Day Trading 101: Use These Strategies to Make a Profit

 

Day traders are those that buy and sell an instrument during the same day. Some even do it many times over the duration of the day. That way, they can easily profit from the price movements that occur during the day. However, this type of trading is not without risks. While it can be a lucrative venture, lack of knowledge or experience can cost you a lot of money.  That is why you should, at least in the beginning, stick to the tried-and-true strategies and methods. That’s why we will take a look at some principles you should definitely adhere to. So, to help you on your way, we will go over the top ten day trading tips for beginners. First things first, make sure you have a solid broker like Ally Invest. You’ll also want to make sure you have access to a quality trading platform.

Top 10 Tips

1. Do Your Homework:

Remember, knowledge is power. And not just knowledge of how trading works. If you want to be successful, you have to follow the stock market news and any event that can affect the market. Use any information you can find. Always make sure to do your homework. That includes making a list of stocks you would like to buy, informing yourself about that stock on a regular basis and keeping up with the news. You should also visit trustworthy websites with reliable financial information as often as you can.

2. Set Aside The Amount of Money You Are Willing to Spend:

You should know how much money you are willing to risk in each trade before even starting your day. We would recommend setting aside the amount that is no bigger than 1-2 percent of your account. Remember, you will lose money in trades, no matter how good you are. Remember, even Warren Buffett doesn’t have a 100% success rate. And you don’t want to risk a large percent of your account on a single trade. So, make sure to set aside the money you can trade with. And be ready to lose that money. We are not saying you shouldn’t be optimistic, but don’t take away from the money you require for your living expenses.

3. Make Sure You Have Enough Time

Day trading can, without a doubt, be a very lucrative trading style. However, you should bear in mind that it will take up most your day. If you don’t have a lot of spare time, you should consider a slower trading style. Reacting to the market movement is crucial and missing out due to the lack of time can cost you a lot of money.

4. Don’t Overdo it

As a newcomer in the world of trading, you should remember not to make too many trades in a day. So, try to focus on a couple of stocks for the first few weeks, at least until you get some experience.

5. Avoid Penny Stocks

We understand that trading low-cost stocks seems ideal for a new trader. However, penny stocks usually lack liquidity, and it is not easy to make a profit with them as a beginner.

6. Let Others Trade First

Day trading can be very volatile, and this is very noticeable during the first 15 minutes of each trading day. A lot of people will execute their orders as soon as the market opens. And this practice increases the volatility of the market. Once you have some experience behind you, you will be able to profit from this volatility. However, until then, you should avoid the rush hour and trade during the milder moments of the day. Take your time, and read the movement of the market.

7. Use Limit Orders to Cut Your Losses

There are two main types of orders you should use as you are starting out – market orders and limit orders. Market orders guarantee execution, however, they don’t guarantee the price. This order executes the trade at the best price it can get at the moment. On the other hand, limit orders demand the right price but don’t guarantee the execution. Use limit orders to trade with precision and set the price you want. Make sure to set realistic prices for trading to avoid missing out on the trade.

8. Keep Your Expectations in Check

Some people imagine that every single trade has to be a win to make a profit. Others expect incredible outcomes after just a couple of trades. And, we have to tell you, neither of those is necessarily true. In fact, many successful traders have success rates that barely go over the 50% mark. However, they focus on making more money on winning trades than they lose on their losing ones. That is why risk management is one of the most important aspects of trading. So, don’t get discouraged if some of your trades end up losing you money. Just take your time and develop a strategy that lets you get more than you lose.

9. Control Your Emotional Response

Trading in the stock market can get very emotional. You might get overly optimistic, hopeful or fearful, depending on the day. But don’t let your emotions take the lead. In the end, use your logic to make the decisions.

10. Always Stick to Your Plan

Make sure you have a plan before you start placing orders, and stick to it. As a day trader, you will have to move fast to grab a good trade. However, you don’t have to put yourself in the position where you have to make snap decisions. Don’t blindly chase profits if that trade goes against your overall plan. Instead, develop your formula and follow it as closely as you can.

Buying For Beginners

As a day trader, you will try to make a profit by using the small price movements during the day. However, there are factors you should always consider when entering a trade. Typically, you should look for liquidity, volatility, and trading volume of a stock. Allow us to explain:

* Liquidity – Stocks with a lot of liquidity usually have tight spreads. That means that you can both enter and exit a position with a good price.

* Volatility – Volatility is a measure of the price movement of a stock. If a stock is very volatile, it means you can gain, or lose, more money.

* Trading Volume – This measure will tell you how many times a stock has been traded in a certain time period. Usually, you should check for a period of one day. You can use this to measure the interest in a certain stock. If the volume increases, it usually means that the price will change too.

Once you have a grasp of these measures, it is time to find what your entry point should be. For this, you should use the following three tools:

* ECN/Level 2 Quotes: ECNs represent the electronic network that will automatically execute orders for you. Level 2 quotes are a service that will get you price quotes from NASDAQ and OTC securities. Use these two in conjunction to vastly improve your chances. It might take you some time to get a good handle on how to use these.

* Live News: Stock prices are always changing. And one of the biggest catalysts for that are news. Subscribe to real-time services to make sure you are in the loop.

* Candlestick Charts: Use these charts to analyze action prices. More on them later.

Selling For Beginners

Once you find the stock you want to buy, it is time to make a plan for the exit point. Namely, identify your price target. Once the stock reaches that target, leave the position. There are numerous strategies when it comes to price targets. Let’s go through them:

Scalping: This is probably the quickest strategy to perform. And, for that reason, it is one of the most popular ones. With this strategy, your price target is met as soon as the trade becomes profitable for you. In essence, you set the price target by planning to sell as soon as the numbers show you will make any money.

Fading: If you see a stock experience several rapid upward moves due to overbuying, you should consider this strategy.  As soon as the stock spikes, the early buyers will start turning profits, and others will avoid the higher price. So, once it goes up, you start shorting the stock to turn a profit from the subsequent price drop. This strategy is risky, but it can be very profitable. Set the price target as the moment new buyers start buying the stock at the lower price.

Daily Pivots: With this strategy, you will be looking to profit from the volatility of the stock. Follow the price patterns of stocks and notice when the prices are at their lowest. Buy at that point, and sell when they are at their highest. Set the price target at first signs of reversals.

Momentum: If you opt for this strategy, follow the news closely. Your goal is to recognize the news that will trigger an increasing trading volume of a stock. Buy on the release of the news and sell once the volume starts decreasing.

The Candlestick Chart

We said that you should use the candlestick chart to find your entry point. Well, this is how to do it. Start by focusing on patterns, technical analysis, and volumes. Of course, there are way too many setups you could run for us to instantly cover. However, one of the most reliable ones is the doji reversal pattern. The doji candle is the one that is signaling the reversal. This is how you can try to confirm this pattern:

  1. The first confirmation is a volume spike. The spike shows that there are traders that will support the price. The spike can be on the doji candle or on those that come immediately after.
  2. Check if the prior support levels match up.
  3. Check the level 2 to see what the open orders have to say.

Margin Trading and Stop Losses

As a margin trader, you will be borrowing the funds for your investments from a brokerage. If you become a margin trader (which is not easy), you will be vulnerable to sudden price movements. In essence, margins amplify trading results. So, if you make a profit, it will be bigger. However, the same goes for your losses too. So, using stop-loss orders is crucial for day traders.

This type of order will greatly reduce your risks. And, you can set the stop-loss to any metric you want. If you are entering a long position, set it just below a recent low point in price. Or, if you decide to enter a short position, set it above a recent high.

 

Alternatively, if you are afraid of market volatility, you can design a stop-loss order that will protect you from it. If the stock’s price is moving up and down every minute, you can place a stop loss at a certain distance away from your entry point. Make sure to leave some breathing room as the price fluctuates.

We should also mention that a lot of traders like setting up two stop-losses. A physical stop loss is the one you place at the point at which you would lose the most money you are willing to risk on this trade. A mental stop loss is the one you set at the point where the movement breaks your entry criteria. In essence, you set it up to exit the position the moment your trade makes an unwanted turn. Just make sure that the exit criteria are very specific.

Final Remarks

Mastering day trading can be a daunting task. It will take a lot of time and discipline on your end. In fact, many who try to do it either fail or give up. The fast-paced environment and the pressure that comes with it can prove to be too much for a lot of traders. But, if you utilize the tips and strategies you can find above, you might make a strategy that will turn a profit. After you get enough experience to be a consistent trader, you should be able to beat the odds. And, if it gets tough, just bear in mind that you can always try again tomorrow.

Posted by Judy Romero