They must quickly acknowledge and recognise a losing trade and take action.
Doing so improves your chances of making more money on winning trades than losing on wrong ones.
Open and Monitor Your First Position
If you’re finally confident with your trading plan, you can start trading by opening an account with a broker. You can also practise trading with a demo account if you are not ready to trade using real money on live markets.
After opening an account, decide what asset you want to trade and whether you want to buy (going long) or sell (going short).
When you are day trading, you will likely make multiple trades within the day. So, keep yourself updated with any breaking news or market events that can impact the prices of the assets you’re trading.
Have Strong Knowledge of Technical Analysis and Day Trading Terminologies
Day trading requires a lot of practice and skill to become successful. You can compare this activity to playing a professional sport. If you do not have sufficient training or education, you will likely lose more capital than you can gain.
One of the first steps in learning day trading is understanding the terminologies and technical analysis. Reading trading books and watching relevant videos can help you gain that knowledge.
Learning to trade can be challenging, especially when there is overwhelming and often contradictory information. Furthermore, the entry and exit requirements or technical analysis that work for one strategy may not work for another.
Instead of trying to learn all possible strategies, consider learning two or three that you think are profitable and stick to them.
Adopt a Proven Day Trading Strategy or Develop a Profitable Day Trading Strategy
If you’re an aspiring trader, you have two choices:
- Adopt a strategy already used actively by other traders: Master a method proven to be profitable, then make minor changes to fit your trading preferences.
- Create your strategy: Prepare to spend months or years refining and backtesting your strategy before trading with real money.
Regardless of your chosen method, you should have a specific methodology, setup, or trading system you are comfortable with when you begin trading.
Convert Knowledge to Skill by Practicing in a Day Trading Simulator
You may feel ready to trade after reading several trading books and taking a few trading courses.
However, beginner day traders sometimes overestimate themselves and start trading with real money, which they often lose.
Knowing about day trading and effectively reacting and executing trades in real-time are two different things, and practice usually makes the difference.
If you cannot make money in a demo account or trading simulator, earning money with a real account will also be challenging. So, find a simulator where you can practise your strategies in real time until you’re comfortable managing your trades and order entries.
How Much Do You Need for Day Trading?
The amount of capital you need to trade depends on whether you want to make day trading a side job or a full-time career.
Let’s say you want to get a feel of day trading, then you can start with $500. To pursue pattern day trading, you should consider putting and maintaining $25,000 in your account.
However, you can start day trading even with a small amount of money.
How to Start Day Trading: A Personal Guide
There’s no day trading guide for financial markets that works 100% of the time. Each trader operates with a different method, so use a strategy that works for you and stick with it.
Learn Day Trading the Right Way
You can try paper trading using a demo account or simulator if you are not quite ready for live trading using real money.
Paper trading uses simulated stock trades showing the market’s performance without risking real money.
Many brokerages offer demo or paper trading accounts so you can get used to the platform’s functionality and see how much money you can theoretically make.
Gather Knowledge and Experience in the Marketplace
Individuals who day-trade without understanding market fundamentals can lose money. To minimise this probability, beginner day traders should start with learning chart reading, technical analysis, and fully understanding the market and its risks.
Have Sufficient Capital
Smart day traders risk only the capital they can afford to lose. This method helps keep emotion from getting in the way of trading decisions and protects traders from financial ruin.
Having extensive capital allows you to capitalise effectively on intraday price movements. Day traders intending to use leverage in margin accounts require adequate cash to support such trades.
Find a Community
Find a group of people who enjoy discussing and providing helpful insights about the market. These groups can provide ideas about trading, how the market moves, how traders think, the strategies people use, and valuable resources for practising day trading.
Learn Strategies and the Basics
Learn how to read trading strategies, stock charts, candlesticks, options trading, risk management, and what live trades look like.
Know How to Read Candlesticks and Patterns
Knowing how to read candlesticks and chart patterns lets you understand when to take profits and losses.
A candlestick chart comprises a data set containing open, high, low, and close (OHLC) values for each period. The portion of the candlestick that’s filled or hollow is called the body.
The lines above and below the body are called wicks and tails and represent the high and low ranges.
If the stock price closes higher than its opening, the candlestick will have a hollow body. The bottom represents the opening price, and the top represents the closing.
On the other hand, if the stock closes lower than the opening price, the candlestick will have a filled body, with the top representing the opening price and the bottom representing the closing.
Understand Chart Setups
You can display charts at varying periods depending on how you want to trade. Some traders use different periods for various trade types:
- 8-period moving average: Often used for day trading.
- 20-period moving average: Suitable for day and swing trading.
- 50-period moving average: Usually used for swing trading.
- 200-period moving average: Frequently used for swing trading.
Other indicators to guide traders include:
- Volume: Measures the number of shares traded.
- Relative strength index: Measures overbought and oversold shares.
- TTM squeeze: Measures market consolidation before a significant movement.
Find a Schedule and Stick to It
Practise due diligence. You should not trade blindly and rely too much on guesswork. Below are some schedules to consider.
Know When Markets Open
Knowing when markets open gives you enough time to prepare what you need to do during intraday trading.
If you are trading in multiple markets with different open and close times, planning your schedule lets you rest and prepare for your next move.
You can also consider swing trading if day trading doesn’t fit your preferences.
Day trading involves spending much time looking at charts minute by minute. Meanwhile, swing trading lets you buy positions and hold them for a few weeks or months. This way, you won’t get too pressured with specific open and close times.
Conducting Pre-market Analysis Part 1
Perform fundamental and technical analysis before the market starts. If the market opens at 9:00 AM, do your analysis between 7:00 AM and 9:00 AM.
Include company metrics like annual or quarterly earnings in your fundamental analysis, then study the stock price, technical indicators, and support and resistance zones in the technical analysis.
Conducting Pre-market Analysis Part 2
If you’re a part of a community, you can discuss potential trades for about 10 to 30 minutes before the market opens. A lot can happen in the market, so receiving essential information from others is beneficial.
Day Trading Strategies: Basic Day Trading Techniques
Below are some of the basic techniques day traders need to learn:
Day traders often lose money because they do not plan on how they will make their trades. To succeed in day trading, traders must set the criteria for their transactions and have the discipline to buy and sell according to those standards.
Trend traders make money by analysing the asset prices’ direction and buying or selling that asset depending on the trend’s direction.
If the trend moves upward and prices make a series of highs, traders will likely take a long position (buy the asset). However, if the trend goes down and the prices show a succession of lows, traders will likely sell their position.
Swing trading is about buying and selling according to short-term price patterns. Swing traders assume that prices will not go in one direction during a trend and instead look to make money from the up-and-down movements occurring within a short time frame.
Scalping is a short-term trading technique that involves making small but frequent profits. The theory is that small profits can accumulate, and traders can build up a large trading account.
Scalping can result in quick losses if not appropriately planned, so traders must have a strict exit strategy to succeed.
Mean reversion works under the theory that prices and other value metrics like price-to-earnings (P/E) ratios will eventually return to their historical means.
In this case, mean reversion traders will take advantage of asset prices that return to the expected trajectory and make trading decisions based on those movements.
The money flow indicator helps traders determine whether an asset is oversold or overbought by analysing the asset’s price and volume.
This method works by comparing yesterday’s number of trades to the current day to determine whether the asset has a positive or negative money flow.
For example, a reading of 80 or higher suggests the asset may be overbought, and the trader should consider selling.
Bull Flag Strategy
In a bull flag strategy, the trader must first find a high-volume stock, preferably in a long-term uptrend, and then wait for its price to consolidate.
One consideration is to look into a consolidation with a lower volume than the upward movement. The entry and exit indicators should be as follows:
- Entry: Buy the stock when it breaks out of the consolidation pattern with higher volume.
- Exit: Sell when the price goes below the consolidation pattern.
All Day Trading Strategies Require Risk Management: Learn to Play Defense
Suppose you had nine consecutive successful trades, and on the tenth trade, your position went down.
If you are an untrained trader, you can be tempted to make additional purchases at a lower price to reduce costs rather than exit that position early and accept your loss.
If you continue holding without being certain when you should sell, you can end up with a higher loss.
This example represents a trader who can earn a 90% success rate but still becomes a losing trader because they failed to defend their position and manage risk.
Day Trading Charts and Patterns
Day traders usually use the following tools to help them determine the buying points:
- Candlestick chart patterns
- Technical analysis indicators like trendlines and triangles
Chart patterns can also help indicate exit points for your profit targets. For example, the breakout point of the triangle can help identify a price at which you can take profits.
Patterns and Technical Analysis
Chart patterns give day traders a clear picture of trading activity and highlight day trading signals like volatility to help you predict future price movements.
Two typical day trading chart patterns are continuations and reversals. Continuations suggest that the trend will keep rising. Meanwhile, reversals indicate that a trend will go in the opposite direction once completed.
Understanding trading patterns can help you become better informed when using strategies more effectively.
Part of your day trading setup is choosing a trading account. There are several account options, but you should pick one that suits your needs and trading goals. These accounts include:
- Cash account: This account uses only cash as capital for trading. While this option limits your profit potential, it also prevents you from losing more than you can afford.
- Margin account: This account lets you borrow money from your broker as leverage to increase your profit potential.
- Professional account: This option is for traders who can prove a certain level of trading capital and experience. A professional account allows traders to remove the restrictions placed by European regulators on retail traders.
Day Trading Tips for Beginners
Aside from developing trading strategies, applying the 12 helpful tips below can help beginner day traders improve their trades:
Avoid Penny Stocks
Penny stocks provide an opportunity to trade at low prices. However, these stocks are often illiquid (difficult to sell or convert to cash), and the chances of winning trades with them are often low.
Be Realistic About Profits
Trading isn’t as easy as what many movies portray. Even day trading experts put in many hours to get to where they’re at now.
Read those trading books you bought from Amazon and practise with a trading simulator to get your strategies right before you engage in real money trading.
No method can guarantee 100% success, but you don’t need these guarantees to succeed and become profitable.
Many winning traders profit from only 50% to 60% of their trades. The difference is that they make more money on their winning trades than they lose on losing ones.
Cut Losses With Limit Orders
Decide what orders you will use to enter and exit trades. Two methods for cutting potential losses are market orders and limit orders.
A market order executes at the best price available but does not guarantee a price. This order is practical when you want to enter and exit the market without overthinking about a specific price.
Meanwhile, limit orders guarantee a specific price, not the trade’s execution. These orders help you trade confidently and precisely because you specify the price you want your order to execute.
Keep a Record
Always maintain a tracking spreadsheet containing detailed earnings reports. Use this sheet to look back and review your losing trades to identify the mistakes and address any pitfalls to minimise your losses next time.
Knowledge Is Power
Aside from knowing day trading procedures, day traders must keep up with the latest stock market events and news affecting stocks.
Research and keep yourself informed about the various stocks and general markets.
Consider adopting a money management system that lets you trade a sufficient amount without exposing most of your capital to high risk.
Don’t risk more than 1% of your money on a single trade. Plan your trades using a calculator and run the numbers before entering a position.
Sensible Decision Making
When you start day trading, you will face several difficult decisions. Should you trade in stocks or forex? Do you use the 20-period or 50-period moving average? What spreadsheet template should you use? Is your internet connection up to speed?
Day traders should think about these questions and more before making decisions.
Setting Up: Set Aside Funds and Time
Many successful day traders use less than 1% to 2% of their capital per trade. If you have a $20,000 trading account and want to risk only 1% of your money on each trade, your total risk per trade should be $200 ($20,000 x 1% = $200).
Aside from setting aside funds, day trading requires you to dedicate your time and focus. If you only have limited time to spare, day trading can be too difficult, and you may be better off with other trading methods like swing trading or buy-and-hold.
Start Small and Keep It Simple
You have several securities and financial instruments to choose from for trading, like blue-chip stocks, gold, mutual funds, forex, and indices like the Standard and Poor’s 500 (S&P 500) and FTSE 100.
However, beginner day traders should consider limiting to only one or two of these markets.
Focusing on only one to two markets during a session makes it easier for you to track and find opportunities. You can increase your trades at a later date when you’re consistently profiting from a few.
Sometimes, the stock market can perform against your expectations, and you can get emotional. As a day trader, you must learn to control your emotions and ensure that your feelings don’t dictate your decisions.
Stick to the Plan
Many successful traders have a strategy that allows them to win trades and maintain the discipline to stick with the plan.
It’s essential for these individuals to follow a formula closely instead of trying to chase profits.
If you want to be successful, don’t let your emotions control your decisions and don’t abandon your strategy.
Timing: Time Those Trades
The world is divided into different time zones, so the global markets also operate on varying schedules.
Suppose you start trading on the NASDAQ at 7:00 PM after getting off work. You may miss a potential entry signal of the day and minimise your profit potential.
If you want to succeed in day trading, you’ll need to adjust your working hours or pick the markets that will coincide with your preferred time.
Many traders and investors place orders right before or as soon as markets open, and this behaviour can contribute to price volatility. Experienced traders can recognise these opening patterns indicating buy and sell signals and time the orders to make profits.
Beginners wanting to try this method should analyse the market for the first 10 to 20 minutes before placing an order.
Risks of Day Trading: Why Is Making Money Consistently From Day Trading Difficult?
To make money consistently from day trading, you need knowledge, discipline, experience, trading awareness, and mental fortitude.
Despite the advantages of using strategies, they are not always easy for beginner traders to implement.
Also, maintaining discipline in the face of unfavourable situations like significant losses or market volatility can be challenging.
Finally, day trading involves going up against thousands of market professionals who have the experience, expertise, access to cutting-edge technology, and deep pockets to sustain trades.
What Makes Day Trading Difficult?
Day trading can be challenging due to the following factors:
- You’re competing against professionals who’ve built their careers around trading: These individuals have access to the best connections and technology in the industry, which can contribute to their success and increase their profits.
- The government will want a cut of your profits, regardless of how small: You must pay taxes even on short-term gains on investments you hold for less than a year.
- Emotional and psychological biases can affect your trading: It’s easy to become emotional and start chasing profit when losing money on a trade involving your capital. Experienced traders with large capitals are capable of overcoming these challenges.
How to Limit Losses When Day Trading
The following are ways you can minimise or prevent losses while day trading:
A stop-loss order is a mechanism which helps traders limit their losses on a position in a security. If you buy a stock, you can place a stop-loss below a recent low.
Should the stock’s value go below this level, the stop-loss triggers and prevents you from losing more money.
Set a Financial Loss Limit
You can specify a maximum daily loss that you can afford. If you place a $500 daily limit and hit this point within the day, you should immediately exit your trade and take the rest of your day off. You can come back tomorrow for another trading day.
Test Your Strategy
After determining how you will enter your trades and stop-loss orders, you can evaluate whether your chosen strategy will fit your risk limit. If your strategy exposes you to high risk, consider adjusting your plan or using another approach to reduce the risk.
If your strategy works within your risk limit, test your plan by going through historical charts to find entry points and note whether your price target or stop-loss limits will be hit.
Paper trade using your strategy for about 50 to 100 trades. After trading, review whether the strategy will be profitable and whether the results meet your requirements.
You can start day trading using real money if you profit in a simulated environment in two or more months. If the strategy turns out to be unprofitable, revise it and start over.
Who Makes a Living by Day Trading?
You can classify professional day traders into two divisions:
- Those working independently
- Those working for a larger institution
Most traders who day trade for a living work in large institutions like hedge funds and other financial associations. The advantage of these traders is that they can access resources like trading desks, capital, leverage, and expensive analytical software.
The Solo Day Traders
Individual traders often trade using their own money or manage other people’s funds. These resources typically have a limited scope that prevents these traders from competing with institution-based day traders.
Solo traders day trade using technical analysis and swing trades to generate sufficient profits from small price movements in highly liquid assets.
Access to a Trading Desk
Trading or dealing desks are reserved for traders managing large amounts of money or working in larger institutions.
The trading desk gives traders fast order execution crucial for day trading. For example, when a company announces a merger, day traders can place their orders before others can take advantage of the price difference.
Multiple News Sources
The news gives many profit opportunities, so traders must check the news to know when something significant occurs that can indicate a buy or sell signal.
A typical trading room usually has access to regular coverage from news organisations, leading newswires, and software that constantly scans news sources for relevant stories.
Trading software is expensive but necessary for many day traders. Those relying on swing trades or technical indicators depend more on software than on the news.
This software may be characterised by:
- Automatic pattern recognition: This feature identifies technical indicators like flags, channels, and other complex indicators.
- Backtesting: This feature allows traders to see how a specific strategy would have performed in the past to determine how the strategy will perform in the future.
- Broker integration: Some of these applications interface directly with the brokerage, allowing for instantaneous and even automatic execution of trades.
- Genetic and neural applications: These programs use neural networks and genetic algorithms to make predictions of future price movements more accurately.
Best Securities for Day Trading
To find the best day trading securities, consider looking for the following characteristics:
- Good volume: Day traders prefer liquid securities because these assets often trade in high volume. Stocks and currency markets are examples of highly liquid securities.
- Some volatility: The tendency of a security’s price to change frequently is volatility. A higher volatility means higher profit potential but also a high possibility for loss. Day traders should look for securities with some level of volatility.
- Familiarity: Knowing how security performs and what trigger moves helps you anticipate when you will buy or sell. Researching the company can help improve your familiarity with that stock.
- Newsworthiness: Media coverage can capture people’s interests in buying or selling securities and helps create liquidity and volatility. Many day traders follow the news to find what trades they can make.
The Best Times to Day Trade
Day traders rely on liquidity and volatility to make successful trades. The stock market offers these factors frequently in the hours after the market opens and then in the last trading hour before the market closes.
Terminology: Day Trading Search Terms
Typical day trading-related search terms you can search online include:
- Day trading
- What is day trading?
- Day trading for beginners
- Day trading rules
- Pattern day trader
- Day trading stocks
- Best day trading platform
- Day trading strategies
- Robinhood day trading
- Reddit day trading
New traders should also familiarise themselves with terms like:
- Automated trading: These systems use programs that let you enter and exit trades automatically based on a pre-programmed set of rules and criteria.
- Bear or bearish position: This position is where you expect the stock to go down in value.
- Beta: This value measures a stock’s fluctuation against market changes.
- Bull or bullish position: This position is where you expect the stock’s value to go up.
- Entry point: This point is the price you buy or enter a position.
- Exit point: This point is the price you sell or exit a position.
- Float: This figure is the number of shares available for trading. A company that releases 100,000 shares during the IPO (initial public offering) will have a float of 100,000.
- Hotkeys: These pre-programmed keys let you enter and exit trades quickly, especially if you want to exit a losing position immediately.
- Initial public offering: An IPO is when a company raises capital by going public and selling a fixed number of shares in the market.
- Leverage rate: This rate is what your broker will multiply on your deposit to give you additional buying power. Five-to-one leverage means you can buy securities up to five times your capital.
- Market trends: This term refers to a security’s general direction within a given time frame.
- Penny stocks: These stocks have a low market capitalisation and are trading for a low price per share.
- Profit-loss ratio: This ratio measures a system’s ability to generate profit over a loss.
Day Trading Example
Suppose a day trader performs a technical analysis of Company A, and the results indicate that this stock has a pattern indicative of a price increase of at least 0.8%.
If the trader believes this increase will happen on the next trading day, they can consider buying those shares.
Once the market opens, the trader buys 1,000 shares of Company A. Afterwards, they wait until the share price reaches a specific price point, preferably one up 0.8%. Once the stock hits that point, the trader exits the position by selling Company A’s shares.
Day Trading vs Alternatives
The following comparisons show how day trading performs compared to alternatives:
- Vs. traditional investing: The traditional buy-and-hold strategy involves putting money in assets like stocks, real estate, and bonds for long-term value appreciation.
Realistic annual investment returns are around 5% to 7%. Traditional investing has small returns unless you can invest millions.
- Vs. swing trading: Swing traders make their play over several days or weeks, making this method different from day trading but at a relatively shorter term than traditional investing. Traders looking to diversify can consider swing trading.
- Vs. robo-advisors: These automated tools allow you to choose an investing profile and specify your risk preference and investment time frame, and then an algorithm will do all the processing.
This method is preferable for long-term investing and may be too slow for daily trading.
Is Day Trading Right for You?
Day trading is one way to approach the stock market, but whether this activity is for you depends on how much effort and education you put into day trading and the risk you can take.
If you think you can commit to full-time trading every day and handle the volume of trades daily, you can consider day trading.
- When is the best time for traders to buy stocks?
For experienced day traders, the time frame following market opening (e.g., between 9:30 AM and 10:30 AM) is usually the preferred time to buy stocks due to volatile price movements. This volatility can signal significant profit opportunities compared to the rest of the day.
If you’re a beginner trader and prefer avoiding volatile peak periods, you can wait for a few more hours until markets calm down, prices become more stable, and trading volumes decrease so that prices become easier to predict.
- Why do day traders fail?
Day traders fail because of the following reasons:
- Inadequate education
- Absence of a sound strategy
- Unrealistic expectations
- Fear, greed, and hope
- Gambling addiction
- Insufficient risk management
- Is day trading legal?
Day trading is legal in the U.S., but it’s still important that you trade with a trusted and regulated broker.
- Can I make money day trading?
You can make money in day trading by taking small but frequent profits. How much you earn varies depending on your strategy, capital, and risk management plan.
- How does pattern day trading affect day traders?
The PDT rule applies to margin accounts containing less than $25,000 in equity. If you make four or more trades within five business days, your account will earn the PDT label. You’ll then be required to maintain at least $25,000 in your account.
- What order type should I use?
You must understand the differences between order types and learn how and when to use the right type.
When setting a profit target, you should place a limit order. Meanwhile, if you’re setting a stop-loss, you must use a stop limit or stop market order.
- What market data should I use?
Day traders need fast access to market data, whether using a cash or margin account, especially when milliseconds can decide whether your order gets filled.
In this case, you should consider opening an account with a brokerage that offers fast data that’s free and comes directly from the market exchanges.
- Can you day trade with $1,000?
Depending on your broker, you can day trade with $1,000. However, you’ll have limited trade frequency.
If you don’t have a PDT account, you can only trade using the cash in your account without margin.
- What’s more appropriate for day trading, fundamental or technical analysis?
Technical analysis is more suited for day trading because it can help traders identify short-term trends and patterns essential for day trading.
Meanwhile, fundamental analysis focuses more on valuation and is appropriate for long-term investing.
- How much do day traders make?
The amount of money day traders make depends on their skill level, capital, and market conditions.
New traders who successfully profit from day trading can earn between $200 to $500 a day.
If markets are open 253 days a year, and you average $250 per day, you can profit up to $63,250 ($250 x 253 = $63,250) annually.
- Is day trading suitable for beginners?
Many traders can lose money in day trading. But your chances to succeed can grow with experience.
One way for traders to improve their experience is to practise using paper trading and test strategies before investing real money.
- How does day trading differ from investing?
Day trading involves looking for a quick turnaround and short-term profit opportunities from buying and selling securities.
On the other hand, investing requires you to ride those short-term fluctuations with the expectation that your money will grow over time.
- Should traders hold a day trading position overnight?
Technically, a day trader can hold a trading position overnight to increase a winning trade’s profits or reduce a poor trade’s losses.
However, holding a position overnight creates additional risks like getting affected by negative overnight news, meeting margin requirements, and increasing borrowing costs if trading on leverage.
- Day Trading: The Basics and How to Get Started
- Is Day Trading Profitable? How to Get Started
- 10 Day Trading Tips for Beginners