Day Trading for Beginners: Best Practices and Tips for Measurable Success
When you first heard of day trading, you probably thought it sounded incredibly appealing. You sit at your desk, make trades throughout the day, and enjoy a nice profit by the time the markets close. Though this is the gist of day trading, actually investing in this way is anything but basic. Day trading is a very risky way to spend your money, even compared to purchasing stocks in different ways. For this reason, it’s typically only well-funded and well-educated investors who end up making a profit.
With enough patience and confidence, the desire to learn, and an understanding of the inherent risks of this approach to investing, you can succeed as a day trader. Here are some tips and best practices to help you get started.
What Is Day Trading?
As a day trader, you buy and sell a stock within the same trading session. The concept is simple, but if you’ve got experience purchasing dividend stock or making other types of investments, you’ll have to learn a new way to analyze markets to succeed as a day trader. To get familiar with day trading, start by learning a few basic terms:
- Security: A security is the ownership of a stock, bond, or option. Day traders make money through the rapid purchase and sale of their securities.
- Liquidity: Liquidity refers to a trader’s ability to purchase or sell an asset without changing its value. You want to focus on highly liquid securities to ensure you can make trades easily without risking a loss of value. Penny stocks are illiquid, for example, and are not advised for day traders.
- Volatility: Volatility is how much a stock is expected to change in price. With a highly volatile stock, you can purchase when it’s low and sell when it’s high — possibly hours later — and net a solid profit. High volatility also means that there’s a greater chance of incurring a loss.
- Arbitrage: An arbitrage is an exploitation of price differences between markets or between a commodity in different forms. The investor buys in one market where the security is priced lower and sells in another market where it’s priced higher. This is an exploitation because if the markets were perfect, they’d always list securities at the same price.
A Note on Slippage
Understanding slippage is vital to your success as a day trader. When you go to purchase a stock, its value may change by the time the order is executed. Or, when you go to sell your stock, you may find that the buyer isn’t purchasing at your desired price level. The difference between what you expected to spend or make and the value you actually got is known as slippage. Highly liquid securities are also known for having low slippage, which is another reason why they’re a desirable target for day traders.
What You Need to Start Day Trading
Day traders generally work with lots of funding. By making many trades or large investments, they can see a significant return even if their stocks only increase slightly by the end of the day. Day traders are also typically experts in specific markets and industries. This helps them identify good opportunities and understand exactly why a trade is worth making. You’ll also need good fundamental knowledge of how markets work.
Aside from good fundamentals, niche expertise, and good capital, you need a strategy that caters to day trading. These are a few tactics that successful day traders employ:
- Swing trades: Traders using this high-risk, high-reward strategy hold onto their investments for at least two days and for as long as two weeks. Since the security is held for a longer time, there’s a greater potential for gains and losses.
- Arbitrage: With this low-risk, medium-reward strategy, you’ll use your analytical tools to search for any price disparities on a commodity between markets. If you find an opportunity, you’ll buy where the security is cheaper and sell where it’s more expensive. This is relatively low risk, but you have to buy and sell before the markets adjust and the price is accurate.
- Trading news: With this medium-risk, medium-reward strategy, traders refer to market news rather than technical analysis for information. News is announced and circulated quickly in the modern world, though, so it can be hard to capitalize on a chance based on a recent announcement before stock prices change.
- Mergers and acquisitions: This medium-risk, high-reward strategy targets companies that are transferring to or consolidating with other businesses. Mergers and acquisitions drastically affect stock prices. This presents ready day traders with the opportunity to buy low and sell high on the same day.
Use these ideas as a starting point for your research, and try them out with a free practice site before you use real money. As you gain experience, you’ll find that some strategies work better for your investing style than others.
In addition to these tactics, you’ll need access to some special tools and resources to start day trading. Some of these are only available to investors who work with a large company, which may limit your options as a day trader
- Access to a trading desk: A trading desk or trading room is where the buying and selling of stocks actually occurs. Professionals who work with companies and make day trades using other peoples’ money often have direct lines to a trading desk. This enables them to execute orders the instant a price changes — which is a key to succeeding with this type of investment. In lieu of a trading desk line, you’ll need access to a broker or brokerage site that can facilitate these types of trades.
- An ear to the ground: Information is vital for any type of investing, but there’s especially a sense of urgency to be in the know when it comes to day trading. Lots of day traders get their leads on a potential investment through the news. Access to official sources like the Dow Jones Newswire and staying up to date through channels like CNBC’s financial coverage and industry-leading magazines can help you identify promising opportunities that you’ll need to act on quickly. Researching market trends is also critical for new traders who want to learn how things work.
- Analytical software: If you’re focused on swing trading or technical information to analyze the markets, you’ll want to invest in good analytical software. These tools assess market conditions for you, often searching for patterns that indicate the potential for a good trade or using complex algorithms to predict price changes within a single trading session.
- Other data sources: Many day traders use candlestick patterns, technical analysis, and volume data to pinpoint the right time to buy a stock. These charts and patterns show things like volume spikes and price levels, which can indicate the potential for stock value changes. Day trading with precision is indeed very technical, so be prepared to learn a lot and spend lots of time looking at data, projections, and numbers.
How to Become a Day Trader
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Learning how to day trade is a straightforward process — the challenge is in making the right trades and avoiding mistakes, which is especially important when you’re working with volatile markets.
Once you have a handle on the strategy you want to use and have sufficient capital and knowledge to get started, you’ll need to find a broker. Note that brokers are paid commissions based on the number of trades processed, so you shouldn’t have a hard time finding someone eager to work with you. Just remember that commissions and other fees will eat into your risk capital and profits. You can work directly with a local broker or use a site like TradeStation or Fidelity.
Next, you’ll need to pick a time when you’ll trade. The opening and closing of markets are considered the best opportunities for day traders.
Finally, you need to pick your securities and make your trades. You’ll submit an order through your broker, though the actual price will depend on the ask — how much the seller is willing to sell for — and the bid — how much the buyer is willing to buy for. Some day traders invest in the same stocks constantly as prices fluctuate, and others look for securities that are performing well that day. Which strategy you use depends on your expertise and the data you have available.
Day Trading Professionally
Many day traders work professionally as part of a larger brokerage firm or a similar institution. The benefit is that these traders have access to lots of capital and other resources, such as a direct line to a trading desk and cutting-edge analytical hardware to help identify low-risk, high-value trades. Finding work in such a position requires extensive knowledge and proven real-world trading success. Also, these individuals are typically managing other people’s money.
Though day trading independently or casually is certainly possible, these people will have to secure their own risk capital, pay for their own analytical tools, and work with a local broker or brokerage site to buy and sell stock.
Day Trading Online
Since this is a type of trading, you can do it in any market where you buy and sell stocks. It’s common to day trade on foreign exchange markets and stock markets. However, since the goal is to make positive returns within a single trading session, day traders generally look for highly volatile stocks that have the potential to increase in value within a short timeframe.
Day trading online can be done part- or full-time from home. Though you won’t have a direct line to a trading desk, you can still make trades quickly through a trading platform like Interactive Brokers or TD Ameritrade. If you’re still searching for a website to create a trading account, consider one that offers amenities to help day traders, such as mobile app support or low transaction fees (the latter is especially important since you’ll be making lots of trades every day).
Day Trading Tips
Day trading is complex and risky, and especially as a new trader, you’ll need to exercise caution and always be looking for ways to improve. Use these best practices to help manage risks and mitigate your losses:
- Watch for scams: If you ever read about binary options, penny stocks, or day trading, you’ll almost certainly come across websites promising huge returns quickly for a small initial investment. To make matters worse, you’re also likely to read a few headlines about traders who lucked out or made smart day trades that amassed a huge profit. These cases are the outliers — it’s far more common for people to lose money day trading. Be cautious of any trading sites or resources that promise any type of return, especially for first-time day traders.
- Start for free: Websites that let you trade just for fun, like ScottradeELITE and OptionsHouse, are excellent for honing your day trading skills since you can practice for free and see the fruits of your labor by the end of the day. Practice trading and selling for fun before investing any real money, but be deliberate about which companies you pick. Vet your investments just like you would if your portfolio were really on the line, and understand exactly why a potential trade is a good choice.
- Understand why people do and don’t day trade: Some professional money managers and financial managers simply refuse to day trade. Their thinking is that not only is this practice high risk, but the potential money you can make doesn’t justify the investment you put on the line. Successful day traders argue that you can make a profit with enough skill and experience. Both sides have a point, though it’s more common for people to lose money day trading than it is for people who purchase common stocks and hold on to their investments.
- Use only risk capital: Risk capital is capital that you can afford to lose. No trade is worth risking financial ruin, and since day trading is especially volatile, you need to remember that it’s more common for people to lose money day trading than it is to gain a profit. Working with only risk capital will also help you be logical about which investments you choose since you won’t make a purchase knowing your financial success is depending on the outcome.
- Master the art of discipline: Knowledge, strategy, and capital are the tools of day trading, but you also need the discipline to use them well. Especially with this type of investing, it’s easy to justify a high-risk trade that doesn’t meet your criteria because it has the potential for a big payout. Knowing when to walk away is important for all investors, but it’s vital for day traders since you’ll be making numerous trade decisions every day.
- Rely on multiple news sources: Refer to official news lines and stock-trading magazines to stay on top of current events. You can also follow experts’ social media accounts and blogs to learn more and get first-hand tips about trading.
- Refer to an online community or trading group for help: Online communities and trading groups are wonderful resources for traders of all experience levels. You can find other investors specializing in day trades to seek advice about getting started, using a certain market, or pursuing a potential investment. Also, humility is an undervalued part of investing — having a community you can trust with your questions and concerns is a great way to ensure your ego won’t lead to you making a bad investment.
- Monitor trading volume: A stock’s trading volume shows how many times that stock was bought or sold in a certain timeframe. The average daily trading volume shows the total trades for a security in a single day. Stocks with high trading volume are prone to price changes, making them a ripe target for day traders.
- Try limit orders: When you buy stock, you place a market order or a limit order. With a market order, you purchase stock at its current value. With a limit order, you tell your broker to buy or sell stock when it hits a certain value. This can be a great tool for day traders since you can jump on a stock as soon as it becomes low enough to justify the risk. Limit orders can cause problems, though, if the stock value continues to fall past the purchase price or rise past the selling point.
- Use options: An option gives the trader the right to buy or sell a stock at a certain price and at a certain time. However, they are not obligated to go through with the trade. Buying options come with numerous benefits for day traders since they let you speculate on directional trades, leverage your capital, and limit your risk. Options also give you access to exchange-traded funds and expensive stocks that would otherwise be too costly.
- Look beyond stocks: Day trading isn’t limited to purchasing and selling stock. You can also try the foreign exchange market, where you invest based on the predicted value of one currency against another by a certain time, or the futures market, where you obligate a broker to buy or sell an asset at a fixed future price and time. Exploring new markets will mean mastering how they work, but you may find better success depending on your strategy and knowledge as a day trader.
- Use back testing: Some analytical software comes with back testing. With this program, you can simulate how applying a certain strategy would have unfolded under past market conditions. Though hindsight has its limits in predicting the future, looking at how different strategies would have played out can help you understand how the market works and how certain decisions can unwind in a single day of trading.
- Cut losses with a stop loss order: With a stop loss order, you tell a broker to automatically sell your security once it drops to a certain value. This can help minimize losses from an investment.
How to Become a Better Day Trader
Practice and continuous research will go a long way toward improving your skills as an investor. Also, consider reinvesting your profit so you can develop sufficient capital to make better gains. Some price movements throughout the day aren’t especially big and certainly aren’t enough for conservative traders to consider. But if you’ve invested enough capital, even a small fluctuation can lead to a good profit. Just remember that you should only use risk capital as a day trader.
Another tip is to look for analytical software that comes with broker integration or back testing. Broker integration means the software provides a direct line with a broker so you can make trades quickly. If you find yourself missing out on investment opportunities because a purchase or sale isn’t executed fast enough, consider this resource.
There are also plenty of online resources and communities you can join to learn day trading. If you’re new to trading or have been struggling with steady losses and want to turn things around, you can download an e-book from the experts at Raging Bull or attend a webinar to become a better day trader. Some sites even let you watch professional traders as they execute orders throughout the day. This is the best way to learn since you get to see how and why an expert makes investments. An online community will also connect you with a group of peers you can turn to for questions or feedback.
Don’t forget to be realistic about your profits and strategy. You probably won’t earn millions day trading, but if you balance risk and opportunities correctly, you can make money and perhaps even go full-time day trading.
Though day trading is surrounded by plenty of myths and bad advice, there’s no denying that some people know how to play the markets well and can make lots of money after a single day of quick investments. You probably won’t strike gold right away, but if you do your due diligence and spend time learning how the markets work and which strategies are best, you can start generating money each day through some high-risk, high-reward trades.