Learn How To Day Trade

Day traders can turn small price moves into large profits. If you want to learn how to day trade, you need to develop a strategy that works best for your budget and time commitment. Let’s explore the steps you should take to learn the ins and outs of this type of trading.

Key Takeaways:

  • Day trading requires a commitment to time and research, even though it can feel like a game at first.
  • You need to learn strategies for trading and managing risk to day trade successfully.
  • By developing — and sticking to — your strategies, you can make the most out of day trading.

What Is Day Trading?

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Day trading is the act of buying and selling a financial instrument within a given day. You can even buy or sell the same financial instrument multiple times over the course of one day. Financial instruments can include currency, shares, options, and many other types of assets. Though day trading is most common in stock markets and foreign exchanges, you can trade in any marketplace.

Day Trading Tips To Manage Risk

Day trading does come with substantial risks, so it’s important to develop a strategy that manages these risks. You need to determine how to limit your potential downside, which is the amount of money you can lose on any one position or trade. Risk factors to consider include:

  • Losses: The level of losses you would be willing to endure before selling.
  • Portfolio percentage: How much your overall portfolio would suffer if a position goes bad.
  • Position sizing: How much you would lose if a trade doesn’t work out the way you hoped.
  • Selling: The point at which you would sell after you make a profitable trade.

Trades won’t go your way every time — that’s a reality of day trading. Having a plan for when to close a position will help you make decisions in any circumstance. Your plan could include selling a position if it rises or drops by a certain amount or observing how the market reacts each day. Proper risk management will prevent small losses from spiraling into bigger losses, which can preserve your capital for more trades in the future.

Day Trading Securities

Learning day trading involves choosing the types of securities you plan to buy and sell. Securities can include:

  • Bonds.
  • Commodities.
  • Currencies.
  • Futures.
  • Options.
  • Stocks.

Stocks typically make the most popular securities for day trading since you can trade in big, active markets with small commission fees. The best day trading stocks generally have the following characteristics:

  • Familiarity: You need to understand what triggers movement and how your securities trade. Factors like earnings reports can greatly impact the value of a company’s stock. Some day traders choose to exchange many different securities in one day, while others trade a few stocks that they’re more familiar with. Deeper knowledge of a stock allows you to better gauge when to sell or buy because you’ll have insight into how that stock has traded previously.
  • Good volume: Stocks are liquid, which means they trade frequently and in high volume. This liquidity draws in day traders because they can buy and sell without having a huge impact on price. Currency is another highly liquid option.
  • The right amount of volatility: Day traders want some, but not too much, volatility. Volatility means the price of the security changes often.
  • Newsworthiness: When a company attracts media coverage, people get interested in buying or selling its stocks, which creates liquidity and volatility. That’s why many day traders follow the news for inspiration on how to act on a given day.

Day Trading Strategies

Day traders with a focus on stocks tend to rely on technical analysis (using charts to analyze stock movements) instead of fundamental analysis (examining factors of a company like its industry, management, and products).

No matter which securities you decide to trade, you need to determine the best trading strategy to gain profits. Some day traders specialize in one specific strategy, while others mix and match a few different strategies. Here are some common strategies day traders use:

  • Fading: A day trader short sells a stock that has risen quickly or buys a stock that has fallen. A day trader using this strategy may close the short position when buying interest increases again or when the stock falls.
  • Momentum/trend following: Using this strategy, a day trader tries to ride the wave of a moving stock. The stock can be moving down or up in this case, and the movement can come from news like an earnings report. Day traders anticipate continuing momentum and buy a stock that’s rising.
  • Spread trading: This technique requires speedy reactions because it attempts to make a profit during temporary sentiment changes. The day trader using this strategy exploits the difference in the bid-ask price, which is called a spread.
  • Swing/range trading: Some day traders look for a range-bound stock, which is a stock that tends to move around between a low and high price. They then buy that stock when it gets close to the low and sell it when it approaches the high. In some cases, traders sell short when the stock gets to the high point in order to try to profit when the stock falls to the low, then closing out at the short position.

A day trader looks closely at the order flow of a given stock to determine when they should trade. They also look at the list of potential orders to buy or sell a stock. Another strategy involves watching a position fall to a point at which other traders buy it. If a trader is going to sell, they instead look for a stock to hit what’s known as resistance. That’s the price at which more traders start to sell, which in turn means the price is more likely to drop.

Day Trading Timing

If you’re day trading, you need both volatility and liquidity. The stock market often provides those two aspects in the hours after opening (9:30 a.m. to around 12 p.m. EDT) as well as in the last hour of trading before close, which happens at 4 p.m. If you’re just starting out, you may want to just watch how the market performs in those volatile hours. As you gain more experience, you can better recognize patterns during those times.

How To Learn Day Trading: Getting Started

Here are some basic tips to keep in mind when you’re starting out:

  • Decide what you can afford to lose, then trade with only that amount: Set aside a fixed amount of money for day trading and use only that money. Keep a strict budget, and know when it’s time to cut your losses.
  • Reserve the time: Day trading involves watching several movements that happen throughout each day. You need to move quickly and track markets and opportunities that come up. If you work full time, you may only be able to dedicate a little time to opening and closing hours when the market is most volatile.
  • Start off small: You’ll probably make some mistakes and lose money as you learn how to trade, so keep your losses small while you gain experience. Once you’re more confident in your strategy, you can expand from there.
  • Stay conservative even if you have good luck at the start: It’s very possible to have a run of luck at the start, especially if the market is bullish. You should see how your strategies work during tougher market times, even recessions, before assessing whether you will expand the time you devote to trading.
  • Decide on order: When you enter and exit trades, you’ll use either a market order or limit order. A market order is executed at the best available price at that time, while a limit order guarantees the price but not execution.
  • Commit to learning: Beyond knowing the basic procedures of trading, you should stay on top of the latest news and events that affect the securities you’re trading, like the economic outlook and the Federal Reserve’s interest rate plans. Make a list of stocks you want to trade, then commit to staying informed about those companies and markets.
  • Use logic, and stick to your plan: The market may test your nerves, but using logic to guide your decisions can help you limit your losses and recognize trends. By developing a strategy ahead of time and then sticking to it, you’ll increase your chances of success.

Day trading takes patience and commitment. Once you learn strategies and ways to manage risks, you can turn smaller accounts into bigger gains.