What Does Day Trading Mean?
At its most basic, Day Trading is just like any other type of securities trading except sped up by a significant degree. Day traders typically only hold specific positions for a few minutes, or less, on average, with no position being held longer than overnight at most. In order to be a successful day trader, you typically need previous experience trading securities in a less high-impact way, dedication to what it is you are trying to do and a high degree of discipline.
The process of making a day trade can be broken down into "5 steps" that are going to always be the same regardless of the specifics involved:
- First you will want to find an asset that you want to trade, be it a stock, option, currency pair or any other commonly traded security.
- You will then decide if it fits your trading plan.
- If it does you will want to take a specific position based on current market trends.
- Then you will exit as soon as the desired movement occurs.
- Finally, you will repeat until you are a veteran day trader.
Let us get this out of the way upfront, day trading isn’t going to be for everyone, it requires an understanding of the fundamentals of trading and it has a number of risks that push it out of the realm of the average trader. With that being said, for those who persevere, the potential rewards are going to outpace practically every other type of security trading.
Is Day Trading For Me?
While the above makes day trading sound relatively straightforward, the truth of the matter is that it has a variety of "Pros and Cons" that means it is not for everyone. Take a look at the following list to determine if there isn’t another type of trading that is better suited to your goals.
Pros Of Day Trading:
- Large profit margins: For those who do it right, day trading can be a very profitable career path with profits that are greater and more reliable than just about any other type of securities trading.
- Work for yourself: Many of the most successful day traders are self-employed which means they don’t have to answer to anyone, they can make their own hours and set their own profit goals.
- Always exciting: Dealing with the shortest market time-frames means that day traders typically see more action than any other type of security trader. You will have the opportunity to pit your wits against the market as well as your competition each and every day. Those who are natural thrill seekers will also appreciate the adrenaline rush that comes from rapid-fire trading and pulling a big win from the grip of defeat.
- No degree required: As opposed to many other financial jobs, a perfectly successful day trader can be completely self-taught. As long as you are willing to put in the time and energy to learn the skills you need, you can be a success with no degree required. Everything you need to learn can be found, at very little expense, online.
- Tax write off: As self-employed individuals, day traders can write off a great deal of their expenses when it comes time to pay taxes. Sophisticated hardware, expensive software, even home office space can all be partly written off by those who work from home.
Cons Of Day Trading:
- Commissions can noticeably affect profits: Due to the higher than average number of trades they make in a single day, the commission cost of individual trades can significantly affect your overall profits if you don’t do everything in your power to minimize these costs.
- The potential for loss is substantial: Day trading is without a doubt the most difficult of all of the types of securities trading to make a reliable profit in. Most day traders see nothing but losses for at least the first month of their nascent career and if they are not careful these loses can prevent them from ever reaching profit making status. While only trading what you can afford to lose is something that every trader should keep in mind, many new day traders trade with borrowed money in the form of margined trades or capital from loans which can cause them to start out from a significantly indebted position.
- High startup costs: Day traders are actively competing against hedge funds, high-frequency traders and other professionals who often have trading capital reserves in the millions. As such, in order to compete it is recommended that you have a trading bankroll that is at least $10,000 at the bare minimum. Additionally, you are going to need to invest upfront in charting software, a trading platform, computer hardware and more. Added to this are the ongoing costs of commissions, live price quotes and other brokerage fees, all of which add up faster than they otherwise would do to the high volume of trades to be made. Finally, many brokerages will not allow you to day trade unless you have proven yourself to be a successful trader on a smaller scale which means there is a time as well as a monetary commitment.
- Self-employed: While there are benefits to working for yourself, there are also drawbacks. These include a lack of health insurance, a steady paycheck and corporate infrastructure, just to name a few. This also means that you will need to deal with the isolation that comes from working by yourself with no one around to lend a hand or to make sure you spend your days working instead of browsing social media, you will be completely responsible for your own success. Finally, in order to truly day trade successfully, you need to commit fully from the start which means giving up your steady paycheck to try something far less guaranteed.
Market Lingo You Need To Know For Day Trading:
- Long: If a trader takes a long position that means they purchased a specific stock, option, currency pair etc.
- Short: If a trader takes a long position that means they sold a specific stock, option, currency pair etc.
- Bear market: If the market is trending downward this is considered a bear market.
- Bull market: If the market is trending upward then this is considered a bull market.
- Bid price: The bid price is the price that traders are currently buying a given asset for.
- Ask price: The ask price is the price that traders are currently selling a given asset for.
- Spread: The difference between the ask price and the bid price.
- Open: The open price is the price of a given asset at the start of the trading day.
- Close: The close price is the price of a given asset at the end of a trading day.
- Slippage: The difference between the price of a bid or ask when you decide to make a trade and the actual price when you commit to it.
- Intraday range: The difference between the high and low of a given asset between different days.
- Volume: The number of shares that trade hands in a given day.
- Liquidity: This refers to the ease with which a given security can be obtained. In general, the greater the liquidity, the lower the price.
- Volatility: The degree to which the price of a security is likely to change over a specific period of time.
How To Find Securities To Trade?
While pre-market prices are subject to change once the market opens, they are a great place to start. The first thing you are going to want to look for is a high degree of volume, not just for the day, but for the last 30 days.
Check Social Media:
Social media is often a great place to get a sense of impending news events before they happen. This, in turn will allow you to determine how the market is going to move before it has a chance to get going and let you get in on the ground floor of potential incoming changes.
A sure-fire way to see an increase in volatility is when earnings are reported. You are never going to want to jump on an assumed trend before they are released but shortly thereafter the trade gates will be thrown wide open.
How To Become A Successful Day Trader?
While it doesn’t take much to make one or two successful trades now and then, if you want to make it into an everyday thing then you are going to need to work at getting into the mindset of an effective day trader. While no 2 day traders are the same, those who are successful at the practice all tend to exhibit many of the same positive characteristics and traits outlined below:
Successful Day Traders Are Early Risers:
Despite the fact that the market doesn’t open until 9:30 am, the most successful day traders like to get a jump on the day and use the early morning hours to track the international markets so they know what will greet them when the local market opens. No economy exists in a vacuum and knowing what is happening in the world will give you a better idea of what type of changes the day will bring. Having an accurate macro view is crucial to determining the right micro changes to follow when the time is right.
To Become A Successful Day Trader You Must Practice:
"Practice, practice, practice, and practice". Day trading is a skill which means that just like any other skill it will only improve with practice. Common wisdom dictates that it takes 10,000 hours to become a master at something which means that if you want to become a master day trader then you will need to commit 8 hours a day, to the task for 5 days a week for 57 months. While some traders are just naturally lucky, if you ever want to see a huge payout of your own then you need to be willing to work for it. Remember, successful day trading is a marathon, not a sprint, slow and steady wins the race.
Day Trading Success Comes From Lifelong Learning:
Being a successful day trader means never resting on your laurels no matter how productive your current strategies or trading plan turns out to be. Rather, it is important to never be content with the status quo and always be on the lookout for the next big thing. New strategies are always being developed and if you don’t stay on the bleeding edge then you will find yourself losing out to the competition. Additionally, the market is constantly changing which means that if you are relying on information that’s even a few days old you can find yourself blindsided by market trends that you should have seen coming. This is why it is important to get into the habit of continuous learning and never let the habit go fallow.
The Successful Day Trader Knows When To Follow His Own Path:
While following the major players in a given market is often a solid strategy, that doesn’t mean you should just blindly follow the crowd all of the time. As a successful day trader, you should be doing your own research and trusting the results you find, even if it means going with a trade that is currently unpopular. If you are looking for a serious payout, then trading against the market is going to be the way to get you there, but only if you do so for the right reasons.
A majority of the movement in the market each day is from sheep who follow what everyone else is doing with no regard for the reasons why they are doing so. Don’t fall into this pattern, be a wolf instead. Improve your intuition through diligent study and constant practice. Once you start to see the payoff from doing so your confidence will improve and you will find it easier to trust yourself in the future.
Truly Successful Day Traders Have A Reliable Plan That They Can Stick To Without Fail:
That doesn’t mean that they will blindly follow their plan in all scenarios, however, as they have also cultivated the ability to read the current state of the market on the fly in an effort to determine when things have changed enough to warrant going off book until the market settles down. In order to be able to go off book successfully you are going to need to banish all emotions from your trading and focus on logic to the exclusion of all else. If you start trading with your heart instead of your head, the only thing you will achieve is failure.
Successful Day Traders Know Their Strengths And Weaknesses:
The most successful traders are those who are in tune with themselves through a close examination of their strengths as well as their weaknesses. Following their example will allow you to make the most of the one while minimizing the effect the other has on your day to day trading experiences. This will help you minimize the risk inherent in the trades you make, maximizing your profits in the process. The easiest way to go about doing so is through the use of a trading journal.
You are going to want to keep detailed notes related to all the trades you make to help you determine personal patterns that otherwise may not be visible. This means you are going to want to keep track of not just success and failures, but how given trades were determined and your emotional state throughout. Once you have enough examples to see the patterns you will want to strengthen the positive ones through conscious usage and do your best to minimize the negatives.
The Successful Day Trader Commits At The Right Time:
No matter how thorough, all the research in the world will never help you to be a successful trader if you don’t have the ability to commit to a given trade when the time is right. The market is a fickle mistress, especially in the shorter time-frame charts you are likely going to be using most frequently which means that when the variables align and it is time to get in on a potentially profitable trade you need to be able to do so without a moment’s hesitation. This isn’t the same as getting lucky or following your gut, you need to prioritize learning how to read situations on the fly and react to them in real time in order to ensure that when the money is on the line you are ready to make the calls that lead to huge wins or prevent significant losses.
The Successful Day Trader Must Have High Personal Motivation:
If you ever want to give up your current job in exchange for a career as a successful day trader then you are going to need to have the mental fortitude to treat it like a job, even when things get rough. Working for yourself means that there won’t be anyone looking over your shoulder and forcing you to get to work, that motivation will all need to be generated internally. Only by stoking your personal drive to succeed will you be able to get out there and do what needs to be done, no matter how tough the going gets. The discipline to be successful can’t be learned, you either have the ability to motivate yourself or you don’t, there is no middle ground.
To Be Successful You Should Hold Enough Trading Capital:
If you ever want to be a truly successful day trader then you need to start off on the right foot. Specifically, you need to have enough liquid trading capital to be able to absorb some losses, especially early on. If every trade you make represents the sum total of your trading capital then this is likely to affect your mindset and lead you to make decisions out of fear as opposed to what the market is telling you. It is important to understand your limits, but it is also important to not have such strict limits that they prevent you from trading successfully.
No trader, no matter how skilled, is going to be right 100 percent of the time. Having a decent amount of trade capital will allow you to play the long game which means being able to come back from losses now and then and keep going until the profitable trades arrive.
A good rule of thumb is that you should never commit more than 2 percent of your total trade capital into any individual trade which means you need a reserve that is large enough to ensure 2 percent is enough to profit from, each time you commit it.
Sticking with this rule will help to guarantee that your emotions don’t get in the way and that you are free to let the facts guide each trade you make. Keeping an emotional distance from your trades will make it easier to remain analytical during all of your trades, especially early on, which will help you improve your overall trade percentage in the process.
The Successful Day Trader Never Rushes:
While making split-second decisions is important, that doesn’t mean you are going to want to rush the process. Successful day traders take the time they need to analyze every situation where money is on the line and then proceed with the course of action that will result in the greatest overall return. Before you make any decision that will affect your bottom line, it is important to have a clear idea what the result is going to be, every time. Additionally, it is important that all of your decisions are proactive as opposed to reactive, as this is the only way you are ever going to find reliable success.
The Best Day Trading Tips For Beginners:
While there is always going to be a little luck associated with day trading, there is still plenty you can do when it comes to improving your averages and maximizing your profits in the long term. The following tips and suggestions are a good place to start when it comes to building a successful day trading career.
Finding The Right Trades:
The first thing you need to remember is that every successful trade is always going to be based around a measured approach. As such, the first thing you are going to want to do is make sure you are trading the types of stocks that not only align with your long-term goals but match up with your temperament as well. Additionally, you will want to utilize any existing knowledge about relevant fields that you may have to lean into a specific type of stock. For example, if you previously worked in manufacturing, then sticking with stocks that are based on companies who deal heavily in manufacturing can give you an edge as you innately understand the ins and outs of those companies which can give you a better idea as to what will cause those stocks to move in unexpected ways.
Regardless of the types of stocks you choose to focus on, there are THREE KEY ASPECTS of every trade you are going to want to keep in mind before you pull the trigger:
The most important thing to keep in mind is that you are always going to want to trade in a time-frame that matches up with your state of mind. Trading in a time-frame just because someone else says you should is a great way to end up either nervous or impatient, neither of which is a mindset that is going to help you make any money.
If you are just getting started in day trading then the time-frame you are most likely to be comfortable with is the 5-minute chart. This is a nice middle ground for day traders as the movements it produces will not be as fast as the 1-minute chart nor will you have to expose yourself to the added risks of holding a specific stock overnight.
You will also need to experiment with micromanaging trades all day versus doing research during the weekend and placing weekly trades at the start of the trading week. Micromanaging trades tends to lead to gains in the short-term while weekly trades are more likely to produce results in the long-term.
When it comes to working with a methodology that works for you, it is important to find something that plays to your own specific strengths and weaknesses as opposed to trying out everything that “experts” say is hot at the moment. Additionally, you are going to want to keep in mind that every trader is going to have bad days as well as good ones and as long as your trading plan is effective at least 60 percent of the time then you are guaranteed to be successful in the long run as long as you stick to your plan.
Switching things up all of the time is only going to skew your results which will make it more difficult for you to determine the true cause of any failures or successes that you come across. Additionally, switching regularly is only going to make it harder to learn the intricacies of your chosen methodology, making you less effective when a difficult to unravel issue arises.
Additionally, you are going to want to focus on a handful of trade indicators that work for you and master them completely before moving on to something else. This will allow you to find the ones that work best with your trading strategy and your overall trading style. The best place to start is with those that work the best in the time-frames you frequent.
You can find on this site a "Collection Of Good Quality Trading Indicators " which you can download for free. A detailed tutorial has been produced for each indicator to help you perfect your trading strategy.
Focus On Building These Attributes:
There are several different attributes that you can work to improve in order to enhance your day trading results. While you may not be an expert at all of these to start, practice makes perfect.
Early on in your day trading career it may seem as though when you finally come across a given trade that is going to pay out, you need to act on it immediately and then get out as soon as you make a profit to keep things from going sideways. If this is the case then you are likely not fully taking advantage of the trades you find as patience will often lead to better payouts overall. This is why it is important to determine your potential entry and exit points before you jump into a trade so that there is no opportunity for emotion to get in the way of your profits.
What’s more, if the trade doesn’t reach the numbers you were anticipating then it is important to not simply follow through with it anyway. You must have the patience to disregard it and then wait for something better to come along. If you decide to chase the specter of potential profit by changing your predetermined exit and entry points on the fly, then all you are going to do is ensure that your plan isn’t as effective as it might otherwise be.
Without patience, you will foster bad habits that will do more harm than good in the long run, regardless of the outcome of the individual trade.
Having faith in your trading plan is crucial when the rubber hits the road and you are staring down a potentially profitable trade. After all, no trading plan is perfect and you are likely to see your plan fail to execute as planned a full 40 percent of the time. As such, you need to believe that the plan you have created is solid, and follow it through exactly, every single time you make a trade, otherwise you are throwing off your odds of success even more. A good plan gives you an edge over the randomness inherent in the market, if you disregard your plan constantly then you are doing little more than gambling and there are always going to be easier ways to gamble than via day trading.
When trading, especially early on, it can be easy to start to feel a connection to individual stocks. This is a sure-fire way to lose out, however, as any stock could change directions at any time and you need to be objective enough to know when your time with a given stock is coming to a close. Not keeping an objective mindset can easily cause you to start making harmful mistakes such as doubling down on losing stocks in an effort to recoup your losses or sticking with a specific stock after all indicators point to a long trend moving away from your desired direction in hopes that things will turn around. The same thing can be said when it comes to listening to outside sources.
Once you have committed yourself to a specific stock it is important to ignore everything besides your trading plan and consider it white noise until the trade is completed. Each trade needs to be objectively verified based on its merits in relation to your trading plan, if you do this then you can let the results take care of themselves.
Don’t Expect Too Much:
Having the wrong expectations is one of the easiest ways to lose out when it comes to day trading. It is important to believe in both yourself and your plan, but this belief should always be based firmly in reality.
Having an unrealistic expectation when it comes to profits is a good way to let your emotions into the trading process which can then easily lead to trading mistakes that you wouldn’t have made if your head was clear. Keeping your expectations realistically in check means having a firm idea of the potential risk and reward that will come along with every trade.
In order to remain true to yourself regardless of the situation you find yourself in, it is important to understand the motivations you have for trading and how they affect your trading style. It is also important to understand the motivations that inspire the various commodity markets if you want to trade in them successfully.
In order to figure out what motivations are influencing your favorite commodity, the first thing you will need to do is to consider who the major players are in that commodity. Once you know who the major players are, you can watch how they trade and determine the reasons behind why they make the trades they do. After you understand how they are likely to move, then you can take a look at how things are currently progressing and compare that to the historical data you have gathered. When taken as a whole, this process makes it easier to determine how the major player movement affects the market as a whole which makes it much easier to predict future movements in turn.
Keeping everything that is required in mind at all times is a challenge, even for experienced traders. If you never put what you have learned into action, however, then you will never improve as a day trader and, what’s more, you will never profit from it. Once you have made a decision it is important to understand why you made the decision you did and also not to be afraid to bail on a trade that suddenly turns around on you. It is important to keep in mind that a small loss in the present is always preferable to a potentially large loss somewhere down the line.
Furthermore, you will want to keep in mind that there are absolutely days that the market isn’t going to be doing much of anything. When this happens, it is perfectly acceptable to simply sit back and wait for more profitable market movement. Other times, something unexpected is going to happen and skew the market in an unexpected direction for a prolonged period of time. Remember, just because you are a day trader doesn’t mean you need to be trading every single second of every day.
The Day Trader Enemies:
While becoming a successful day trader isn’t possible without making mistakes and learning from them. There are plenty of serious pitfalls that you can be aware of in such a way that it makes you less likely to have to experience them yourself. Keep the following in mind and remember, “Forewarned is Forearmed”.
Chasing Bottoms And Tops:
There are certainly some strategies out there that are effective when used near the turning points of existing trends. These are in the minority, however, which means that picking bottoms and top is, more often than not, a risky proposition. Unfortunately, it is an all too common mistake for traders to invest money into securities that are either too low or too high, gleefully ignoring the 2 percent rule as they do so. This impulse should be avoided like the plague and replaced with a focus on major inbound price moves instead.
Not Having A Good Exit Plan:
It is common for new day traders to have a plan when it comes to getting in on a potentially profitable trade without having an equally solid idea for when they are going to get back out. This then leads them into scenarios where they get out too early and miss out on some easy money or stay in too long and either end up with an investment or end up being forced to take a loss despite the promising start.
Trying To Get Even:
While most new day traders start out with a plan of some type, they often make the mistake of letting their emotions take over and when that happens it is very easy for a plan to go out the window. It is important to keep in mind your trading goals as well as your long-term plan when this occurs as trying to get even with a specific stock, either by doubling down or by holding onto it well past the point where logic would dictate that it is time to get out, will only lead you to a loss far more than it will work out in your favor.
This is why it is so important to focus on the numbers to the exclusion of all else which means removing your ego or self-esteem from the picture entirely. Focusing on the price action to the exclusion of all else will make it easier to block out aberrant thoughts relating to magic numbers or breaking even, which will naturally improve your overall trade results, possibly to a significant degree.
Sticking With Relative Trends:
If a trend is already well-defined in the market, then it is entirely possible that it is going to continue long enough for you to make some money off of it, but it is far from a guarantee. The market will naturally fluctuate up to 20 percent of its current average with very little warning, before settling back to the current standard. This means that if you recklessly jump onto a specific trend without doing the required homework, you will frequently find yourself making a momentum play that is never going to go anywhere.
Before you make a move regarding a specific trend, there are three distinct time-frames you are going to want to consider first:
- If you are prone to trading in the short-term then you are going to want to keep an eye on the weekly, hourly and daily charts.
- If you prefer holding onto trades for a longer period of time then daily, weekly and monthly charts are typically going to be more useful.
Being Too Focused:
Many new traders get so focused on a specific trade that they forget that no trade exists in a vacuum. Not keeping this in mind is a sure-fire way to hurt your overall successful trade percentage with losses that are, by and large, avoidable. The more profitable solution is to instead keep a strong macro view of any trades you are considering working with. Keeping tabs on the market in this way and looking for potentially profitable trades is a great way to track general derivatives. These derivatives are crucial when it comes to managing the underlying conditions that occur between markets while also make sure they are currently moving in the same ways.
Letting The Opinions Of Other Influence Your Trading:
While every day trader is going to have opinions regarding the best way to trade this type of stock or when to use that indicator, the best day traders tend to avoid this advice like the plague and instead work out their own. The only thing you really need to focus on in order to make the right types of trades in the right time-frames is Math and anything else is only going to get in the way.
Timing It Wrong:
As hard as it might be to believe, finding a trade that is likely to be profitable in your desired time-frame is only half of the battle, you also need to learn when the right time to pull the trigger in order to determine the right results. Making the right move at the wrong time can easily cost you a big profit. How big exactly? Making the right move costs day traders around the world upwards of 10 million dollars per day. This doesn’t mean that you need to wait to make a trade until the stars align and everything is perfect, just that you will want to focus on getting a feel for the best moment to start a trade and then act on it directly.
While few traders, even those who are new to day trading, start off the day with a plan of averaging down, it is something that they often end up doing because they didn’t take the time to actively plan against it happening. The truth of the matter is that the resources spend holding onto a weak position will almost always cost you more than if you had ended a trade and used those funds elsewhere instead.
Remember, every time you end up with a failed trade that means the next trade needs to be even more profitable overall in order to make the entire day work out to a profit instead of a loss. If you get into the habit of averaging down, and your trading capital wasn’t terribly strong to begin with, then a few days of doing so can easily equate to days or even weeks that will be required in order to just get back to where you were when you started.
Not Factoring In Risk And Reward Before You Make A Trade:
Risk and reward are an important part of every trade. This in no way means they are going to be equal, however, and if you don’t take these differences into account then you can easily make the wrong moves without even realizing it in the moment. If a given trade has enough risk to cost you 2 percent of your overall trade capital then you are going to want to ensure that it pays out at least twice that much (3 times as much is better) to make it worth your while. Likewise, a signal trade that is worth 10 percent of your total trade capital is always going to be riskier than 5 smaller trades worth 2 percent each.
The Day Trader Tools:
Even when compared to other types of trading, the tools you use as a day trader are extremely important if you hope to generate a profit on a regular basis. Thanks to the tight time-frames that day traders typically operate under, every second can literally be the difference between success and failure which means the platforms, software and tools you use are ultimately just as important as the strategies you employ and the stocks you pick to trade. What follows is a list of things that every day trader should have on hand in order to ensure as much success as possible.
The Right Day Trading Hardware:
While you don’t necessarily need the latest and greatest in computer hardware in order to run most types of trading software, that doesn’t mean you can get by with the bare minimum either. The better your computer, the faster and smoother this software will run and the less lag and fewer crashes you will experience. First and foremost, it is important that you have adequate RAM which will make it easier to multitask without issue as you will frequently have several different programs as well as your web browser open at the same time. Additionally, as your software needs increase, the base level of hardware required will do the same.
While these costs can easily add up dramatically if you have to purchase an entire new rig all at once, there will rarely be a need to do so. Rather, you can purchase parts overtime as needed, or when they are on sale, in a more piecemeal fashion most of the time. With this strategy, you can grow your hardware capabilities slowly as your need for the increased power manifests itself.
As you get more serious about day trading, you are also likely going to want to run at least 2 monitors at a time, if not more, which will allow you to dedicate one to trading and the other to research and tracking results. This will mean you will likely need a better video card with enough HDMI ports to account for the additional monitor inputs. Once this is done, depending on the quality of your system, and its available cooling power, you may need to look into liquid cooling solutions as well to ensure that things don’t overheat in the midst of an important trade.
Regardless, you are going to want to invest in the best internet speed available that your current system can reasonably take advantage of. The current high-end standard is 1 gigabyte MBPS which can be found in most major markets, though something around 100 MBPS is typically fast enough for most systems. In addition to having access to the speed, you are going to need to be sure that your router and modem can keep up as well or they will bottleneck your efficiency to a noticeable degree. When you contact your internet service provider, you will also want to consider reinstalling a landline as a type of emergency backup in case you find yourself unable to make a specific trade in any other fashion. While this might seem like overkill, the $10 per month will seem reasonable the first time you find yourself using it to place a major trade and you can think of it as a hardline to your broker in case the worst occurs.
Who To Choose Your Broker?
Many traders stick with the first brokerage they come across without ever thinking twice about it. This can be a serious mistake, however, as an experienced trader has needs that are frequently quite different than those of a beginner. As such, once you get used to the day trading experience it will generally behoove you to reevaluate your choice of broker and determine if you ultimately made the right decision.
First thing in order to determine the best options for what you are looking for, the best place to start is on your favorite day trading website and see what the people who frequent their forums have to say. After you have determined a suitable list, the next thing you will want to do is determine the fees that they charge in exchange for the services that they offer. If you have already determined what trading platform or online tools that you prefer then it is important to make sure that the brokerages you are looking at support them as not all brokerages support all trading platforms. Otherwise you risk having to learn an entire new platform from scratch.
Additionally, it is very important that you choose a brokerage that is based in your home country or at least in a country that provides proper oversight when it comes to day trading. While many foreign brokerages might offer cheaper fees, putting your money into the hands of a company without direct oversight means that if that company suddenly disappears, your trading capital will go with it.
Finally, it is important to make a concentrated effort when it comes to determining the type of customer service the brokerages you are interested in provide. In order to determine this, you will want to do more than listen to reviews which can easily be skewed in one way or another, it is instead best to see for yourself. This means you are going to want to call the brokerage personally and see how long it takes for you to speak with a real person. While you won’t have to actually call your brokerage very often, when you do it is likely to be an emergency which means you are going to want the time it takes to find someone to talk to, to be as short as it possibly can be.
As a new customer, it is likely that you will receive a call back from someone associated with the brokerage who will try and sell you their service. If this call takes more than one business to occur then you will know that you are better off going somewhere else. After all, if the company treats new customers with that level of disdain, consider how much worse things will be once they already have your money and aren’t actively trying to make a good impression.
Finally, assuming that their customer service is up to snuff, you will also want to email them with questions a few different times, just to see what their level of response is like. While this process may be a bit time consuming, once you find a brokerage that is on point, it will be more than worth the effort in the long run.
Online Day Trading Tools:
There are plenty of different tools online that claim to help you maximize your trade efficiency so the ones you choose to use are ultimately up to you.
First things first, you are going to want to find a "Financial Calendar " that works for you to ensure that you don’t miss any important dates when it comes to financial earnings reports. The program you choose should automatically populate with various important events as well as offer many different customizable dates and provide details on multiple different markets.
If you ever trade in the Forex Market then you will want to find a good currency convertor that shows any changes to specified currencies in real time. You will also want a currency convertor that shows the range a specific currency pair has operated in over a predetermined period of time.
Additionally, you will want to ensure that you have a calculator that makes it easy to determine pivot points along with Fibonacci numbers. These tools will make it easy for you to keep up to date on relevant trends and help you stay informed on relevant indicators that it is otherwise easy to miss if you aren’t careful. Along similar lines, you are going to want to track down a heat map that is reliable and that shows you the trades that are currently trending along with a volatility monitor to make it easy for you to keep tabs on the mood of the market.
Day Trading Strategies:
Scalping is a trading strategy whose goal is to make a profit from small changes in price. Those who use this strategy typically place as many as 100 or more trades in a given day. Scalping takes advantage of a combination of large position size and small price gains in the shortest market time-frames. The goal is to either buy or sell a number of shares at either the bid or ask price and then exit once the price has only moved a few cents.
Scalping is a fast-paced type of trade that nimble traders will excel in. The ideal margin for this type of trading is 4 to 1 in order to make the most profit in the shortest amount of time. Typically, scalpers focus on either the 1-minute or 5-minute candlestick charts. Commonly used indicators include the MACD, RSI and Stochastic. Price chart indicators like Pivot Points and Bollinger Bands are often used to determine levels of resistance and support. It is recommended that you have at least $25,000 worth of trading capital in order to utilize this strategy successfully.
Common mistakes to this strategy include: choosing poor execution times, not setting the correct stop losses, late exits, late entries and overtrading.
A fade is an investment strategy based around taking a contrarian approach to the current trend. This is a high-risk strategy that has the potential for high short-term gains when it works out in your favor. The reasoning behind this is that once the initial surge or spike in price has occurred then the resulting retracement or pullback will be able to generate a profit.
To know you are on the right path when it comes to one of these strategies, you will want to look for a gap between the price and the trend line, this means the price is heading more in the direction of the trend and away from the trend line.
The right time to fade a breakout is when you have reason to believe that the breakout from either the resistance or support level is false which means it is unlikely to continue for much longer. You would then want to put this strategy into play when you have reason to believe that this breakout is going to be substantial.
Most fade breakout trades tend to fail because the minority who chose to fade the breakout is frequently compromised by the major players in the market who want the current trend to continue.
Remember, in order to sell something, you need to have a buyer and if everyone is currently buying above the resistance level or selling below the support level then the number of buyers for what you are proposing is going to be relatively slim. There is a reason that this is a high-risk strategy.
Momentum Trading Strategy:
In momentum trading, traders tend to focus on stocks that are currently moving in one direction a significant amount. Those who trade based on momentum typically only hold their positions for a few minutes at a time, though it can be longer depending on the speed at which the stock is moving.
Successful momentum trading requires the trader to analyze the list of stocks they favor by watching the charts, particular the momentum indicator which visualizes the total net change of a stock’s closing price over a predetermined period of time. The momentum line is typically show in tandem to the price line and it shows a zero axis with positive numbers indicating an upward trend and vice versa. This indicator will typically determine an incoming breakout which means that even 2 periods of sustained momentum will be enough to cause a breakout.
Once a potential momentum trade is found, you don’t need to jump on it right away as this type of trend is typically likely to continue for more than a few periods. It is important to keep an eye on the stock in question once you have made a move, however, as the second the trend seems to be dying out you need to exit to keep from losing a slice of your profits.
Butterfly Spread Strategies:
When it comes to trading options many day traders remain perfectly content with simple puts and calls when it comes to making money from market indecision or possibly using covered calls as a means of generating income. There are more promising alternatives available, however, and one of these is the butterfly spread. This strategy allows traders in the know to pinpoint the traders that are likely to generate the greatest amount of profit for the lowest amount of risk. The modified butterfly spread, also discussed below, takes things up a notch.
Standard Butterfly Spread Strategy:
The perform the standard butterfly spread you are going to want to utilize 3 different puts or calls in a 1, 2, 1 configuration:
- The first call you place is purchased at a strike price that is similar to the current price of the underlying asset.
- The second pair is purchased at an increased price.
- The final call is purchased at an even higher price.
- The same strategy can be used for puts though the price descends rather than ascends.
What you end up with is a neutral trade that is sure to generate a profit assuming the underlying asset remains somewhere in the range of the strike prices. It is also useful if you are interested in profiting from a directional trend as long as you set all three either below or above the current strike price depending on if you are purchasing puts or calls.
Modified Butterfly Spread Strategy:
The more advanced form of this strategy is called the modified butterfly spread and it has similar goals to the standard version, though it differs in a few key ways when it comes to execution. The biggest difference is that it offers you the opportunity to maximize your profit if put trades are bullish and call trades are bearish. This is done via a ratio of 1, 3, 2 which:
- Leaves just the first put or call at the breakeven point.
- Triples up on the higher/lower price.
- Doubles up on the final price point.
The key takeaway from this example is that puts are selling at 5 points beneath the at-the-money point and another at 20 points below. As the price is currently at $194 this means that you will be able to breakeven if the price drops to $184 which means that the strategy generates 5 percent worth of downside protection.
This means that the underlying asset in question would need to drop a total of more than 5 percent before any type of loss would occur. In this example, the total potential loss is approximately $2,000 which equals the amount required to put the trade into action. In this case, the loss would not occur until the underlying asset dropped to a price that is lower than $175. On the other hand, the amount you stand to gain from the aforementioned trade equates to about $1,000 which is a 50 percent return on your investment assuming the underlying asset only increases to $200. The strategy would also result in a $500 profit as long as the underlying asset doesn’t move past $195.
Criteria To Consider For Butterfly Spread Strategy:
When it comes to determining the correct type of butterfly spread to use it is important to keep in mind the amount of money you are willing to lose based on your total trade capital. You will also need to determine the estimated risk based on the current state of the market which will determine your overall odds of failure or success. There is no one right answer to this question, you will need to ask yourself these questions and set your own limits to determine the type of butterfly spread that works best for you.
The potential for the return on your investment, along with the likelihood that you will actually see it are going to determine the level of risk that it is in your best interest to proceed with. Performing this risk/reward analysis is crucial as you want to avoid rushing into the modified butterfly spread simply to mix things up or to try something new. It should go without saying that it is only recommended that you use the modified version if you have a sizable amount of trade capital stashed away.
When it comes to day trading options, it is a great choice for day traders looking to improve the flexibility of their trades while mollify the risk/reward ratio of an existing underlying stock that is not as strong as you would otherwise prefer. As long as it is only used when required, and the conditions are right, the modified butterfly spread adds to that flexibility even more.
I hope this Day Trading For Beginners book was informative and able to provide you with all of the information you need to achieve your goals, especially as a beginner, whatever it is that they may be. Just because you’ve finished this book doesn’t mean there is nothing left to learn on the topic, expanding your horizons is the only way to find the mastery you seek.