Day trading — the act of buying and selling a financial instrument within the same day, or even multiple times over the course of a day, taking advantage of small price moves — can be a lucrative game. But it can also be a dangerous game for those who are new at it or who don't adhere to a well-thought out method.
Let's take a look at some general day trading principles and common day trading strategies, moving along from basic tips you need to know to advanced strategies that can help you learn how to day trade like a pro.
Not just knowledge of basic trading procedures, but of the latest stock market news and events that affect stocks — the Fed's plans for interest rates, the economic outlook, etc. Do your homework; make a wish list of stocks you'd like to trade, keep yourself informed about the selected companies and general markets, scan a business newspaper and visit reliable financial websites on a regular basis.
Set aside a surplus amount of funds that you can trade with and are prepared to lose which may not happen while keeping money for your basic living, expenses, etc. Day trading requires your time — most of your day, in fact. The process requires a trader to track the markets and spot opportunities, which can arise any time during the trading hours. Moving fast is key.
As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier. Of course, you're looking for deals and low prices. But keep away from penny stocks. These stocks are highly illiquid and chances of hitting a jackpot are often bleak. Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility.
A seasoned player may be able to recognize patterns and pick appropriately to make profits. But as a newbie, it is better to just read the market without making any moves for the first minutes. The middle hours are usually less volatile while the movement begins to pick up towards the closing bell. Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders?
Limit orders help you trade with more precision wherein you set your price not unrealistic but executable for buying as well as selling. A strategy doesn't need to win all the time to be profitable. The point is, they make more on their winners than they lose on their losers. Make sure that the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.
There are times when the stock markets test your nerves. As a day trader you need to learn to keep greed, hope and fear at bay. Decisions should be governed by logic and not emotion. Successful traders have to move fast — but they don't have to think fast. Because they've developed a trading strategy in advance, along with the discipline to hold to that strategy.
In fact, it is far more important to follow your formula closely than to try to chase profits. There's a mantra among day-traders: Day traders seek to make money by exploiting minute price movements in individual assets usually stocks, though currencies, futures and options are traded as well , usually leveraging large amounts of capital to do so.
In deciding what to focus on — in a stock, say — a typical day trader looks for three things: Once you know what kinds of stocks or other asset you are looking for, you need to learn how to identify entry points — that is, at what precise moment you're going to invest.
There are three tools you can use to do this:. Before you actually jump into the market, you have to have a plan for getting out. Identifying the point at which you want to sell an investment is called Identifying a price target. Some of the most common price target strategies are:. Previously, we mentioned three tools for determining entry points — that is, deciding the opportune moment you're going to buy a stock or whatever asset you're trading. The most technical are intraday candlestick charts.
We'll focus on these factors:. There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern highlighted in yellow in Figure 1 is one of the most reliable ones.
If we follow these three steps, we can determine whether the doji is likely to produce an actual turnaround and we can take a position if the conditions are favorable. When you trade on margin and bear in mind that margin requirements for day trading are high , you are far more vulnerable to sharp price movements.
Margins help to amplify the trading results — not just of profits, but of losses as well, if a trade goes against you. Therefore, using stop-losses , which are designed to limit losses on a position in a security, is crucial when day trading. A stop loss order controls risk. For long positions a stop loss can be placed below a recent low, or for short positions above a recent high.
It can also be based on volatility: Define exactly how you will control the risk on the trades. However you decide to exit your trades, the exit criteria must be specific enough to be testable — and repeatable.
Day trading is a difficult skill to master, requiring as it does time, skill and discipline. Many of those who try it fail. But the techniques and guidelines described above can help you create a profitable strategy, and with enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds.
There is one final rule we should mention: Set a maximum loss per day that you can afford to withstand — both financially and mentally. Whenever you hit this point, take the rest of the day off. Stick to your plan and your perimeters. After all, tomorrow is another trading day. If you want to learn proven, profitable strategies you can start using today, from an experienced Wall Street trader, then check out Investopedia Academy's "Become a Day Trader" course.
Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Deciding What to Buy Day traders seek to make money by exploiting minute price movements in individual assets usually stocks, though currencies, futures and options are traded as well , usually leveraging large amounts of capital to do so.
Liquidity allows you to enter and exit a stock at a good price i. Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss. Trading volume is a measure of how many times a stock is bought and sold in a given time period most commonly, within a day of trading, known as the average daily trading volume - ADTV.
A high degree of volume indicates a lot of interest in a stock. Often, an increase in the volume of a stock is a harbinger of a price jump, either up or down. There are three tools you can use to do this: News moves stocks; subscribing to such services tell you when potentially market-shaking news comes out. ECNs are computer-based systems that display the best available bid and ask quotes from multiple market participants, and then automatically match and execute orders.
Together, they can give you a sense of orders being executed in real time. Candles provide a raw analysis of price action. More on these later. Day Trading Like a Pro: Deciding When to Sell Before you actually jump into the market, you have to have a plan for getting out.
Some of the most common price target strategies are: Strategy Description Scalping Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure that translates into "you've made money on this deal. This is based on the assumption that 1 they are overbought , 2 early buyers are ready to begin taking profits and 3 existing buyers may be scared out. Although risky, this strategy can be extremely rewarding.
Here the price target is when buyers begin stepping in again. Daily Pivots This strategy involves profiting from a stock's daily volatility. This is done by attempting to buy at the low of the day and sell at the high of the day. Here the price target is simply at the next sign of a reversal, using the same patterns as above.
Momentum This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here the price target is when volume begins to decrease. Day Trading Pro Tips: Charts and Patterns Previously, we mentioned three tools for determining entry points — that is, deciding the opportune moment you're going to buy a stock or whatever asset you're trading.
We'll focus on these factors: Looking at candlesticks - the highlighted doji signals a reversal.More...