Day trading, also known as Intraday trading, is one of the most common and popular ways of making money fastly after swing trading. While some believe it to be the fastest way of making big money, others fall victim to the risk associated with this type of strategy.
If you’re thinking to start day trading, especially when you’re a beginner, it is necessary to understand all the risks as it can help maximize day trader’s profit chances.
To be a successful day trader, you must know which security to trade-in, when to enter the market and when to exit. To ease your day trading journey, here’s a detailed guide that will help you in understanding the topic better.
Read this article till the end to know more about:
- What is Day Trading?
- How to Start Day Trading?
- What are the Risks of Day Trading?
- 3 Best Day Trading Strategies
- Best Indicators for Day Trading
- Tips for Beginner Day Trader
What is Day Trading?
Day trading involves actively buying and selling stocks on the same trading day in order to profit from small price movements. It is used in every financial market, but it is mostly used in the forex market, futures derivatives, stock trading, crypto trading, equity, and indices trading.
Most day traders rely heavily on stock price fluctuations to earn high trading profits. They open several successful trades and close within the same day.
Notably, traders always look for highly liquid stocks or assets and prefer short selling. When a trader short sells a stock, they profit when the price of a stock goes down.
Day traders frequently borrow or leverage funds each day in order to acquire new assets, but this significantly increases their risk. Unlike the margin traders who are trading borrowed money, individual day traders put their own assets at risk.
They make a profit by differentiating between the bid price and ask price. This advanced level of trading necessitates constant market and news monitoring and involves a significant amount of speculation.
On the other hand, experienced day traders are often highly skilled and knowledgeable about the markets, goods, techniques, and risks. It’s critical to recognize the significant risks involved in any sort of intraday trading before getting started.
Overall, a requisite for success in intraday trading is having adequate market knowledge before you buy and sell a security. In addition, the traders depend heavenly on borrowing money.
How to Start Day Trading?
Day trading can be complex and simple at the same time. If you’re a beginner, you might face some challenges while starting intraday trading. For your assistance, here is a step-by-step guide to get started:
Learn The Basics:
The very first step of getting started with any trading or investment strategy is to learn the fundamentals of the market. To become successful, you should have the adequate market knowledge and how do securities behave? Look at the past performance of the security.
Let us tell you that day trading is the fastest process and you may not get knowledge time to research every security deeply. Despite this, you must have a proper market understanding and good market data to determine where the market moves.
Pick a Broker:
After learning all the market fundamentals, it’s time for the real thing. To start intraday trading, you’ll first need to find a reliable broker such as PrimeFin. The reason behind choosing a reliable broker is that they work in clients’ interest.
While fraud or scam brokers eyes to dupe their client’s money by offering fake bonuses and offers. Most brokers are regulated by the securities and exchange commission (SEC).
Open A Trading Account:
Now that you have chosen a good broker, open a trading account with them. Based on your trading style, skills, and experience, you can choose between the different types of accounts available with the broker. You can create an account with an online broker quite easily and quickly.
Alternatively, you can make use of a free demo account, if you have very little or no knowledge about the market. There are several features of this account type. Firstly, practice on a demo account and when you think it’s the right time, you can switch to a live trading account.
Choose The Right Asset:
You can day trade a range of financial instruments including Commodities, Forex, Cryptocurrencies, Stock market, and more. Choosing the right assets can help you execute trade more efficiently.
For instance, high volatile assets can give you a higher chance of easy profits while trading with low amounts of money.
Understand the Entry and Exit Points:
It is vital for a day trader to determine the right prices for entry and exit in the stock market. For example, most seasoned traders use different types of strategies to determine the right entry and exit points.
What Are The Risks Of Day Trading?
Naturally, the compact the time frame chosen for trading, the bigger the risk. Hence it is considered a risky trading method. However, the Financial Industry Regulatory Authority (FINRA) has written rules to regulate this fast-moving practice and to educate every investor about the potential for significant losses.
Typically, the price movement will be higher in a short period. Therefore intraday players use high-risk methods to maximize their gains.
It’s important to remember that both risk and opportunity come combined. All-intraday trading strategies come with high risks, therefore if they give more profits then also there can be a considerable loss.
Hence, to avoid such trading losses, market players should plan the trading methods correctly and needs through market research and practice.
Some of the common risks are:
- Trading with high leverage to earn maximum profits in relatively less time with high price movement
- Opening hundreds of trades to make money and reach their day-ending profit goals.
- Retail investors are prone to psychological biases that make day trading difficult.
- As most day trading uses a high degree of leverage in margin accounts, having access to adequate capital is vital.
3 Best Day Trading Strategies:
Trend trading is ideal and favorable for novice traders. Searching for trading moments in the direction of a particular movement is easy and the most trusted pattern as markets trend in the same line with overriding price moves 80% of the time.
For executing this strategy, professionals always look for sharp movements which are trading with large volumes and following the trend direction.
It is always known as the quickest method to earn money in the financial market. Therefore it’s most used by the traders. The most important part of this strategy is it’s very complicated and needs a lot of time and concentration for monitoring the markets.
It is profitable, but at the same time, it also comes with high risks and is not recommended for every market practitioner.
Scalping is the most widely used intraday trading strategy. The forex traders mostly use it. In this method, traders take advantage of small price movements to make money.
These trades can last even for seconds. Traders square of the positions with as soon the positions goes the profit. Professional traders mostly use it.
Unlike Swing traders, Day traders always look for the most volatile assets. The main goal of this strategy is to book small profits from the small price fluctuations throughout the trading day.
Traders can earn a large amount of money by making small trades, but at the same time, they will have to pay more attention to the stock’s price fluctuations and risk management as traders may end up losing money rapidly if they don’t close the position at the right time.
This strategy involves the practice of opening the position after the price movement breaks a certain level. Traders open the short position if the price goes below the support level while they open a long position if the price level goes above the resistance level.
Once the assets move beyond the specific price level, the volatility increases and the price will move in the direction of the breakout. Traders need to identify the correct entry and exit points. Traders always use the last performance of the asset to identify the breakout point.
Best Day Trading Indicators:
There are several trading indicators that can be used while executing intraday trading. Every trading strategy has different indicators. The combination of various free tools and methods can improve the reliability of this trading.
Some of the famous and crucial indicators which are used by the market practitioners are:
The MACD Indicator:
Moving average convergence divergence, also referred to as MACD, is a trend following indicators that help day traders in identifying the difference between two moving averages of an asset’s price.
The indicator generates technical signals when it crosses above or below its signal line. It further helps day traders in determining whether the bearish or bullish movement is weakening or strengthening.
The Fibonacci Indicator:
The Fibonacci indicator shows horizontal lines that predict where the support and resistance level will occur. As it can be drawn between any two important price points, this indicator is considered the most useful and efficient.
Tips For Beginner Day Trader:
Here are three hot tips that can help you become a good day trader:
Start With A Demo Account:
The first and most important tip for mastering day trading is to start with the demo account. So that they earn knowledge and become familiar with the dynamic of the financial markets, trading methods, and functionality of the trading platforms.
With intraday trading, many day traders may lose money rapidly due to high leverage; therefore, they should invest money wisely and only that they can afford to lose. Sometimes due to high leverage, beginners might invest the maximum amount which they can’t afford. Alternatively, you can take expert advice.
Trust The Reliable Brokerage Platform:
The third and most important tip is to choose the correct broker as the intraday trading technique involves the practice of executing hundreds of trades that can attract a huge amount of commission and spreads.
This can affect the potential profits at the end of the day. The different brokerage firm has different charges; therefore, opening a trading account with a reliable broker is essential.
Final Thought :
Intra-day trading is the best trading method for making profits if it’s executed correctly. Therefore it’s better to have the proper trading plans and understanding of the market. Before entering, it is crucial to understand what sort of trader you’re: pattern day trader or regular day trader.
Technical analysis is crucial in employing day trading strategies to identify the entry and exit timing of the position. For understanding other trading methods and terms such as margin call, spreads, margin loan, etc., you can go through our other articles in the blog section.