Day Trading Essentials, Tips, and
 Common Strategies

If you are new to the trading industry, here is a brief definition of what trading means. Trading is the buying and selling of certain securities like stocks, futures, forex, options, and most recently popularized cryptocurrencies. The main goal of trading these financial instruments is to make a profit from the difference between the buying price and the selling price.

Understanding Trading

The main thing that you must understand is that day trading is not the same as investing. Investors buy a stake in an asset with the goal of building profit in the long run. Investors usually hold their financial instruments for years at a time, sometimes even decades. On the other hand, day traders, as the term suggests, only hold their instruments for a single day. Day trading is basically short-term trading, rapidly buying and selling of securities with the aim that their assets rise or fall in value for the short period of time the trader owns them. And by a short period of time, we are talking mere seconds or minutes.

Long-Term Trading Alternative

Although, this type of trading has been met with severe criticism and controversy over the years. It is typically considered a decent alternative to long-term trading for traders that still are not confident about getting into the industry. By it is very nature, day trading does not pose as much risk as investing. Most markets are usually unpredictable, and there is a chance of hitting it big on one day. In investing, things can go awry in a snap, resulting in major losses. Investors could be completely blindsided because their market appears to be doing well one day only to plummet the next completely. Day trading, by contrast, is not as risky.

More Demanding

On the other hand, day trading is also more demanding than investing or swing trading. Because you do not have the luxury of time, your choice of financial instruments must work out in a day otherwise your money will be wasted. While markets are known to be efficient, sometimes it can take some time for their efficiency to reflect itself on the trade. This way, the greatest strength of day trading is also its biggest weakness.

More Accessible

Initially, day trading was not accessible to the general public. Years ago, only financial companies could engage in day trading because they were the only ones who had access to the market data and the exchanges. Now that technology has vastly improved and the internet has blown up, just about anyone can get into day trading. Not only do individual traders have access to the set of tools and services needed, but they can also make similar trades at a much lower cost. That is why day trading has been steadily gaining popularity over the years.

That being said, day traders need to have a keen eye for changes in the market as well as know how to balance risks. With such a volatile environment – you literally have minutes to either make a fortune or break the bank – a day trader can’t be anything less than quick and astute. While anyone can be a day trader, not everyone can maneuver the market and come out alive and well. It requires a certain set of skills and a certain type of disposition to be able to get into day trading.

Besides personal requirements, before you get into day trading, you will also need these essential resources:

Capital

Obviously, you will need money to engage in day trading. In fact, this is true for trading in general. Typically, day traders borrow money to trade in the market. This is a necessary risk since it takes money to make money. Mostly, day traders only use risk capital or money they can afford to lose, to avoid financial ruin. It also helps day traders separate themselves emotionally from the trading market. Day trading is quite an emotionally taxing sport so individual traders must always keep themselves in check so they will not be prone to acting on impulse alone.

Technology and Internet Connection

Because day trading occurs in an electronic communication network, of course, you will need stable access to these networks. You will need a computer as well as high-speed Internet connection to make your trades. Most of the time, a day trader’s setup is quite complex, involving two monitors connected to a single personal computer, another PC that is a clone to the first and will serve as back up cable broadband, and a wireless router. It is also advised to utilize analytical software to not only execute trades and manage your accounts but also gather information, search for trades.

Business Plan

As an individual trader, you will need to come up with a business plan that addresses your goals, business set-up needs, tax considerations, and other pertinent information. Day trading, after all, is a business and you need to treat it the same way you would treat any other business venture.

Knowledge and Experience

Without a fundamental understanding of how the market works, you are going to be at a huge risk of losing money. You will need to devote yourself to constantly researching about the industry if you want to succeed in check out Investopedia, especially if you do not have related experience in investing and trading in the market. Take advantage of extremely useful resources online as well as investment tools like charts and statistics. It also pays to be updated on the news on various markets.

Day Trading Markets

There are different types of markets for trading, and it is important for you as a day trader to decide which one to focus your energy on. Each market has their advantages and disadvantages as well as unique characteristics. It is firmly advised to get to know your market before you engage in day trading.

Stock Markets

Briefly summarized, this market deals with buying and selling shares of a particular company. The stock market has been and remains to be one of the most popular markets for day traders. Why? Because it is a straightforward trading market and you have the chance to make a profit from large international companies like Apple and Amazon.

A stock is a capital raised by a company through the issuing and subscription of shares. Day trading stocks can be rather exciting since buying and selling stocks is easy. The stock markets have dynamic liquidity that makes speculating the direction the prices will take next makes for viable day trading. It is not just a market for long-term investments as people have believed in the past. Short-term traders can also make a profit from the stock market.

Stocks are also generally easier to understand than other markets. Day trading can be really complicated to understand, especially in technically complex markets like forex and cryptocurrency. However, the stock market is much easier to wrap your head around since you can understand how and why a certain company is flourishing or flopping. This will make it much simpler to identify which stocks to trade on a given trading day.

Moreover, because the stock market is so popular, there are endless resources and indices online to help you with your trading. You will be more open to more opportunities with all the available stock trading courses, market statistics, forums, etc.

The downside, however, is that because it is such a popular market, the competition is absolutely brutal. The minimum required amount on your account could be really high which makes this market not suitable for those without a sizeable capital, to begin with.

The stock market is the most in-demand day trading market to date so we will talk about how to trade stocks in the next section.

Forex Markets

Forex (foreign exchange) is also quite a popular market that has been gaining widespread interest over recent years. In fact, while the stock market might be the most popular, it is the forex market that is the largest market in the world. Billions are traded in foreign exchange worldwide every single day. This market is just extremely huge and navigating your way in it is going to be rather tricky, even for seasoned traders.

Forex day trading is essentially speculating on the price fluctuations in the foreign exchange market and particular economies. What this means is that you buy and sell currencies when you suspect that they will move either lower or higher in relation to other currencies. You trade currencies in pairs, however, although there is a massive list of options to choose from, only a select few have the liquidity and potential to be profitable for day trading.

Despite its complexity, the forex market remains to be one of the most accessible markets available today. For one thing, because there is no central market, there is no schedule in trading opportunities. You can delve into the market on any hour of any given day. Forex also has a considerably low barrier to entry and a minimal initial investment. Furthermore, in forex trading, you do not have to pay a commission to your brokers since they can make money through trade marketing quotes. It is these advantages that make forex trading so attractive.

Cryptocurrency Markets

Probably one of the more recent markets that have gained quite the following is the cryptocurrency market. Years ago, the term cryptocurrency had not yet penetrated the public consciousness, and the crypto trade was not as active. Now though, virtual currency is on the rise, and people want to get into the trade.

Technology has advanced to the point where day trading cryptocurrency is made easy. The cryptocurrency market’s nature also makes it quite a lucrative market for day traders. It is highly volatile and has much trading volume. Cryptocurrency trading for high profits as viable and as risky as stock market trading. Both markets give you an opportunity to make a lot of money, but you also stand to lose a lot of money if you are not careful.

The cryptocurrency market is much more speculative than other markets, especially since it is a relatively newer market compared to the other trades. A lot of people have their own opinions on how the crypto prices will move and the value of a certain cryptocurrency coin. However, only a few truly understand the market and, as such, a lot of day traders get caught up in the moment and often lose their money. There is a lot of false information circling the cryptocurrency industry at the moment, and it is important for individual traders to be able to discern which advice is sound and which is just pure speculation.

Futures Markets

The futures markets are another popular trading market, and it has quite the history. It is one of the oldest derivatives contracts that started way back when farmers had to hedge against changes in the prices of crops. In fact, the futures market’s humble origin is the reason why a lot of futures being traded to this day are livestock and grains. Of course, now the futures market has also evolved and assets like precious metals, treasury bonds, stocks, and even industrial metals.

The concept of a futures contract is quite simple: traders bet a particular index will hit a specific level at a certain point in the near future. A futures contract is an arrangement between a buyer and a seller to conduct their trade at a specific date and price in the future. Basically you, as a day trader, can profit from price fluctuations when the contract is made and when the position is closed.

If you prefer to trade in commodities, then this market is for you. However, you should know that you will need a decent sized capital to get into this market. Also, you will have to focus your attention on one or two particular futures contracts. What is even better is that because of technology, day trading in futures is super easy now. All of the tools and resources are available online for you to use.

Trading in futures is not going to be a walk in the park though. Like with other markets, you will need to invest your time and energy into learning and researching all the necessary components of the futures market.

Options

Traditionally, options were not really part of the day trading markets but nowadays not only have people started trading options, but they have also been able to make a considerable profit out of this financial derivative as well. There are now plenty of platforms that offer to trade in the options market. However, this financial instrument does have a reputation for being particularly risky.

Day trading options basically mean buying and selling an asset during or within an exercise date or predetermined date. There are only two main classes of options: put and call. Put is the sell option which allows you to sell an asset at a particular price. The call is the buy option which allows you to buy at a particular price. That being said, the list of different capital, global, and emerging markets you can trade options in is long and not all of them are suitable for a day trade. To name a few, you can trade in stock options, options on futures, index option, mini option, weekly SPY options, and the list goes on.

The main advantage of trading in options is that you do not have to own the underlying asset which is beneficial to you as the trader because these can be more expensive than stocks.

How to Start Day Trading Stocks

As mentioned, the stock markets are one of the most popular trading markets right now. Unlike other markets, day trading in stocks is not as difficult to follow. However, there are still some steps you must follow before you start day trading in stocks actively.

Know and Understand the Stock Market

Obviously, before you engage in day trading in the stock market, you have to know the ins and outs of the trade. Learn the terminology, understand the basics of how stocks work, and read a stock chart and stock quotes. You can’t just jump into the trade all willy-nilly, especially since the stock market encourages quite the fierce competition.

Evaluate Your Finances

Different countries require different minimal capitals but in the US, to be able to day trade stocks, you will need a balance of at least $25,000 in your account. Anything less and you will not be allowed in the market (though there are loopholes but those can rather complicate matters even further). In this way, the stock market is not the most accessible market. You will need a set capital, and even then it does not guarantee that you will be able to turn a profit. The stock market is definitely not for beginners in the trade.

Find a Trading Platform and Choose a Broker

A broker is someone that facilitates trading between you, the individual trader, and the market. With a broker, you can buy and sell stocks. Each broker provides a trading platform, the technology that allows you to place orders as well as view stock quotes and charts, and do research. To find success in day trading in stocks, you will want a competent broker who can execute your transactions quickly (remember, day trading is a fast-paced sport so even a second could make or break you) and who is also honest and informative. You will also want a broker that has a low commission fee, especially if you do not have that much capital, to begin with.

Formulate Your Strategies

Once you have chosen a suitable broker, it is advised to start coming up with your game plan, your strategies on how to gain profit from the stock market. The good idea is to practice making trades with demo accounts. You can place fake money trades using your planned strategy and examine the results. If you made a profit on the demo account, then there is a chance that your strategy is sound. If not, you might want to practice some more, rethink your moves. This way at least you will get a grasp of what trading will be like, and you will not be wasting money on your trading decisions too.

Best Day Trading Strategies

The best day traders utilize the best strategies to gain a profit from their trades. Here we have summarized just a few tried and true day trading strategies that you could consider for your next trade.

Scalping Strategy

Considered as the strategy for confident day traders, the scalping strategy subscribes to the belief that a lot of small wins can add up to a lot of money at the end of the trading day. This strategy requires quick wits, razor-sharp focus, and a certain fearlessness to make decisions within seconds.

News Trading Strategy

The stock market reacts immediately to global news events. By constantly keeping up to date with business news, day traders can align their trading decisions based on which stocks are the most affected.

Pullback Trading Strategy

The first thing you will need to do for this strategy is to find and monitor a stock with an established trend. Study the trend until the price starts to decline. If it is an uptrend, the downward price movement, known as the pullback, is your cue to buy the stock.

Breakout Trading Strategy

You can only make a breakout trade when the stock prices move above the former top resistance price. However, this is quite difficult to spot. You can’t just look at a chart and find the resistance then buying after a breakout. What you need to do is monitor the level of stock trading volume or how many shares are being exchanged.

Momentum Trading Strategy

With this strategy, you will be jumping on a stock whose price is on the rise. What you will need to look for is a unique and major rise in price and 30-40% of the stock movement. It is also a good idea to go for smaller stocks since they do tend to trade faster.

Final Word on Day Trading

Perhaps one of the most important things to remember when it comes to day trading is to do as much research as possible. Take advantage of online resources and do not skimp out on trading tutorials and courses. Day trading is quite a complex market, and it demands your utmost attention and discipline.

There are several common strategies when it comes to day trading however one thing that they all have in common is that they all require a certain level of risk management skills. Day trading – and trading in general – is basically betting on a certain asset for a certain amount of time. You either make a profit, or you lose money. How you balance your odds is all up to you.

About Rachel Williamson