Day trading strategies, as well as how to quickly get started in the market
Day trading is when one purchases and sells stocks within short time frames instead of holding onto them for extended periods of time, such as years at a time. You make a buy of an asset at a lower price and then unload it at a higher one when the price begins to rise again.
Trading during the day requires competence to avoid losing money rather than making it. Beginners in day trading have a lot of ground to cover in terms of education. You will need to pick what to trade and how much capital you will need. Still, you will also need to decide when to trade, buy the appropriate equipment and software, and figure out how to manage your risk. All of these things will need to be done.
As you embark on this adventure, the following are some pointers that will correctly guide you.
Key takeaways
When determining which assets to buy and sell, day traders utilize a variety of trading tactics. While some may trade several times a day, others may only do so once a day.
You can start trading foreign currency with as little as $500, and you can start trading futures with as little as $1,000.
Before you start using your own money to buy and sell assets, it is recommended that you first use a practice account to develop a profitable strategy.
Suppose you want to be successful in day trading. In that case, you need to learn how to handle the significant amounts of risk involved effectively.
The fundamentals of day trading for newcomers
It makes no difference to a day trader if the broader market is going up or down because they only worry about their trades. You examine the various assets individually to choose which ones you wish to trade. You have the potential to generate money so long as the stock market is experiencing both gains and losses.
Some day traders are pretty busy. As they buy and sell different securities throughout the day, they might conduct dozens of different trades. Some traders may only make a single transaction throughout the entire trading day. What you decide to do will be determined by several different elements, the most important of which are the movement of prices on that particular day and your overall trading strategy. Price charts are the primary tool most day traders utilize when determining when to place a transaction, which is then carried out through a brokerage account.
A day trader in pattern day trading completes at least four "day trades" during five business days.
Day trading is a challenging and perhaps emotionally taxing activity, mainly if you anticipate incurring a loss of capital. Because of this, you shouldn't get into day trading without first doing some serious research. There is no easy journey to financial success here. On the other hand, you won't have to put in the effort of years of preparation. You should devote three to six months to planning and formulating a strategy. You'll need to educate yourself on the following:
- The process behind many trades.
- When to purchase and when to sell.
- Commonly used day trading tactics.
- How to read and interpret a price chart as well as identify patterns.
- How to cut down on the amount of money you lose in a deal.
After you've had a few months' experience and reached a point where you're comfortable with your trading technique, you'll be ready to start trading with actual money.
How much money is there to be made working as a day trader?
Trading during the day won't help you become wealthy overnight, but if you give it your full attention, it has the potential to bring in a lot of money. The amount of money that you can make from day trading is highly variable because it is dependent on various factors, including the following:
- Your experience
- How well you can limit your losses and how diligent you are in your trading technique
- The initial sum of money with which you begin trading.
When comparing day traders who work for a bank or hedge fund to private day traders who trade with their own money, one must make another distinction. Private day traders trade with their own money. Day traders who are salaried don't have to worry about spending their own money, which means their income is more stable. Even though many day traders are eligible for bonuses or commissions and their base wage, the average salary for a day trader in February 2022 was $80,081.
How to start off in day trading with $500 or $1,000?
Every market has the potential to yield a profit. Therefore, the deciding factor is how much capital you need to start. Do not attempt to dominate every market at the same time. This will cause you to have a divided focus, and it could take you longer to produce money. Choose just one industry to study so that you may concentrate your efforts. Applying the same skills to other markets is much simpler when you have mastered making money in one market.
1. How you can start day trading with $500
On the foreign currency market, you may open a day trading account with as little as $500 if you want to get started trading right away. The foreign exchange market is another name for this.
Trading currencies on the foreign exchange market, such as the euro and the U.S. dollar (EUR/USD), is what you do. Although the minimum deposit to open an account here is only $100, we strongly recommend that you start with at least a little more. This is a fantastic place to begin if you have a starting capital of merely $500 and are interested in observing the results.
2. How you can start day trading with $1000
The futures market does not have a minimum equity requirement that is legally established. However, brokerages can set their house minimums. You might be able to open an account and begin day trading with as little as $1,000 in capital, depending on the brokerage firm that you decide to work with.
The market for futures contracts offers trading in a diverse range of underlying assets. This value is typically determined by a commodity like crude oil or gold. For instance, they could also be determined by the movements of indices like the S&P 500.
Trading equities daily demands a minimum investment of $25,000, making this a more capital-intensive choice. If you start, day trading stocks might not be the best option for you, given the higher initial capital outlay required.
What you should know before beginning day trading
When you've decided what you'll be trading, the next step is to gather the essential equipment you'll need to get started.
A computer, possibly a laptop
It is recommended to use two monitors; however, doing so is unnecessary. There should be no lagging or crashes when running your trading program on the computer because the computer should have sufficient memory and a fast enough processor.
You don't require the most advanced computer, but you also don't want to skimp on quality. Because both software and computers are subject to ongoing evolution, you need to ensure that your computer is current. When day trading, having a computer that is too slow might cost you money, particularly if it crashes while you are in the process of making transactions or if its slowness causes you to become stuck in trades.
A fast and reliable connection to the internet
When you have a spotty internet connection, day trading is not something you should attempt. It is recommended that you utilize an internet connection of at least the cable or ADSL variety. Because the speeds of these various services can vary, it is vital to select an internet plan that is at least among the available options.
The slowest internet speed that your service provider offers may be sufficient. However, suppose you have several web pages and programs open simultaneously. In that case, you may find that the information on your trading platform does not update as rapidly as it should. If your internet connection is frequently unreliable, paying a little extra for more dependable service or a quicker connection can be worthwhile.
A platform for trading
Download a few different trading platforms to compare their features. Because you are just starting, it is unlikely that you will already have a well-established trading style. Choose a few different paths from the available choices that your broker gives you, and choose which one appeals to you the most.
There is a wide variety of software platforms for trading stocks. Futures and FX traders frequently choose NinjaTrader as their day trading platform. Bear in mind that you may find it necessary to switch trading platforms on multiple occasions during your trading career or make adjustments to how the platform is configured to fit your growing trading needs.
Using the NinjaTrader Replay tool, which allows you to trade last days as if you were trading in real-time, is one of the most effective ways for forex and futures traders to hone their trading skills through practice.
A Broker
Your broker acts as a middleman between you and other traders and, in exchange, collects a commission or other fee on the trades that you execute. Day traders should prioritize brokers who charge minimal fees because significant commission rates can potentially destroy the profitable potential of a day trading strategy.
Having said that, it is not always ideal to go with the broker who has the lowest fees. You need to have a broker who will be there to provide support if you run into a problem. It is well worth paying a few dollars more on a commission if the company can save you hundreds or thousands of dollars if your computer experiences a meltdown and you cannot get out of your trades.
Although significant banks provide trading accounts, these accounts aren't always the most practical choice for day traders. Larger banks often charge more significant fees, whereas smaller brokerage firms are likely to provide day traders with cost and commission structures that can be tailored to their specific needs.
Trading tips and tricks for day traders
After you have determined the assets you will be trading and have your trading equipment prepared, it is time to begin training, making plans, and formulating a trading strategy. The following is a list of some advice that will assist you in getting started with day trading and managing the risk associated with it.
Start off small
When you initially begin day trading, you should start with more modest sums of money that you can comfortably afford to lose. For instance, depending on the type of trade you decide to engage in, you might choose to start with either $500 or $1,000.
Because it is common for novice day traders to suffer financial losses, in the beginning, you should avoid taking chances with money that you require for day-to-day living expenses. When the money you can't afford to lose is disappearing, this can be distressing. Still, it can also contribute to poor decision-making. You can limit your losses and reduce the likelihood of trading rashly in response to those losses if you begin with a bit of capital.
Make use of "limit orders"
You can establish a specific price for purchasing or selling with a "limit order." If you place a limit order to buy, you will complete your purchase at the limit price or below (to ensure that you do not overpay). If you place a limit order to sell, you will fill your order at the limit price or higher (to ensure that you don't lose too much money).
You do this through your brokerage firm to get the order started. When the stock reaches the specified price, the transaction will be carried out mechanically. This can protect you from suffering significant financial losses.
Refrain from reacting in an emotional manner
When day trading, it's easy to let your emotions get you and make rash decisions in response to either positive or negative news. On the other hand, this may cause one to make decisions that are not prudent. Instead, when it comes time to decide whether to buy or sell, you should stick to your approach. In day trading, making decisions based on logic rather than emotion might result in greater profits.
Be sure to time your trades precisely
- As a day trader, you need not continuously trade stocks all throughout the day. What you are trading will determine which hours of the day are most important for you to focus on. If you limit your trading time each day to two to three hours, you will probably discover more stability.
- The first few hours after the market opens is ideal for day trading stocks, while the last hour before the market closes is the finest time to trade stocks. It would be best if you strived to become an expert trader by trading between 9:30 and 11:30 am Eastern Standard Time (EST). This is the most turbulent time of the day, providing the most significant price moves and the most excellent opportunity for profit. During the final hour of the day, between the hours of 3 pm and 4 pm EST, some significant moves take place. Trade throughout the morning session if you only have an hour or two to dedicate to the market.
- One of the best times to trade is when day trading futures is around the market's opening. Because there is always some level of trading activity in active futures, the prospects for profitable day trading often begin a little bit sooner than they do in the stock market. Pay attention to the trading between 8:30 and 11 am Eastern Standard Time. The official closing of futures markets can occur at various times. Still, the final hour of trading generally presents opportunities to profit from significant price movements.
- During the week, trading in the foreign exchange market occurs nonstop. The most commonly traded currency pair is the euro to the dollar during the day. When the London markets are open, the trading volumes for this currency pair are usually at their highest between the hours of midnight and noon Eastern Standard Time. As a general rule, the most significant price shifts occur between seven and ten in the morning Eastern Standard Time (EST), when both the London and New York markets are open for business.
Put your plan into practice
You should always use a demo account to practice your trading approach, regardless of your trade market. Because of this, you can practice for as long as you choose, even when the market is closed. Because no two days are ever the same in the markets, it takes practice to spot the trade setups and carry out the transactions without any hesitation. Before you start trading for real money, you should have at least three months of practice under your belt and have reached the stage where you can make a profit regularly.
The job of a day trader is to search for a pattern that repeats frequently enough to generate a profit and then to take advantage of that pattern.
When making the transition from virtual to actual money trading, most investors see a decline in their performance. Demo trading allows you to hone your skills and evaluate the viability of your trading plan. It can't simulate the real market. Additionally, it does not result in the mental anguish that many traders experience when putting their real money on the line.
Therefore, if you start trading for real money and find that things aren't going as well as they did in the practice account, keep in mind that this is a perfectly normal phenomenon. You will eventually improve your performance if you continue to trade according to your strategy and avoid trading based on your emotions.
Avoid investing in penny stocks
When you are just starting as a day trader, you will want to watch out for profitable opportunities. The low prices of penny stocks can make them appear as attractive investments. However, since it can be challenging to trade them fast, they are not a good choice for day trading. If their price falls to an unacceptable level, they risk being immediately removed from trading on major stock exchanges. It would be best to steer clear of these stocks unless you are a day trader with a considerable amount of experience.
Day trading tactics and strategies
Consider the following three considerations before making a final choice on whether or not to invest in an asset:
- Liquidity: The capability to enter and exit a stock rapidly and at advantageous prices is provided by liquidity. Greater availability of liquidity results in a more significant number of opportunities to buy and sell at a profit.
- Volatility: The degree to which the price of an asset will shift throughout a single day is referred to as its volatility. The more the volatility, the greater the possibility for profit and the greater the risk.
- Trading volume: The amount of demand for an item can be measured by looking at its trading volume, the number of times that asset is exchanged in a given day. If the trade volume is large, there is a greater interest in purchasing that asset.
One of the most critical aspects of successful day trading is knowing when to get out of a trade to maximize one's profits. When determining the best time to sell assets, you should investigate various tactics before settling on one.
- Trading the news: Positive or negative news regarding a nation or stock can produce significant volatility in the market, leading to giant gains and high losses. Trading the news can be highly profitable. If you employ this method, you will buy when the news is positive and engage in short selling whenever there is negative news. With more experience, you will likely be able to predict global and economic developments and, for instance, sell before it is revealed that negative news is forthcoming.
- Scalping is a trading strategy that takes advantage of minor price differences between the bid and the ask prices. To accomplish this, you will need to enter a position and then leave it almost immediately, typically within a few minutes or perhaps just a few seconds.
- You can try investing in a contrarian manner if you believe that an increased price will start to go down at some point in the future. You will make purchases when prices are going down and sales when they are going up.
- Following trends is something you should do if you believe there will be a continuation of the trend in question. If you believe that a price will continue to move in the same way it is currently moving, you will purchase when the price increases and sell when the price is decreasing.
Experiment with each of these distinct approaches as you hone your skills on the demo platform. You'll locate the one that caters to your trading style while also accommodating the level of risk you're willing to take. Many day traders will utilize a combination of these methods, depending on the nature of the market and the kinds of assets they are investing in. This is because market behavior and the types of assets they are trading both have a role in their decision-making.
Day trading and gambling – are they similar?
Trading during the day exposes one to incur a financial loss. Unanticipated shifts in the market's direction might cause you to lose a significant amount of money regardless of how practical your trading approach is or how much you have practiced. As a result, it might be good to think of day trading as somewhat comparable to gambling when you are first getting started. Never risk more money than you can realistically afford to lose.
Most individuals who participate in day trading wind up incurring financial losses. They aren't aware of the potential dangers. They don't put in the necessary amount of practice, and don't have a robust plan to handle the ups and downs of the market.
You must get an understanding of risk management before proceeding any further. Day traders need to keep their risk under control in two different ways: trade risk and daily risk.
The trade risk
The amount of money you are willing to lose on each deal is known as the trading risk. You should only risk one percent or less of your whole capital on each trade in a perfect world. Choosing an entry point and then establishing a stop-loss order will allow you to achieve this goal. The stop-loss order will cause you to exit the trade if it begins to go too far in the wrong direction.
Because the size of the position you take affects the risk as well, you should educate yourself on how to correctly calculate the position size for futures, FX, or stocks. No one trade should put you at risk of losing more than one percent of your total capital when considering the size of your position - the price at which you entered the market, and the price at which you will cut your losses.
The daily risk
In the same way that you don't want a single trade to do a lot of damage to your account (which is why you should follow the rule of 1 percent), you also don't want a single day to destroy your week or month. Therefore, you should impose a cap on your daily losses. One of the options is to make it equal to three percent of your total capital. If you are only willing to risk 1 percent or less on each trade, you will need to have at least three losing deals (with no winning trades) to incur a loss of 3 percent. If you have a solid plan, something like this shouldn't happen too frequently. When you reach the limit for the day, you should cease trading for the day.
This strategy aims to limit the amount of money lost on any given day to an amount that is readily recuperated by an average winning day. When you have come to a point where you can reliably turn a profit, you should adjust your daily loss limit to be equivalent to your typical winning day. For instance, if you make an average profit of $500 when you win, it is acceptable for you to lose that same amount. You should exit the market if your losses exceed that amount.
Top mobile applications for newcomers to get started with day trading
It is not ideal to day trade using an app on your smartphone. Most day traders use many windows at once, so they may multitask and take in more information. It would be highly challenging, if not just impossible, to recreate that experience on a mobile device.
When you are first beginning, some people will let you trade with a little quantity of money. However, there are apps that you may download that will assist you with the day trading procedure. For instance, you can use certain apps to set up price alerts for specific items. Consider using these practical applications if you're starting:
- Moomoo is a mobile trading app that does not charge commissions. This makes it a more affordable platform for traders who are just beginning their careers in the financial markets. It provides access to various tools, such as advanced charting, tools for research and analysis, and free Level 2 quotes, among other things.
- StockAlarm enables you to establish alerts for various assets, enabling you to execute transactions more rapidly and respond more effectively to unforeseen shifts in the market. You will be able to set alerts for over 10,000 different assets, and you may base those alerts on over 50 different characteristics.
- TDAmeritrade is a mobile brokerage software that enables users to trade various financial instruments, including stocks, options, futures, and FX. In addition to this, it provides access to markets located in other countries. You can carry out trades whenever you choose, five days a week, thanks to the platform's accommodating scheduling.
- Anyone may start day trading with Robinhood because the platform makes it easy to do, making it a valuable tool for novice traders. It is a no-fee platform and the zero-dollar starting requirement makes getting started with it more affordable. However, you should still treat your trades seriously, avoid investing money that you can't afford to lose, and spend some time honing your trading methods before starting actual trading.
The vast majority of day traders will choose to obtain the most thorough information possible by using detailed charts. Your brokerage firm may offer a smartphone app with charts and other capabilities. Still, in most cases, these will need to be streamlined.
Frequently Asked Questions (FAQs)
Can I day trade in cryptocurrencies?
Due to the high level of volatility in the cryptocurrency (crypto) market, day trading may be an effective strategy for making money in this market. At this time, cryptocurrencies are not governed by any regulation in the same way that stocks and options are. This indicates that there are no restrictions placed on their day trading. In the same way that you would for any other kind of day trading, you should spend some time learning, practicing, and building a strategy before engaging in day trading with cryptocurrency.
What exactly is meant by "pattern day trading"?
According to a definition provided by federal legislation, pattern day traders are individuals who open and conclude a deal on the same day at least four times per week. Those who engage in pattern day trading are subject to additional regulations imposed on their accounts, such as a minimum equity requirement of $25,000. In addition to this, they are granted additional rights. These include perks like access to greater leverage for day trading.
What kind of trading is most appropriate for someone just starting?
Invest some time in educating yourself about the stock market and creating a diversified portfolio for the long term by purchasing either equities, exchange-traded funds, or mutual funds (ETFs). You can also use that time to educate yourself on day trading and build up your self-confidence in your abilities to engage in trading and investing. Day trading is likely to be too risky to handle if you are entirely new to investing and the stock market.
