Day trading is one of the most popular activities for traders seeking to generate short-term profits from the markets. Day traders take advantage of buying and selling securities throughout the day to amplify their gains. Successful day trading strategies require traders to have a strong knowledge of trading techniques, risk management techniques, financial market analysis and the ability to stay disciplined during volatile times.
From jumping into the market without any sort of plan to scaling out of positions too quickly, novice traders are often guilty of making many of the same common day trading mistakes. To avoid making some of these mistakes, here we will outline the best day trading strategies for beginners.
What is Day Trading?
Day trading is a strategy used to take advantage of small price changes in the market within a single day. This type of trading requires a high stamina level and a keen eye to spot opportunities throughout the day. Trades that are held for longer than one day may incur overnight rollover fees, which applies to positions held overnight.
Day traders are typically looking for short-term positions that are characterised with low risk and high reward potential – meaning the positions can move rapidly in their favour with minimal risk. Day traders typically look for entries and exits that are efficient and risk-controlled with the aim of making a profit.
Best Day Trading Strategies for Beginners
The best day trading strategies for beginners vary depending on their personal risk appetites and trading capital levels. But generally, successful day traders reduce risk by adhering to the following strategies.
- Choose the Right Stocks
When beginning to day trade, it is important to invest in stocks that move quickly and will yield substantial profits. For example, while trading a penny stock can yield huge profits, the market is typically highly volatile and its best to start with established corporations.
It’s also important to pay attention to the news and to find stocks that have strong earnings reports. It’s best to start small, with a few stocks to study, and find those that have technical indicators that line up with market trends.
- Set Clear Profit Goals
Beginners should always set attainable profit goals that are realistic and based on the stock market’s past performance. Setting large, unrealistic profit goals can lead to overtrading – placing too many trades in a single day, in a desperate attempt to achieve unrealistic returns.
Rather, break down your initial investment into blocks and set realistic profit goals. For instance, a trader that has $10,000 to invest might establish a 10-trade plan in which they will risk no more than $1,000 per trade.
- Utilise Stop Loss Orders
One of the key risk management techniques for day traders is to set stop-loss orders, which is a price at which the stock will automatically be sold if it reaches the agreed upon level. This way, traders are able to limit their losses and protect their profits.
Additionally, traders should supplement their stop loss orders with conditional orders. A conditional order is an order that allows traders to place trades at predetermined levels in the markets, ensuring they don’t miss out on potential opportunities.
- Avoid Emotional Trading
One of the greatest risks for day traders is trading on emotion. When trading with emotional intensity, traders often overlook risks, overlook objective market analysis and ignore stop loss orders. By becoming overly emotional, traders can often make poorer decisions that increase their losses.
Traders should take a disciplined approach, taking each trade one at a time and following their established trading plan. This can help to keep traders in a more logical headspace and allow them to focus on strategic trading rather than impulsive trading.
- Practice Risk Management
Day trading can be very risky, so risk management is an important strategy to employ when entering the markets. To combat risk, traders should focus on avoiding significant losses and always assume that each trade has the potential of being a loser.
It is best to set clear rules, such as no more than three transactions per day, and ensure that losses are covered by profits from successful trades. Additionally, beginners should diversify their investments by investing in multiple stocks.
- Stay Informed
In addition to understanding the markets, investors should also keep up to date on news and trends both related to the securities that they are interested in trading and the markets in general. This way, investors will have the information to make informed decisions and will be able to understand market movements.
Day trading can be a profitable venture for investors who have the knowledge and risk management skills to be successful. By following the strategies outlined in this article, novice day traders will be better prepared to take on the markets and tap into the potential that day trading provides.