Many people dream about fast and easy money. Recently more and more individuals think about joining the trading business. In past, the stock market was available only for those working for big financial companies. But with the development of the internet and brokerage, getting into trading has become possible basically for everyone.
The question is how to start trading and how to do it effectively. It may seem a bit complicated for novices. Even more advanced traders may experience bad times and heavy losses. So let’s talk about day trading, so you can begin working on your profits.
Introduction to day trading
Generally, day traders are investors who buy and sell financial instruments within one trading day. It can be done in any market, however, stock markets and foreign exchange are the most popular. Day trading requires a great amount of knowledge and preparations. Having a good trading strategy is a must.
Day traders often choose short-term strategies to take advantage of small movements of the prices of the assets. It is important to stay up-to-date with the latest news. Some economic announcements have an enormous influence on market behaviour.
You can find among intraday strategies the following:
- Range trading. It is based on identifying support and resistance levels and then depending on them when buying and selling.
- Scalping. Scalpers invest small amounts of money in many short-term transactions to benefit from minor price movements throughout the day.
- High-frequency trading (HFT in short). Sophisticated algorithms are used to catch market inefficiencies.
- News-based trading. Tracking economic news is especially important here as this strategy is used in times of high volatility.
Be aware of the risk
The risk is something every trader needs to take into account. Some argue that risk is higher for day traders. Other claims that profitable day trading is possible. It is definitely not for everyone. It must be preceded by getting the necessary knowledge and understanding of the markets. You must develop trading skills and do not forget that bad luck may interfere with your performance.
Moreover, be aware of the scammers who promise unbelievably high profits. Some are attracted by the idea of getting rich in a short time and then lose their money with fraudulent brokers. Remember, if something sounds too good to be true it is probably not. Always check your broker well before you invest money with him.
Day trader’s profile
I have mentioned that a day trader ought to develop some special skills and get a deep knowledge of the market. Let’s see what we are talking about specifically.
The size of your capital
You should possess capital big enough to make effective use of intraday price movements. Some invest only as much as they are prepared to lose. This protects your overall capital and helps you to avoid emotional trading. Too big investments are correlated with anxiety and fear and this is not the state of mind you should take trading decisions with.
Work on being disciplined. There is a saying “Plan the trade and trade the plan”. You have to be well prepared but then you need to stay disciplined in order to work on the profits. Day trading is buying and selling on the markets with frequent moves during the day. Follow your plan and do not give in to temporary cravings.
Invest in learning
Knowledge is power. You have to know the trading platform well and you have to be able to read the charts properly. But this is not all. You need to get an understanding of the market and assets you are choosing to trade. There are plenty of educational resources online you can learn from. You may also become a part of the trading community and share your thoughts and doubts with others by joining trading groups.
Consider the best strategy for you
There are various strategies that can be used by day traders. They differ in risk level and reward potential. Trading news is characterised by medium risk and medium reward, arbitrage carries low risk and medium reward, mergers/acquisitions medium risk and high reward and in swing trading both, the risk and reward stay at a high level.
What a day trader needs
- Access to a trading desk is usually available for those who trade for big financial institutions or those with large investment capital. It ensures instant order executions.
- Access to significant information is very important. Special software exists that analyses various sources in the search of meaningful news.
- Access to analytical software. Many applications can be used in order to improve the trading process. These include automatic pattern recognition, broker integration or backtesting.
- Moreover, think about the time you can devote to trading, the amount of money you have in the account and the earning potential of the market you have chosen.
Day traders who work for large companies have usually access to a trading desk, expensive software and large capital. They often use arbitrage or news strategies.
Individual investors normally keep less money in their accounts and they choose technical analysis or swing trading strategies.
Day trading is not for everyone but it can be a profitable occupation. If you think about becoming a day trader, you must be ready to invest your time in it. It is not something you can do occasionally. You will need to get the required knowledge, develop trading skills and you should not stop there. It is a continuous learning process.
Start small. Invest the amount you are ready to lose. Experiencing a heavy loss at the beginning can effectively discourage you.
Decide what strategy suits best your needs and stay faithful to it. Do not jump from one to another. It can cause emotional trading and every trader knows that emotions are not the best advisors here.
Make use of the demo accounts offered oftentimes by online brokers. You will have a chance to practice different strategies and markets before you decide to invest your own money.
Stay focused and enjoy trading!