Day trading (also known as intraday trading or short-term trading) is one of the most misunderstood trading techniques. The fast pace of moving investment positions within a single trading day generates a perception that day trading is riskier or more volatile than other types of trading. Let’s put this to the test with an overview of some helpful strategic trading tips trading strategies for beginners and the experienced alike, as well as by discussing how day trading really works.
These day trading tips could help traders of all experience levels develop daily trading strategies for their portfolios.
Find favorable entry points
Look for scenarios where supply and demand are drastically out of balance and use these as entry points. The financial markets are like anything else in life: if supply is near exhaustion and there are still willing buyers, price is about to go higher. If there is excess supply and no willing buyers, price will go down. At Online Trading Academy, we teach students how to identify these potential turning points on a price chart by studying historical examples.
Set day trading price targets
All traders, no matter their expertise level should set day trading price targets before entering the market. If buying a long position, traders should decide in advance how much profit is acceptable as well as a stop-loss level if the trade turns against them. Then, stick by their decisions. This limits potential loss and keeps traders from being overly greedy if price spikes to an untenable level. Exception: in a strong market, it’s acceptable to set a new profit goal and stop-loss level once the initial target is achieved.
Insist on a good risk-reward ratio
One of the most important lessons in stock trading for beginners is to understand a proper risk-reward ratio. Beginner traders should stick to a strict rule of risking only $1 to potentially make $3, or a risk-reward ratio of at least 1:3. As the Online Trading Academy instructors point out, proper stop loss utilization, allows traders to manage risk.
Day trading requires patience, so be a patient trader. Paradoxical though it may seem, successful day traders often don’t trade every day or all day. They may have a certain time they feel is the best time to day trade for them; and during those times, they may be at their computer and in the market, but if they don’t see any opportunities that meet their criteria they will not execute a trade that day. That’s a lot better than going against your own best judgment out of an impatient desire to just do something. Plan your trades, then trade your plan.
Discipline is integral to strive for consistent trading results. Beginners need to set a trading plan and stick to it. At Online Trading Academy, students execute live stock trades in the market under the guidance of an instructor with the goal of improving decision making skills. Impulsive behavior can be a trader’s worst enemy. Greed can keep traders in a position for too long and fear can cause them to bail out too soon.
Execute trades confidentiality
Don’t be afraid to push the order button and execute trades. Novice day traders often face paralysis by analysis because they get wrapped up in watching the trading chart candles and the Level 2 columns on their screen; this prevents them from acting quickly when opportunity presents itself. For disciplined traders who work their plan, actually placing the order should be automatic. If they’re wrong, their stops should get them out without major damage.
Don’t day trade with money that is needed or set aside to meet a goal. Knowledgeable traders have a small bucket of short-term risk capital and a larger bucket of investment capital they’re saving for retirement or another long-term goal. The larger bucket tends to be invested more conservatively and in longer-duration positions.
Balance capital invested per trade
Position size refers to how much capital is allotted to a transaction in the stock market. A simple example would be, if a trader wanted to invest $100, they could buy 10 units of a stock that was priced at $10 (10 units x $10 = $100).
It is important to never risk too much capital on one trade. Position size should be a set as a percentage of the total day trading budget (which might be anywhere from 2% to 10%, depending on the budget). Allowing the position size to exceed the predetermined percentage may result in missing out on an even better opportunity in the market due to all available funds being tied up in one or two trades. Plus, the risk of loss is potentially greater as the size of the position increases.
Explore options beyond trading stocks
Trading stocks is where many day traders start, but that doesn’t mean day trading is limited to just trading stocks. Forex, futures and options are three asset classes that display volatility and liquidity just like stocks, making them ideal for day trading. And often, one of them could present appealing opportunities on a day when the stock market is going nowhere.
Learn from experience
Once the trade analysis is done and the trade is placed, even if it goes against them traders shouldn’t second-guess themselves or beat themselves up for mistakes. All day traders experience losses, so it’s ok when the occasional trade doesn’t pan out, especially for a beginning day trader. When a loss occurs, traders should evaluate the trade to confirm that they followed their own established day trading rules and that they didn’t get in or out at the wrong time. Journal the trade, learn from any mistakes that were made and move on to the next trade, building on that experience.