Day trading has a reputation for being high-risk high-reward which can leave beginners in the gutter. Day trading requires skilled technical analysis, self-discipline and objectivity. This type of trading is highly profitable, but has a low success rate. The complexity and high risk of day trading is not for the faint of heart. Furthermore, critics say active trading strategies such as day trading do not perform as well as a passive strategy, on average. But don’t let this put you off learning about it!
What is Day trading?
Day traders are active traders who profit off price changes within a single day. It is most common in the foreign exchange and stock markets and are usually for more experienced traders as day trading requires knowledge and large funds. Day traders use high leverage assets to make profit on small price movements, such as highly liquid stocks and currencies. Day traders are looking for market movement and often look for events in the news to judge what to trade that day. Traders can follow an economic calendar to see scheduled announcements of corporate earnings or economic reports. Sudden moves created from these announcements are what day traders make profit from, as there is a period of adjustment between company news and share price.
Here are some strategies employed by day traders:
- Scalping: this strategy makes profits on very short-term and small changes in price. A trader may do tens to hundreds of these microtransactions in a day.
- Range trading: this relies on support and resistance levels to judge when best to buy and sell.
- News-based trading: this type of trading looks for news events that will increase volatility temporarily to make profit.
- High-frequency trading: this strategy utilizes algorithms that exploit tiny inefficiencies in the market.
What you need to Day trade
To successfully day trade, an in-depth understanding of how markets work and strategies that work to make profit from short-term positions is required. Certain skills are utilized by experienced traders to make day trading profitable, having a good grasp of technical analysis and chart reading are among the most useful. Building your knowledge of the marketplace is fundamental to success. In particular, try and understand the specific behaviour of the products you trade to better grasp their market patterns. Foreign exchange and liquid stocks are popularly traded as they have a high volatility and therefore a high potential profit which is good for these short-held positions.
Not only do you need experience under your belt but you need fat stacks in your pocket. Day trading isn’t something everyone is equipped to do. It is best to use risk capital – money which you can afford to lose – to protect from major losses that could lead to bankruptcy.
Discipline is another fundamental for day traders as following a specific strategy is the best path to profit. By setting a plan at the start of the day and specific criteria for trading you can control and optimise your trading success. It also allows you to examine and improve your trading strategy to optimise profit.
Perhaps it’s a trading desk at a large company or perhaps it’s a home office, the right trading set up is crucial to harness profits and day trade successfully. Access to a live news feed will inform day traders of key events indicating times to buy. There is software out there that analyses important news feeds to direct you to the most important stories. Every minute counts with day trading! Furthermore, you would need some fancy kit – analytical software that can recognise patterns and generate algorithms to predict future price movements will really help you out. But it’ll set you back a fair amount.
Rules for day trading
- Plan your trades when you wake up
- Trade your plan, don’t let emotions get involved
- Manage risk
- Always take profits
- Respect Stop Losses – you’re playing with the most volatile assets!
Day trading can be difficult to master and requires a lot of time and effort to succeed. If you have an idea of your risk tolerance, capital and trading strategies then do go ahead – after you’ve practised of course. Day trading is hard to do part time as your full attention is required when markets are open and needs a fair amount of experience to succeed. If you do decide to try out day trading then focus on a very specific asset class and really learn how it moves. A good strategy will mitigate losses!
Do you aspire to be a day trader? Start small and build up to day trading! Download BullBear’s app to practice trading risk-free.