There are several options on the table for anyone looking to get into this game, including day trading.
Day trading has gained popularity over the past few years as a profitable investment option. It is not without its own downsides, however.
Most publications and blogs tend to mention one side of day trading while masking the other. Not us. Here is everything you need to know about day trading and how it works.
What is day trading?
Day trading refers to the purchase and sale of investment options (instruments) specifically within the same trading day. All positions are usually closed prior to the market closing on that trading day. Since day trading essentially involves speculation in securities, those who are involved are thus speculators.
The reason behind traders exiting positions before the closure of the market is to keep clear of risks and costly price gaps. Mostly brokers allows the initial maximum leverage of 2:1. Other brokers allow leverage of 4:1 provided that the leverage falls to 2:1 (or even less) before the markets close in that trading day.
There are several types of day traders, depending on the frequency of making traders. The day-traded financial instruments includes stocks, equity index futures, options, interest rate futures, currencies, CFDs, and commodity futures.
Day trading can happen in virtually all marketplaces, but it is popular in the stock market and Forex. Day traders use different intraday strategies to ensure they get big returns. Some of these strategies include:
Scalping: – This strategy involves making numerous small profits on small price changes in a trading day.
Range trading: – Makes use of resistance & support levels to predestine purchase and sale choices.
News-based trading: – Here, day traders leverage opportunities from the volatility by news reports.
High-frequency trading: – Involves the use of algorithms to play on brief market inefficiencies.
How to be a successful day trader
Day trading is a very challenging activity, especially for the tenderfoots. Knowing all about the strategies doesn’t necessarily mean you’ll have a successful run in the game. Here are a few tips that will make you stay ahead of the game as a day trader:
- Ensure you are always up to speed on the latest events and updates around the stock market, especially those that can affect day traded instruments.
- Determine how much you are willing to inject into each trade. Most successful traders only risk about 1% or 2% of their account funds on each trade. Set aside enough funds to trade. Remembers losses and profits are both possible outcomes.
- Assess and determine the type of orders you’ll make use of when trading. Limit orders help you trade with precision, albeit they don’t guarantee execution. Market orders, on the other hand, don’t offer a price guarantee.
- You also need to set aside time more so during the day. After all, it is why it is called day trading. Day trading is not suitable for you if you can’t spare enough time.
- Start with a few stocks, say 1 or 2 per session. This makes it easier for you to track the market and spot opportunities. Even better, brokers allow trading fractional shares. Here is a quick illustration: If Alibaba shares are trading at $225 and you only have $75 to spare, you can purchase a third of a share.
- Day trading evokes different emotions and reactions. It is best to keep the emotions out and make decisions based on logic.
- Avoid penny stock as they are illiquid, not to mention there is only a minute chance of winning big.
- Trade executions begin the moment markets open, but that doesn’t mean you should place orders immediately. Use the first few minutes to survey the markets before making your move unless you have done enough research beforehand. You can also recognize trends to know when opportunities arise.
On average, the hours after opening and those leading to closing are usually volatile. Mid-hours are traditionally less volatile. Rush hours offer opportunities, but it’s advisable to stay away from them if you are a novice.
- Not all traders you make will be profitable. Some are bound to bring losses. The secret is to make more on the winning trades than you lose on those that don’t.
How to start day trading
Most aspects of day trading are volatile by default. Day traders rely on fluctuations in day trading instruments to make profits. Stocks that bounce a lot on a trading day and are highly liquid are a day trader’s favourite.
Unlike binary options, where profit or loss ultimately depends on the outcome of a Yes/No proposition in day trading profit or loss hinges on several factors. The gain or loss a day trader makes or incurs is determined by factors such as contracts/lots purchased and sold, entry & exit price, and the number of shares involved.
Before setting foot into the game, you have to assess yourself and determine if it is right for you. Weigh all the factors involved when making this decision.
Use the resources available to learn everything about day trading and the aspects involved, such as tax implications. This will help you not only choose the strategy but also in coming up with a plan. Set realistic goals and a limit on the amount you are willing to risk.
Open a practice (demo) account with a broker and test yourself. Judging by the result of the practice, if you are ready, you can move to commit money into day trading. Choose a suitable broker that you’ll open an account with and start day trading. Some of the questions to ask when choosing a broker are:
- Does the broker deal with the instruments that you will be day trading
- How responsive is the customer service
- What fees and commissions does the broker charge
- What trading platforms and technology does the broker offer
We recommend choosing a broker that checks on all your needs. Once you have registered an account with the broker, you’ll need to fund your account before starting day trading.
Frequently Asked Questions
Can Trading Make You Rich?
Just like with any other investment options, day trading can be rewarding if you know how to go about it. Day traders make money in the form of profits from their trades.
How much you can earn as a day trader depends on your strategy, risk tolerance, and the amount you risk. Even so, day trading is a high risk, and we reiterate that you educate yourself comprehensively before starting.
How much can a beginner day trader make?
Most day traders don’t reveal their trading results except to the tax agencies. This makes it hard to determine exactly how much someone can make from day trading. However, the trading results vary from one day trader to another.
Day traders have varying strategies and risk management practices. Besides, each day trader risks a different sum of money to their trades.
Is day trading illegal?
No. Day trading is legal, but not all brokerage companies offer day trading services. That said, ensure that the broker you choose to trade with is regulated and licensed by the relevant bodies and authorities.
In Australia, the Australian Securities and Investment Commission regulates institutions in the finance and investment niche.
Can I start trading with $100?
Yes, you can start trading with $100 depending on your broker. How much you make out of that $100 will be determined by your strategy. Note that the minimum amount required to start day trading varies according to the broker and the costs involved in the activity. Some brokers, such as IG, have no minimum limit.
Is day trading a gamble?
Although day trading can be profitable, it involves a lot of risks. The probability of making profits is the same as the probability of suffering losses. Even professional traders can’t promise with certainty the outcome of their next trades.
Much as day trading is different from gambling, the two share similarities here. Day trading can also be very challenging since you are competing against professional ad seasoned traders. Besides, retail investors are often liable to biases.