Day Trading means that the trade market positions are held for a short time, typically the trader opens and closes a position the same day. It got a bad reputation in the 1990’s because many beginners began to day trade on the new online trading platforms without applying tested stock trading strategies. They thought they could make a fortune in stock trades with very little knowledge or effort. This was a bad concept they had.
Day trading is not all that complicated once you learn a simple, rules-based strategy for anticipating market moves. Here are 10 rules for beginners to start day trade:
- Price targets
- Entry points
- Capital of a single trade
- Day Trade in other things
If you’re buying a long position, decide in advance how much profit is acceptable as well as a stop-loss level if the trade turns against you. Then, stick by your decisions. This limits your potential loss and keeps you from being overly greedy if price spikes to an untenable level. Exception: in a strong market it’s acceptable to set a new profit goal and stop-loss level once your initial target is achieved.
This allows you to “lose small and win big” and come out ahead even if you have losses on many of your trades. In fact, once you gain some experience, risk-reward ratios of as high as 5:1 or even higher may be attainable.
If supply is near exhaustion and there are still willing buyers, price is about to go higher. If there is excess supply and no willing buyers, price will go down. Identify these turning points on a price chart and you can do the same by studying historical examples.
Again, you need to set a trading plan and stick to it. Impulsive behavior can be your worst enemy. Greed can keep you in a position for too long and fear can cause you to bail out too soon. Don’t expect to get rich on a single trade.
Successful day traders often don’t trade every day. They may be in the market, at their computer, but if they don’t see any opportunities that meet their criteria they will not execute a trade that day. That’s a lot better than going against your own best judgment out of an impatient desire to do something.
Successful traders have a small bucket of risk capital and a large bucket of money they’re saving for retirement or another long-term goal. Large bucket money tends to be invested more conservatively and in longer-duration positions. It’s not absolutely forbidden to use this money occasionally for a day trade, but the odds should be very high in your favor.
Set a percentage of your total day trading budget (2% to 10%, depending on how much money you have) and don’t allow the size of your position to exceed it. Otherwise, you may miss out on an even better opportunity in the market.
New day traders often face “paralysis by analysis” because they get wrapped up in watching the candles and the Level 2 columns on their screen and can’t act quickly when opportunity presents itself. If you’re disciplined and work your plan, actually placing the order should be automatic. If you’re wrong, your stops will get you out without major damage.
Forex, futures and options are three asset classes that display volatility and liquidity just like stocks, are also ideal for day trading. And often one of them will present appealing opportunities on a day when the stock market does not.
Every day trader has losses, so don’t kick yourself when the occasional trade doesn’t go your way. Do, however, confirm that you followed your established day trading rules and didn’t get in or out at the wrong time.