Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game—if it is played correctly. But it can be a dangerous game for newbies or anyone who doesn't adhere to a well-thought-out strategy.
Below, we'll take a look at some general day trading principles and then move on to deciding when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.
1. Knowledge Is Power
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks—the Fed's interest rate plans, the economic outlook, etc.
So do your homework. Make a wish list of stocks you'd like to trade and keep yourself informed about the selected companies and general markets. Scan business news and visit reliable financial websites.
2. Set Aside Funds
Assess how much capital you're willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000).
Set aside a surplus amount of funds you can trade with and are prepared to lose. Remember, it may or may not happen.
3. Set Aside Time, Too
Day trading requires your time. That's why it's called day trading. You'll need to give up most of your day, in fact. Don’t consider it if you have limited time to spare.
The process requires a trader to track the markets and spot opportunities, which can arise at any time during trading hours. Moving quickly is key.
4. Start Small
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to be able to trade fractional shares, so you can specify specific, smaller dollar amounts you wish to invest.
That means if Amazon shares are trading at $3,400, many brokers will now let you purchase a fractional share for an amount that can be as low as $25, or less than 1% of a full Amazon share.
5. Avoid Penny Stocks
You're probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid, and chances of hitting a jackpot are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, stay clear of these.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But for newbies, it may be better just to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you'll use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it's executed at the best price available at the time—thus, no price guarantee.
A limit order, meanwhile, guarantees the price but not the execution.1 Limit orders help you trade with more precision, wherein you set your price (not unrealistic but executable) for buying as well as selling. More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.
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