Day trading is a topic that is often misunderstood and difficult to grasp for most beginners but has the potential to be extremely profitable through the use of proper strategies and research methods. Many who jump straight into day trading are insufficiently prepared and make mistakes that easily could be corrected through a few simple, yet effective tips from professionals. These tips brought into light by experts are essential in day-trades and could prove very useful for anyone potentially interested in entering this field. An important thing to know going into day trading is to leave your emotions behind.
Setting a Strategy
When day-trading, it is of paramount importance to leave emotions out of your decision making. According to Statista, at the end of the day, 90% of day-traders fail and do not profit. How can you put yourself into the 10% that does make a profit? By setting a strategy.
Day trading is not just a hobby, but rather could be considered closer to a job. Day trading requires a lot of time and planning before anything. In order to be successful, you will need to dedicate a fair share of your energy and resources to the process.
Time & Risk Management
Setting up a consistent schedule with certain hours for day trading will help with time management and making effective trades. These hours should be segmented for chart studying and employing a strategy with the goal being to find a precise entry point along with an exit strategy. It is essential to establish a working strategy through deciding entry/exit points that you will abide by, stop/loss points that you will sell at once your trade goes down a certain amount (generally around 2-3% of your account), and a risk-reward ratio.
Good entry and exit point can be decided upon through the use of indicators, which is explained in the following paragraph. A stop-loss order or risk-reward ratio can help ensure you won’t lose a large amount of money, otherwise known as “cutting your losses.” A good risk-reward ratio is 1:2 meaning you’re willing to risk $1 to potentially make $2 allowing traders to lose small and win big. These strategies help to take the emotion out of day trading. 90% of day traders are unsuccessful, but these strategies can help aid in success.
Useful tools that can be utilized effectively by beginners are indicators. One form is looking at the support and resistance levels. The resistance line shows the highest peak\rejection-points that the market has traded at over whatever period of time you are viewing. The support line is the opposite meaning that it shows the lowest point\supporting-points the market has traded at over that same period. These two act as obvious buy and sell points. Furthermore, a more practical indicator is the
Relative Strength Indicator (RSI). When the RSI indicator reaches its higher line, the stock is considered overbought, meaning the value is likely to go back down and that, generally, it would be smarter to sell than buy at that point. Conversely, when it reaches its lower line, the stock is oversold, making it a good entry point. Finally, another easy indicator to use is the Simple Moving Average line. The SMA line depicts the average stock price over a certain period of time. Using the SMA line in tandem with the RSI is a useful way to make prudent entry and exit points. For example, if a market is oversold and is close above the SMA line, it is likely that the stock will increase in the near future. There are other forms of indicators, however, using the Support and resistance, SMA line and the RSI are very effective forms of indicators for new traders.
Rather than simply tracking data regarding investments and looking solely at charts and similar sources, it is valuable to keep up with current economic events that relate to the performance of your investments. Paying attention to the news and current events can give day traders an advantage in predicting changes in the market and provide a perspective that competitors lack. Although diversifying investments can pay off for those who have a great experience under their belt, it is a much safer route to focus efforts to a specific area that you know well. Doing this will allow full attention to a certain category of investments and ensure that beginning day traders will minimize losses and capture potential gains.
Daily Margin Rules
If a trading account does not meet this requirement independently and falls below the amount, further trading cannot be done until the account is replenished and brought back up to the minimum. A margin call occurs when the account falls below the maintenance margin amount, where a brokerage demands the day trader to add money to the account, close out positions to bring the account back to the required level, or will do it themselves if demands are not met. Margin calls should be avoided at all costs.
Paper trading can be another helpful tactic in day trading. Paper trading is simulated trading where you can buy and sell securities without risking real money. This allows traders to test out strategies and practice using software while avoiding any risks. The best place to practice is a paper trading platform that offers live market feeds, so nothing is delayed. This allows for the most accurate practice. Paper trading helps shorten the learning curve for day trading. Without running any risk, you can determine a winning strategy. Although paper trading does not take into account emotion, it is a very efficient way for beginners to become familiarized with the topic.
In today’s competitive arena of day trading, information is almost essential to be in the 10% who succeed in trading. Current events can have an enormous effect on the value of stocks, making it imperative to have a source of immediate information. There are many news networks that provide sufficient information, as well as certain applications that give you insight into potential events that could affect stock values based on analytics from multiple media sources. Furthermore, there are analytical softwares that help traders, identify potential trends with more accurate predictions, and develop algorithms to predict price movements.