Day trading can be a powerful way to grow your money quickly, but it can also be an easy way to lose it all if you’re not careful. Successful day trading requires diligence, discipline, and the right tools.
In this article, we help you learn the fundamentals you need to know to get started day trading.
What is Day Trading?
Simply put, day trading is the buying and selling of stocks or other assets (commodities, currencies) on the same day. Day trading intends to capitalize on extreme price fluctuations in the market by following the adage of “buy low, sell high.”
Steps to Start Day Trading
Anyone can day trade if they put in the work. The following outlines the basics of what you need to do to be successful at day trading.
Identify What to Trade
One of the toughest parts of day trading is identifying what to buy and sell and when to buy and sell it. Consider assets and industries you understand so you can more effectively predict their price movements.
Once you know what asset classes and in which sectors you wish to trade, use the following guidelines to help you hone in on the exact assets to trade and when:
- Volatility: More volatile assets have greater swings between their lowest and highest price on any given day. You can make more money faster by trading higher volatility assets, but you can also lose faster that way.
- Volume: If there aren’t enough people trading a particular asset, you may not be able to find a buyer or seller at a price you like. Noticing significant changes in buyer or seller volume can help you to identify and better time your trades.
- Spread: If the spread between an asset’s selling and buy prices is too narrow there’s less room for profit. It is better to look for assets with a widespread.
Choose a Broker
To trade assets, you need a broker to provide you with a platform through which you can execute trades. The single most important consideration here is that the broker be reputable.
There are many other considerations, however. When searching for a broker, consider factors like fees and commissions, trading platforms used, and customer service offerings.
When starting, you can avoid unnecessarily putting your money at risk by opening a demo (or paper trading) account. This will allow you to practice your day trading and experiment with different strategies until you’re confident putting real money to work. It also allows you to appraise the broker’s trading interface.
For your day trading adventure to be long-lasting, you need to make sure your gains outweigh your losses. This requires knowing upfront your goals and your limits.
While everyone who day trades wants to make money, not everyone has the same intended trajectory or time horizon. What’s more, everyone has unique financial circumstances and their risk tolerance. You need to know how much you’re willing to risk how fast for how much potential gain to avoid overtrading or under trading and subsequently sabotaging your efforts.
Implement Day Trading Strategies
The key to successful day trading is discipline. And discipline requires a set of rules, or strategies, to which you adhere. Here are some of the most common and reliable to get you started:
- Following Trends: One easy way to start trading with greater odds of success is to make the same trades the experts are making. Some brokers, like eToro, offer copy trading.
- Range Trading: This is buying and selling the same asset frequently whenever it hits its support or resistance level (trending price at which buyer activity outweighs selling activity or vice-versa).
- Contrarian Trading: Going against the grain can land you outsized returns, but you’d better have a solid thesis behind your contrarian viewpoint.
- News Trading: This is trading on news stories that may affect an asset price. The common wisdom here is to “buy on the rumor, sell on the news.”
As this primer has hopefully shown you, making money day trading requires diligence, focus, and objectivity. To ensure your day trading experiences are as rewarding as possible, learn as much as you can about day trading, the markets, and the particular assets you’re interested in trading before you put your hard-earned money at risk.
Then, continue to pay attention and advance your education in those areas. Generally, the more knowledgeable and focused you are, the more successful you can be at day trading.