Top 7 Tips for Day Trading Beginners

D ay trading is a great way to make money on the stock market because you can take advantage of small changes in price, especially in a volatile market, without waiting for a particular stock to make a big move. However, traders can also get into big trouble with day trading if they don’t know what they’re doing. Here is some of my best advice for investors who are just getting started with day trading.

  • Get a good understanding of the jargon and analysis techniques used by pros.
  • Put a stop-limit in place for individual trades as well as a daily limit to avoid big losses.
  • Pick a single strategy and know it like the back of your hand, sticking to it even when your emotions start to get the best of you.

What Is Day Trading?

Day trading is where an investor buys and sells a stock within the same day or even multiple times in one day. Day traders spend all day monitoring the market, taking advantage of small movements in pricing. However, day trading can be risky for beginners who may not yet follow a consistent strategy.

What Investors Need Before They Start Day Trading

There are three things that traders must have before they start day trading:

Understand the Terminology and Technical Analysis

Think of day trading as a new sport you have to learn. Your ability to earn money day trading is based on your performance. Naturally, you would never start playing a new sport without first educating yourself about how to play.

Start by learning the terminology and technical analysis. Browse authoritative sites on trading, read books, and watch videos to soak up as much knowledge as you can before actually diving into day trading.

Don’t try to learn as many day trading strategies as you can. You’re better off focusing on one or two strategies and learning all you can about those.

Develop a Profitable Strategy or Adopting a Proven One

It can take a long time, even years, to develop your own profitable strategy for day trading. As a beginner to day trading, you have two options: adopt a proven strategy that active traders are already using or create one for yourself.

While very successful day traders use strategies that they developed on their own, as a beginner, you should be prepared to spend months testing and refining a day trading strategy before you begin working with actual money. Instead of reinventing the wheel, you may want to start by mastering a strategy that’s already been proven to work. Then, after you’ve mastered that strategy, consider putting your own spin on it and making it your own.

Practice in a Day Trading Simulator

Even after researching and learning about the terminology and how to analyze the market, you still probably aren’t ready to be set free on the open market with real dollars. Understanding day trading and reacting to opportunities in real time to earn profits are two different things. A trading simulator can bridge the gap. Using a simulator, you can practice the strategies you’ve learned until you’re comfortable enough to use real money.

Tips for Day Trading

Image via Unsplash by adamaszczos

Here are seven must-have tips for starting strong with day trading:

Evaluate How Much You Can Risk per Trade

Don’t put more money into your day trading fund than you’re willing to risk losing. How do you avoid doing that? Before you start day trading, evaluate how much money you’re willing to risk on each individual trade. Keep in mind that many day traders who are successful risk less than 1% or 2% of their account per trade. In other words, they risk very small amounts per trade to limit the risk as much as possible. If you have $20,000 in your trading account, for example, and you’re willing to risk 0.5% per trade, that means that the maximum loss you would see per trade is $100.

Set Aside Time

While I get that you probably don’t have all day to sit in front of your computer to watch the market, day trading does require a significant amount of your time during the day. If you don’t have any time to spare as it is, it’s probably best not to get into day trading at all. To be successful, traders have to monitor the markets and spot opportunities when they come up. Being available to monitor for those opportunities and move quickly when they come up is key.

Start Small

You should be prepared for the likelihood that you’ll lose money when you first get started day trading. However, if you start small and only risk money you can afford to lose, you can keep your losses to a minimum while you gain experience trading.

Set Up a Stop-Loss Amount Daily

A stop-loss is the pre-determined point at which you sell and walk away to avoid any more losses. When you know how much you’re willing to lose per trade, you set a stop-loss to protect yourself against big losses when day trading.

Per the first tip above, you should always know how much you’re willing to risk when trading. When you hit your target stop-loss for a trade, stay disciplined and just accept the loss. This will prevent you from experiencing even greater losses by hanging in there longer and hoping prices will go back up. If you stick to your strategy and keep your emotions out of it, you’ll avoid big losses.

You should also set up a stop-loss for the day. This can stop you from ever having days where you see particularly large losses that you’ll have to make up for the next day. For example, if your stop-loss per trade is $50, you may want to set a daily stop-loss of $150. If you take a loss with three different trades, you’re done for the day.

Utilize Technology

There are a lot of day traders out there, so you need to rely on every resource that’s available to maintain an edge. Charting platforms are a great way to analyze the market since you can visually see what’s happening with a particular stock at any given moment. You can also use historical data to fill in any gaps. There are also mobile apps you can download on your phone that allow you to keep an eye on market prices wherever you go. If you combine that with a quick internet connection, you can make well-informed, accurate decisions for day trading.

Identify Entry Points

An entry point is the price where you enter a trade. However, there’s more to identifying entry points than just looking at a price and saying that it looks good. The decisions you make should be backed by strategy.

One way you can identify a strong entry point is by evaluating the historical data to see if a stock you’re interested in trading is high or low in price. If you’re planning to buy but notice that it’s high based on the historical data, you may decide that you’re not at a good entry point at that time. However, the data can also show you previous good entry points, so if the pricing drops to that level, you know to jump in and buy.

However, don’t stop with the entry point. When you’re evaluating the data, look to see what a good exit point would be as well. This way when the price drops to the entry point, you’ll already have a number in mind for what the price needs to be to exit.

Time Your Trades

Just like there are certain days of the week when travel experts recommend consumers buy plane tickets, there are also certain times that are ideal for buying and selling stock. The best time to buy is during pre-market or in the opening hours.

Keep in mind that the first hour after the market opens is highly volatile. Buyers and sellers are, at this time, reacting to the news from the night before, and the market prices are usually heavily in flux. For experienced day traders, this is the best time to buy and sell. However, be careful if you’re new to trading since this period of volatility can be challenging for beginners.

Historically speaking, Monday tends to be the best day of the week to buy stocks, as the market often is reacting from negative news from over the weekend. Likewise, Friday tends to be the best day of the week to take short positions or unload stocks. A Friday that comes before a three-day weekend is especially good for capitalizing on this phenomenon.

While timing the market can help, the best plan for successful day trading is to have a well-thought-out strategy, know it like the back of your hand, and stick to it, even when your emotions threaten to get the best of you. Read about what the best day traders are doing. Then, pick one strategy you feel confident with and use that. Don’t worry about developing your own strategy until you have been day trading some time and are comfortable and confident with what you’re doing.