Day trading is one of the most popular types of financial markets trading strategy around.
Although many advanced traders use day trading strategies, most beginners can easily master various day trading strategies, too. Read on for more information about what day trading is, day trading for beginners and how to get started.
What is Day Trading?
Simply put, “day trading” is a phrase used to describe any trading strategy that does not involve taking overnight positions. Day traders make sure that all of their transactions are opened and closed within the same trading session or day.
The primary advantage of day trading is that you avoid exposure to unanticipated market movements that can take place overnight when you are not closely watching the market. This lets you get a good night’s sleep as you prepare to take on the market when it next opens in your locale.
Day Trading Strategies
Day traders generally seek to profit from small and frequent market moves. They usually also aim to consistently implement an efficient and effective day trading strategy that can use tools like price charts and technical indicators to forecast short-term market movements as accurately as possible.
A variety of trading strategies can be lumped into the broad day trading category as long as they do not involve holding positions overnight. Five examples are mentioned below.
Scalping is a popular day trading strategy that aims to take numerous small profits on trading positions with very short durations. Scalpers must have ultra-fast reaction times and often enter and exit trades within seconds or minutes. They also need to time their entry levels well, choose high probability trades in highly liquid and volatile assets, and quickly cut losses.
Scalpers also do best with tight dealing spreads, quick order executions and minimal order slippage.
Day trading for beginners often starts here because you can practice scalping with a demo account, try it with real money and expand your investments over time.
Some day traders with deep pockets and a substantial risk appetite might use news trading strategies that aim to benefit from the highly volatile markets often seen shortly after key news releases. News traders usually monitor economic calendars and news feeds for key data releases or news events.
News trading strategies can be based on either fundamental or technical analysis. They also generally require a trader to watch the market just before a risk event to observe key support and resistance levels that allow the trader to act quickly once the news is out.
Trading Reversals from Oversold and Overbought Levels
The Relative Strength Index and the Stochastic Oscillator are momentum indicators that day traders can use to signal when markets are overbought or oversold and hence ripe for a reversal. Day traders typically sell into overbought markets and buy into oversold markets. This is typically an active trading strategy that requires quick reactions to execute trades at the right time and level.
A pivot point is a technical analysis indicator computed by taking the average of the high, low and close prices from the previous day. They are used like support and resistance levels when trading, with day traders typically aiming to buy ahead of pivot points below the market and sell ahead of those above the market.
Day traders often watch price charts to identify patterns that have predictive value. Once the market breaks out of the pattern, it can set up an objective that suggests how far the market might continue to travel in the direction of the breakout. Once a breakout occurs, day traders will typically set up a trade in the direction of the breakout and then aim to close the trade near the computed price objective.
Day Trading Charts and Patterns
Many day traders generate price charts for the assets they actively trade or consider taking a position in. They might also draw trend and retracement lines on the charts to suggest target levels and determine where support or resistance points are likely to show up.
Day traders also often superimpose technical indicators over the price action or display them in the indicator box below the price chart.
Day traders also peruse charts for classic patterns that have a predictive value that often includes useful measuring objectives once the market breaks out of the pattern. Popular chart patterns used by day traders include:
- Head and shoulders tops and bottoms
- Double and triple tops and bottoms
- Saucer tops and bottoms
- Flags and pennants
Day Trading Tools
Although day traders use a variety of strategies, they often take advantage of similar tools to optimize their chances of success. Some of the more useful trading tools are described in detail below.
Day traders often plan their trading week around an economic news calendar that will list all major economic data releases, central bank policy statements and benchmark interest rate announcements, national elections and central bank official speeches.
Such key events can affect the financial markets considerably. They can also cause the short-term breakdown of a key tenet underlying technical analysis, so any day trader should be aware of their release date and time.
Economic calendars generally list the likely impact of an event, as well as the expected and previous results for key data releases. Significant deviations from the market’s consensus can cause substantial volatility as the market rushes to discount the new information.
A trading platform is used to execute transactions online. A good trading platform will generally incorporate technical analysis and charting functions, have order entry and position management abilities, and display a high-quality financial news feed that day traders often need to watch just in case any market-moving news breaks.
Most trading platforms have real-time prices displayed on their charting interface and a trade window so you can trade directly from charts. An example of a popular and sophisticated online trading platform used to trade forex, precious metals and other assets is MetaTrader 5 from MetaQuotes
Keeping an accurate record of your trades throughout the day can provide valuable insight into how your trading is going and where improvements need to be made. When journaling your trades, you should explain why, where and in what size you initiated a trade. You can also add the signals you used and what results you observed, including whether the trade was profitable and to what extent.
A trade journal helps you review your day trading mistakes so you can hopefully avoid repeating them. Some day traders keep a journal on paper or in a spreadsheet, while others might use trade journal software like Edgewonk’s.
Final Day Trading Tips
When the trading day is over, your success as a day trader will depend on what strategy you operated and how disciplined you were in implementing it. Also remember that complexity is often not advantageous when it comes to formulating a strategy since the easier your strategy is to implement in practice, the more likely you are to be able to profit from it during fast markets and over multiple assets.
In most cases, technical analysis plays a key part in your day trading strategy because of its notable success in forecasting short-term market moves. Technical analysis can even be used to validate potential trades.
Day trading for beginners involves patiently developing a strategy that works for you. Plan how you intend to manage your risk. Spend your money prudently. These are key elements of success you should keep in mind when organizing your day trading business.