10 Day Trading Strategies for Beginners

Day trading is defined as the act of purchasing and selling a financial instrument on the same day, or even multiple times throughout the course of a single day. Making money by taking advantage of small price movements can be a lucrative game—but only if it is done properly. However, it can be a dangerous game for newcomers or anyone who does not follow a well-thought-out strategy while playing.

Not all brokers, on the other hand, are well-suited for the high volume of trades made by day traders. Some brokers, on the other hand, are specifically designed with the day trader in mind. You can look through our list of the best brokers for day trading to see which brokers are the most accommodating to those who wish to day trade their investments.

Fidelity and Interactive Brokers, two of the online brokers on our list, offer professional or advanced versions of their platforms that include real-time streaming quotes, advanced charting tools, and the ability to enter and modify complex orders in a short period of time.

We’ll start with some general day trading principles and then move on to topics such as determining when to buy and sell, common day trading strategies, basic charts and patterns, and how to limit losses.

1. Information is a powerful tool.

Additionally, day traders must be up to date on the most recent stock market news and events that have an impact on stocks, such as the Federal Reserve’s interest rate plans, the economic outlook, and so on.

As a result, complete your homework. Make a wish list of stocks you’d like to trade and keep yourself up to date on the performance of the companies you’ve chosen and the general market. Examine business news and financial websites that are regarded as reputable.

2. Set Aside a Budget of Money

Determine the amount of capital you are willing to put at risk on each trade. Many successful day traders trade with a risk of less than 1 percent to 2 percent of their total account balance per transaction. If you have a trading account with a balance of $40,000 and are willing to risk 0.5 percent of your capital on each trade, your maximum loss per trade is $200 (0.5 percent x $40,000).

Set aside a sum of money that is greater than the amount of money you intend to trade and that you are willing to lose. Keep in mind that it could happen or it could not.

3. Make time aside for yourself as well.

Day trading necessitates the allocation of your time. That is why it is referred to as day trading. In fact, you’ll have to give up a significant portion of your day. If you only have a limited amount of free time, you should not consider it.

The process necessitates a trader’s ability to track markets and identify opportunities, which can arise at any time during trading hours. The ability to move quickly is essential.

4. Begin with a small investment.

As a beginner, limit your attention to one or two stocks at a time during a trading session. With a small number of stocks, it is easier to keep track of and identify opportunities. Recently, it has become increasingly common to be able to trade fractional shares, allowing you to invest in smaller dollar amounts by specifying specific dollar amounts you wish to put down.

That is, if Amazon shares are trading at $3,400, many brokers will now allow you to purchase a fractional share for as little as $25, which is less than 1 percent of a full Amazon share, if the stock is trading at $3,400.

5. Stay away from penny stocks.

Your search for bargains and low prices is likely to include penny stocks, so avoid them at all costs. These stocks are frequently illiquid, and the odds of hitting the jackpot are often slim to non-existent.

Many stocks that trade for less than $5 per share are delisted from major stock exchanges and are only available for trading over-the-counter (OTC). Unless you are seeing a legitimate opportunity and have done your research, avoid participating in these.

6. Set a deadline for those trades.

When the markets open in the morning, many orders placed by investors and traders begin to be executed, contributing to price volatility. A seasoned player may be able to recognize patterns and pick the right cards to maximize his or her chances of winning. However, for newcomers, it may be preferable to simply observe the market without making any decisions for the first 15 to 20 minutes.

The middle of the day is usually less volatile, and then the action begins to pick up again as the clock approaches the closing bell. Despite the fact that rush hour presents opportunities, it is safer for beginners to avoid them at least initially.

Limit orders allow you to reduce your losses.

Identify the orders you’ll use to enter and exit trades and make a decision on which ones to use. Will you use market orders or limit orders to place your orders? There is no price guarantee when placing a market order because it is executed at the best price available at the time of placement.

A limit order, on the other hand, ensures that the price will be met but not that the order will be executed. Limit orders, which allow you to trade with greater precision, allow you to set your price (which should not be unrealistic, but should be executable) for both buying and selling. Aside from using options strategies to hedge their positions, more sophisticated and experienced day traders may also use them to hedge their positions.

8. Maintain a realistic outlook on profits.

It is not necessary for a strategy to win all of the time in order to be profitable. Trades that are profitable for many traders are only 50 percent to 60 percent of the time. They do, however, make more money on their winners than they do on their losers, despite the fact that they lose money on both. Make certain that the risk associated with each trade is limited to a specific percentage of the account’s total risk, and that the entry and exit methods are clearly defined and written down in writing before proceeding.

9. Maintain Your Cool

There will be times when the stock markets will put your nerves to the test. As a day trader, you must learn to control your emotions such as greed, hope, and fear. Instead of being guided by emotion, decisions should be guided by logic.

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10. Adhere to the Game Plan

Successful traders must move quickly, but they do not need to think quickly in order to be successful. Why? For the simple reason that they have planned ahead of time and have the discipline to follow through with their trading strategy. It is critical to strictly adhere to your formula rather than attempting to chase after profits. Keep your emotions under control so that you don’t lose sight of your objectives. Among day traders, there is a saying that goes something like this: “PLAN your trade and TRADE your plan.”

In order to better understand day trading, let’s first take a look at some of the reasons why it can be so difficult to make money.

Is It Difficult to Make Money Day Trading?

Day trading necessitates a great deal of experience and knowledge, and there are a number of factors that can make the process difficult.

First and foremost, understand that you will be competing against professionals whose livelihoods are based on trading. These individuals have access to the best technology and connections available in the industry, ensuring that even if they fail in the short term, they will ultimately succeed. If you join the bandwagon, it will result in increased profits for them.

Uncle Sam will also want a piece of your profits, no matter how insignificant they appear to be. You should keep in mind that you will be required to pay taxes on any short-term gains (or on any investments you hold for less than one year) at the marginal rate. The only caveat is that your losses will more than offset any gains you may have.

As an individual investor, you may be more susceptible to emotional and psychological biases than other investors. The majority of professional traders are able to eliminate these from their trading strategies; however, when it comes to trading with your own money, the situation is often more difficult to manage.

Making a decision on what to buy and when to buy it

Individual assets (stocks, currencies, futures, and options) are exploited by day traders in an attempt to profit from minute price movements. Day traders typically employ large amounts of leverage to accomplish this. A typical day trader considers three factors when deciding what to focus on, such as a particular stock:

  • Because of liquidity, you can buy and sell stocks at reasonable prices. For example, tight spreads, which are the difference between the bid and ask prices of a stock, and low slippage are the difference between the expected price of a trade and the actual price of a trade are examples of liquidity.
  • Price volatility is a simple measure of the expected daily price range, which is the range in which a day trader will operate. More volatility translates into greater potential profit or loss.
  • Average daily trading volume (ADV) is a measure of how many times a stock is bought and sold in a given period of time; it is most commonly referred to as the daily trading volume average. A high level of trading volume indicates a great deal of interest in a particular stock. An increase in the volume of a stock is frequently a sign of a price increase, either upward or downward.

You must learn how to identify entry points—that is, the precise moment at which you will make your investment—once you have determined what kind of stocks (or other assets) you want to buy. The following are some tools that can assist you in this process:

Real-time news services: Because news has the ability to move the stock market, it is critical to subscribe to services that alert you when potentially market-moving news breaks.

Quotes from the ECN/Level 2:

  • In the financial industry, ECNs (or electronic communication networks) are computer-based systems that display the best available bid and ask quotes from multiple market participants, then match and execute orders on the fly. This subscription-based service provides real-time access to the Nasdaq order book, which is composed of price quotes from market makers who are registered to trade in every Nasdaq-listed and OTC Bulletin Board security. They can work together to provide you with a sense of orders that have been executed in real time.
  • Charts showing intraday candlestick action: Candlestick charts show the raw movement of the market on a daily basis. More on these in a moment.

Determine the conditions under which you’ll enter a position and write them down in detail. The phrase “Buy during an uptrend” isn’t precise enough. Something like this is much more specific, as well as being able to be tested: “Buy when the price breaks above the upper trendline of a triangle pattern on the two-minute chart in the first two hours of trading, provided that the triangle pattern was preceded by an uptrend (at least one higher swing high and higher swing low before the triangle pattern formed).”

You should scan through more charts when you have a specific set of entry rules in mind (assuming you want to day trade every day) to see if those conditions are generated on a consistent basis and result in a price move that is more often than not in the anticipated direction. If this is the case, you may have discovered a potential entry point for a strategy. After that, you’ll need to decide how to get out of those trades, which is known as selling.

Choosing the Right Time to Sell

There are a variety of methods for exiting a profitable position, including trailing stops and profit targets, among others. Profit targets are the most common method of exiting a trade, as they allow you to take a profit at a predetermined level. The following are examples of common price target strategies:

 

 

  • Scalping is one of the most widely used strategies in the market. Essentially, it consists in selling a trade almost immediately after it becomes profitable. The price target is the figure that translates into “you’ve made money on this deal,” in whatever language is used.
  • Shorting stocks after a rapid rise in their value is known as fading. On the assumption that (1) they have been overbought, (2) early buyers are ready to begin taking profits, and (3) existing buyers are scared away, this is done. Despite the fact that it is risky, this strategy can be extremely rewarding. The price target in this case is the point at which buyers begin to enter the market again.
  • Profiting from the daily volatility of a stock is the goal of this strategy. This is accomplished by attempting to buy at the lowest point of the day and sell at the highest point of the day, respectively. In this case, the price target is simply the point at which the trend begins to reverse.
  • This strategy typically entails trading on news releases or identifying strong trending moves that are supported by large volumes of trading. When a new piece of news is released, one type of momentum trader will buy and ride the trend until it shows signs of reversal. The other type will reduce the impact of the price increase. The price target is reached when the volume of trades begins to decline.
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If the Level 2/ECN and volume of a stock indicate that there is a decrease in interest in the stock, you will want to sell the asset in most cases.

It is also important that the profit target allows for more profit to be made on winning trades than to be lost on losing trades, as previously stated. If your stop-loss price is $0.05 away from your entry price, your target price should be more than $0.05 away from your stop-loss price as well.

Before you begin trading, determine exactly how you will exit your trades in the same way you determined your entry point. The exit criteria must be specific enough so that they can be repeated and tested multiple times.

Charts and patterns for day trading.

Many traders use the following tools to help them determine the most advantageous time to buy a stock (or whatever asset they are trading):

Candlestick patterns such as engulfing candles and dojis are among the most popular.
Technical analysis, such as trendlines and triangles, is important.
Volume changes either by increasing or decreasing.

In order to find an entry point, day traders can look for a number of different candlestick setups. The doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable patterns in the market if it is followed correctly.

The image is courtesy of Julie Bang and is used with permission.

Typically, look for a pattern that looks like this, with several confirmations, as shown below:

First, look for a spike in trading volume, which will indicate whether or not traders are supporting the price at this point. It is possible to place this on the doji candle or on the candles that immediately follow the doji candle.
Secondly, look for previous price support at this level of the market. For instance, the previous day’s low of the day (LOD) or high of the day (HOD).
Finally, take a look at the Level 2 situation, which will display all of the open orders as well as the sizes of those orders.

If you follow these three steps, you will be able to determine whether the doji is likely to produce an actual turnaround and, if the conditions are favorable, you will be able to take a position.

Profit targets for exits can also be determined through traditional chart pattern analysis. A price at which to take profits can be calculated by adding the height of a triangle at its widest point to the breakout point of the triangle (in the case of an upside breakout).

How to Keep Your Losses Under Control When Day Trading

A stop-loss order is intended to limit the amount of money that can be lost on a position in a security. A stop-loss can be set below a recent low for long positions, and a stop-loss can be set above a recent high for short positions. It can also be based on the volatility of the market.

For example, if the price of a stock is fluctuating at a rate of $0.05 per minute, you might consider placing a stop-loss $0.15 away from your entry point to give the price some room to fluctuate before moving in the direction you anticipate.

Define exactly how you intend to manage the risk associated with the trades. A stop-loss can be placed $0.02 below a recent swing low if buying a breakout from a triangle pattern, or $0.02 below the pattern if buying a continuation of the triangle pattern. ($0.02 is arbitrary; the point is to be specific.)

One strategy is to set two stop-loss levels: one at the beginning and one at the end of the trade.

A physical stop-loss order is one that is placed at a specific price level that corresponds to your risk appetite. In essence, this is the maximum amount of money you can afford to lose.
When your entry criteria are violated, you should place a mental stop-loss at that point. This means that if the trade takes an unexpected turn, you will be forced to exit your position immediately.

Whatever method you use to close out your trades, the exit criteria must be specific enough to be testable and repeatable in order to be effective. Also, it’s critical to set a daily loss limit that you can afford to withstand, both financially and mentally, before you begin. You should take the rest of the day off whenever you reach this point. Maintain adherence to your plan and to your perimeters. After all, there’s always tomorrow (and another trading day).

Having determined how you will enter trades and where you will place a stop-loss, you can determine whether or not a potential strategy is compatible with your risk tolerance. Identifying and reducing risks is essential if your strategy is exposing you to an excessive amount of danger.

After determining that the strategy falls within your risk tolerance, testing can begin. Make a manual search through your historical charts to locate your entries, making note of whether your stop-loss or target would have been met. Paper trade in this manner for at least 50 to 100 trades, noting whether or not the strategy was profitable and whether or not it met or exceeded your expectations.

Once you’ve determined whether or not the strategy is viable, you can proceed to trade it in a demo account in real time. If the strategy proves profitable in a simulated environment over a period of two months or more, it is recommended that you try it out with real money. If the strategy isn’t profitable, it’s best to scrap it and start over.

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Finally, keep in mind that if you’re trading on margin, which means you’re borrowing your investment funds from a brokerage firm (and keep in mind that margin requirements for day trading are high), you’ll be much more vulnerable to sudden price swings than you would be otherwise. Margin helps to magnify the results of trading, not only in terms of profits, but also in terms of losses if a trade goes against you. As a result, when day trading on margin, it is critical to use stop-loss orders.

Now that you’re familiar with the fundamentals of day trading, let’s take a quick look at some of the most important strategies that new day traders can employ.

Day trading strategies that are fundamentally sound

As soon as you have mastered some of these techniques, developed your own personal trading styles, and determined what your ultimate objectives are, you can employ a number of strategies to aid you in your pursuit of profits.

Here are some widely used techniques that you can employ. Despite the fact that some of these have already been mentioned, it is worth going over them again:

Following the trend: Those who follow the trend will buy when prices are rising and sell short when prices are falling, as the case may be. Price movements that have been consistent in their rise or fall are taken into consideration in this process.
Contrarian investing is based on the assumption that the rise in prices will be reversed and that prices will fall. While buying during the fall and selling short during the rise, the contrarian is betting on the trend changing in his favor.
Scalping is a trading style in which a speculator takes advantage of small price differences created by the bid-ask spread. Entering and exiting a position quickly (within minutes or even seconds) is what this technique is most commonly used for.
Short selling when good news is announced and buying when bad news is announced are the two strategies employed by investors who use this strategy to trade the news. Higher volatility can result in higher profits or losses, depending on the situation.

Day trading is a challenging skill to master. It will take time, skill, and discipline to achieve success. Many people attempt it and fail, but the techniques and guidelines described above can assist you in developing a profitable strategy for your business. The amount of practice and consistent performance evaluation that you put in will greatly increase your chances of succeeding against the odds.

Which Trading Strategy Is the Easiest for a Beginner to Understand and Execute?

For beginners, following the trend is the most straightforward trading strategy because it is predicated on the premise that “the trend is your friend.” Contrarian investing is defined as investing in the opposite direction of the market herd; shorting the market when the market is rising or buying when the market is falling are both difficult trading strategies for a beginner to implement. Scalping and trading the news necessitate a high level of decision-making and trading speed, which can be challenging for a beginner.

When it comes to day trading, which is more appropriate: technical analysis or fundamental analysis?

Technical analysis is important for day traders because it allows them to identify very short-term trading patterns and trends, which are critical for making money in the market. The focus on valuation in fundamental analysis makes it more suitable for long-term investing; however, the disconnect between an asset’s actual price and its intrinsic value as determined by fundamental analysis can last for months, if not years.

On the other hand, the market’s reaction to fundamental data such as news or earnings reports is highly unpredictable in the short term. Even so, day traders should keep an eye on the market’s reaction to such fundamental data because the resulting volatility can present trading opportunities that can be exploited through the use of technical analysis.

What is it about day trading that makes it so difficult to make consistent money?

Making consistent money from day trading necessitates a diverse set of skills and attributes, including knowledge, experience, discipline, mental fortitude, and trading acumen, to name just a few. It is difficult for beginners to put basic strategies in place, such as cutting losses or letting profits run their course. Furthermore, maintaining one’s trading discipline in the face of difficulties such as market volatility or significant losses can be difficult to maintain.

In the end, day trading involves pitting one’s wits against millions of market pros who have access to cutting-edge technology, a wealth of experience and expertise, and enormous financial resources in an attempt to exploit inefficiencies in otherwise efficient markets. That is not a simple task!

Is it possible or desirable to hold a day trading position overnight?

Occasionally, a day trader will want to keep a trading position open overnight in order to reduce losses on a bad trade or, less frequently, to increase profits on a profitable trade. The majority of the time, however, this is not a good idea unless it is a well-considered decision rather than one made by a trader simply because they do not want to book a loss on a bad trade.

In addition to higher margin requirements, additional borrowing costs, and negative news, there are risks associated with holding a day trading position overnight. In other words, the risk of an adverse outcome for the decision to keep the position open overnight may be greater than the possibility of a favorable outcome.

What’s the bottom line?

Despite the fact that day trading has become somewhat of a contentious phenomenon, it can be a viable means of making a profit. By maintaining the efficiency and liquidity of the markets, day traders, both institutional and individual, play a critical role in the marketplace. Despite the fact that day trading continues to be popular among novice traders, it should be reserved for those who possess the necessary skills and resources to be successful.

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