For anyone who has been in the stock market for a while, they will tell you that trading can be quite different from investing. The investor too needs to be knowledgeable and have a corpus to work with but trading can be much more demanding. Day trading is even more challenging, given the added pace and uncertainty of operations.
How is Day Trading Different From Regular Trading Done in the Stock Market?
While trading is about buying and selling stocks over a longer period, day trading is the speculative process of buying and selling during the course of one day. This includes trades that are done between the opening and closing of a single day’s trading and the positions settled the very same day.
For example, if you buy a stock at 8 am and sell it by 4 pm on the same day, you have completed a day trade.
Day traders usually make multiple buys and sells that could last from seconds to minutes and even hours during the day. The broad strategy is to take advantage of the fluctuation of the prices of a given stock over a short-term period and convert that into profit.
Besides being extremely well informed about the ins and outs of the stock market, day traders need to constantly update themselves and be alert to the movements in a short window.
If you are actively considering day trading or want to step up your game, here are some tips that could help you.
Deciding What You Want to Trade in - Futures, Forex or the Stock Market
One of the first decisions you will have to make is deciding your day trading market. The key day trading markets are the stock market, forex and futures.
Futures: The futures market is where agreements between a buyer and a seller to conduct a particular trade at a specific date and price are done. Trading futures require $1,000 in your account.
Forex: Forex is a volatile market where you trade in global currencies like USD, AUD, GBP and EUR. You can open an account with an amount of $50.
The stock market: One of the most popular types of markets for day traders, here you buy and sell shares of a company. Day trading stocks requires $25,000 as a minimum in your account.
So, what do you want to trade in? Which is the best day trading market for those starting out in the world of day trading? Decide on a market that best suits your financial position, interests, strategies and goals.
Infrastructure
Before you can start day trading, you need to make sure you have the infrastructure that includes:
A computer/laptop: You need to have access to a fast computer, preferably two, with enough memory. Traders often use multiple monitors, to keep a close eye on the trading charts and indicators.
A reliable internet connection: You would not want to miss out on trading opportunities due to an irregular internet connection. You would also need to have instant access to the market all the time. So go for a mid-range internet package so that you can make fast and accurate decisions.
Take a look at the various trading platforms and choose one that suits your style. Download a few different platforms and try them before you make a final decision.
A broker: Do research and read reviews and find a broker who can help you make informed decisions and is reliable and offers a reasonable fee structure.
When to Day Trade
As a beginner, to avert careless mistakes, it is advisable to trade during the same hours each day.
The forex market trades 24-hours a day, five days a week, however, the first couple of hours after the open, and the last hour before the close sees the biggest price fluctuations.
The stock market, again, sees the maximum movement in the first couple of hours of the market opening, and the last hour before it closes.
The futures market is another market you should trade early. Even the last hour of trading offers substantial movement.
Risk Management
How do you protect your trading accounts from losing all the money you had generated? You would need to have a proper risk management strategy to limit the risks of the market. The risk strategies that day traders normally follow are given below.
1% rule: How much you are willing to risk on each trade? Never trade more than 1% of your capital in a single transaction. For example, if you have $1000 in your trading account, your position should not be more than $100.
Pick an entry point and set a stop loss: Setting a stop-loss and take-profit points will get you out of the trade if things go wrong.
Daily risk: As the name suggests, set a daily loss limit. As a beginner, you could set it at 2% of your capital and stop trading when you hit the daily cap. When you are experienced enough, you can set your daily loss limit equal to your average winning day profit. So keep a record of your previous trades to calculate your profits.
Transition From Simulated to Live Scenario
If you are new to forex, futures or stock day trading, you could open a demo account first and practice the trade. You do not have to invest a huge capital in your demo account. Familiarise yourself with the trading practices and platforms. There is minimum risk involved and you will get an opportunity to improve your trading skills without investing large sums of money. Once you have practised enough on your demo account, you can open a live account and start trading.
As with any trading, whether it is futures, stocks, forex or any other commodity, there is both risk and reward involved in day trading in stocks. But, with the right preparation and strategies, it is possible to convert that risk into some neat profits. After all, successful trading is all about maximising profits and minimising losses.
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