The selling and buying of a financial asset within the same day or several times during the same day is called day trading. It can be a lucrative game to seek advantage of small price movements, provided you play it correctly. For rookies, day trading can be a dangerous game, especially when you don’t abide by a well planned strategy.
It is vital to follow day trading strategies when you’re planning to monetize on small and frequent price movements. You require in-depth technical analysis to create an effective and consistent strategy. You also have to utilise charts, patterns and indicators to foretell the future price movements. If you’re thinking of choosing a broker, make sure he suits your day trading style. You should look for things like:
- Remarkable speed of trade execution
- Capability of trading directly from graphs
- Price action data
- Stop losses and take profit orders
- Automation of trade
Day Trading Strategies
- Keep aside funds
Determine how much capital you can risk on each trade. Most day traders risk less than 1-2% of their account per trade. For example, if you have $40,000 in your trading account and you’re eager to risk 0.5% of the capital on each trade, then the maximum loss per trade is $200. So you have to set apart extra funds that you can trade with.
- Invest time
Day trading demands lot of your time; this is why it is called day trading. You may have to invest most of the day into trading. If you have limited time, don’t opt for day trading. Here the trader has to track markets and spot all opportunities that can come up during the trading hours. The key is to move quickly.
- Begin small
Since you’re a beginner, concentrate on maximum 1-2 stocks during a single session. You will find it easier to track and look for opportunities when there are few stocks. Of late, it has become common to trade fractional shares and hence you can invest in smaller dollar amount on which you wish to invest. This means that if Apple shares trade at $250 and you just wish to buy $50, there are many brokers who’ll allow you to buy one-fifth of a share.
- Don’t go for penny stocks
Being a novice, you might be looking for low prices and deals but you should strictly avoid penny stocks. The reason behind avoiding them is that they’re mostly illiquid and so the likelihood of hitting a jackpot is rare. Stocks trading under $5 a share become de-listed from the stock exchanges and they only become tradable OTC (over the counter). Unless you find a real opportunity or you’ve done enough research, stay away from these.
- Curb losses with limit orders
Decide the type of orders you will use to enter trades and exit them. Will you utilize market orders or limit orders? If you place a market order, it can be executed at the best price at that time as there’s no guarantee of price. With the help of limit orders you can trade with better precision where you set your price for buying and selling. The more experienced traders might deploy such strategies and hedge positions as well.
A day trading strategy doesn’t have to win all the time in order to be profitable. Ensure that the risk on each trade is limited to a definite part of the account. The stock market can test your nerves at times. You shouldn’t let your emotions govern your logic.