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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.
But many popular online brokers such as eTrade, TD Ameritrade, and Interactive Brokers have professional or advanced versions of their platforms that feature real-time streaming quotes, advanced charting tools and the ability to enter and modify complex orders in quick succession.
Basic Day Trading Tips
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.
Set an Amount Aside
Assess how much capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their account per trade. If you have a ,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is 0 (0.005 x ,000). Set aside a surplus amount of funds you can trade with and are prepared to lose. Remember, it may or may not happen.
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 any time during trading hours. Moving quickly is key.
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 Apple shares are trading at 0 and you only want to buy worth, many brokers will now let you purchase 1/5 of a share.
Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing 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.
Cut Losses With Limit Orders
Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it is executed at the best price available at the time — thus, no price guarantee.
A limit order, meanwhile, does guarantee the price, but not the execution. 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.
Be Realistic About Profits
A strategy doesn’t need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. The point is, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.
And Stick to the Plan
Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. There’s a mantra among day traders: “Plan your trade and trade your plan.” Don’t let emotions get the best of your strategy.
Before we go into some of the ins and outs of day trading, let’s look at some of the reasons why day trading can be so difficult.