Day Trading refers to market positions which are held only a short time; typically the trader opens and closes a position the same day but positions can be held for a period of time as well.
The concept got a bad reputation in the 1990’s when many beginners began to day trade without applying tested stock trading strategies. Long story short they lost a lot of money.
Yet day trading is not all that complicated once you learn a simple, rules-based strategy for anticipating market moves, such as that taught on our site.
Here are 10 secrets to day trading for beginners:
Look for scenarios where supply and demand are drastically imbalanced, and use these as your 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.
Always set price targets before you jump in.
If you’re buying a long position, decide in advance how much profit is acceptable as well as a stop-loss level if the trade turns against you. Then, stick by your decisions. This limits your potential loss and keeps you 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 your initial target is achieved.
Insist on a risk-reward ratio of at least 3:1 when setting your targets.
One of the most important lessons in stock trading for beginners is to understand a proper risk-reward ratio. This allows you to “lose small and win big” and come out ahead even if you have losses on many of your trades. In fact, once you gain some experience, risk-reward ratios of as high as 5:1 or even higher may be attainable.
Paradoxical though it may seem, successful day traders often don’t trade every day. They may be in the market, at their computer, 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.
Again, you need to set a trading plan and stick to it. If you’re trading on your own, impulsive behavior can be your worst enemy, that’s why our pro membership pairs you with a mentor you can talk to 24/7. Greed can keep you in a position for too long and fear can cause you to bail out too soon. Don’t expect to get rich on a single trade.
Don’t be afraid to push the “order” button.
Novice day traders often face “paralysis by analysis” because they get wrapped up in watching the candles and the Level 2 columns on their screen and can’t act quickly when opportunity presents itself. If you’re disciplined and work your plan, actually placing the order should be automatic. If you’re wrong, your stops will get you out without major damage.
Only day trade with money you can afford to lose.
Successful traders have a “little bucket” of risk capital and a “big bucket” of money they’re saving for retirement or another long-term goal. Big bucket money tends to be invested more conservatively and in longer-duration positions. It’s not absolutely forbidden to use this money occasionally for a day trade, but the odds should be very high in your favor.
Never risk too much capital on one trade.
Set a percentage of your total day trading budget (which might be anywhere from 2% to 10%, depending on how much money you have) and don’t allow the size of your position to exceed it. Otherwise, you may miss out on an even better opportunity in the market.
Don’t limit day trading to 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 will present appealing opportunities on a day when the stock market is going nowhere.
Don’t second-guess yourself, but do learn from experience.
Every day trader has losses, so don’t kick yourself when the occasional trade doesn’t go your way. Do, however, confirm that you followed your established day trading rules and didn’t get in or out at the wrong time.