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10 Day Trading Strategies For Beginners
Day trading involves buying and selling securities over a short period of time (usually less than a day) to make many small profits.
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It’s easy to be seduced by the idea of making quick profits in the stock market, but few people get rich day trading – in fact, many lose money more easily. Conversely, investors who buy and hold low-cost index funds that track a broad market index, such as the S&P 500, are likely to see higher returns over a longer period of time. Historically, the S&P 500 has delivered annual total returns of around 10%.
However, if you still want to try day trading, be sure to follow some rules so you don’t get overwhelmed. Learn how to manage the significant risks inherent in day trading.
There are countless tips for maximizing your day trading profits, but these three are the most important:
Stocks are the most popular securities for day traders – the market is large and active, and commissions are relatively low or non-existent. You can also day trade bonds, options, futures, commodities and currencies.
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Stock-focused day traders typically rely on “technical analysis,” or analysis of stock movements on charts, rather than “fundamental analysis,” which involves examining factors about a company, such as its products, industry, and management. While some day traders may trade dozens of different securities in a single day, others trade just a few and gain insight into them. This knowledge can help you determine when to buy and sell, how the stock has traded in the past, and how it will trade in the future.
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Once you decide to trade a security, you need to determine the best trading strategy to maximize your chances of making a profitable trade. You may want to focus on a specific strategy or mix and match some of the typical strategies below.
Traders find a type of stock that tends to jump between low and high prices, called a “range-bound” stock, and they buy near the low and sell near the high. They may also sell short when a stock hits a high, try to profit when the stock hits a low, and then close the position.
This quick technique attempts to profit from temporary changes in market sentiment by exploiting the difference between a stock’s bid and ask prices, also known as the spread. For example, if a buyer’s bid price falls sharply, a day trader might step in to buy, then try to quickly resell the stock at or above the bid price, pocketing a small spread on the trade.
It involves traders shorting stocks that have risen too quickly when buying interest starts to wane. A trader can close a short position if a stock falls or buying interest increases.
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The strategy attempts to ride a rising or falling wave in a stock, perhaps due to an earnings report or some other piece of news. Traders buy a rising stock or “short” a falling one, hoping that the momentum will continue.
How you implement these strategies is up to you. Some traders may pay pennies per share, such as spread traders, while others need to see more profit before closing a position, such as swing traders. Some traders may be willing to hold overnight, while others may be reluctant and prefer to remain neutral in case bad news arrives before they can react.
To know when to place a trade, day traders closely monitor a stock’s order flow, the list of potential orders to buy or sell a stock. Before buying, they look for a stock that has fallen to a “support” level, a level where other buyers step in to buy a stock’s price and where it is more likely to rise. To sell, they look for when a stock hits a “resistance level,” or a price at which more traders will start selling and prices are more likely to fall. To make such decisions, you need a broker that allows you to see the order flow.
No matter which strategy you choose, it’s important to find one (or more) that works and use it with confidence. It may take some time to find a strategy that works for you, and even then, the market may change, forcing you to change your approach.
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Day traders need liquidity and volatility, and the stock market typically provides liquidity and volatility from 9:30 a.m. ET to around noon, and during the last trading session before the market closes at 4 p.m. ET.
Theories abound about the best time to take profitable trades, but one cannot deny the concentration of trades at the end of a typical market session. Analysis by Jefferies Group found that 25% of average daily trading volume in 2018 occurred in the last 30 minutes of regular trading hours (excluding the closing auction), while 5.5% occurred in the first 30 minutes.
Day traders can make anywhere from 100 to several hundred trades per day, depending on the strategy and the frequency of attractive opportunities. With so much to trade, it’s important for day traders to keep costs low – our online broker comparison tool can help narrow down the options.
The above basic rules will help you avoid the biggest day trading disasters, but it is also important to manage smaller risks. The purpose of risk management is to limit your potential downside risk, or limit the amount you can lose on a single trade or position. When considering your risks, consider the following questions:
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Even with a good strategy and the right securities, trading doesn’t always go the way you want it to. It’s important to have a plan for when to close a position, whether it’s purely mechanical — like selling after it’s up or down X% — or based on how the stock or market is trading that day.
Proper risk management can prevent small losses from turning into big losses and preserve capital for future trades. However, this means that traders must be prepared to realize losses, which many traders find difficult to accept, although it is essential for long-term survival.
If you’re not ready to be a prime-time player, you can always try a stock market simulator for simulated trading. Demo trading involves fake stock trades, allowing you to see how the market works before risking real money. Many brokers offer demo trading accounts. This approach also gives you an idea of the broker’s platform and features, plus you get an idea of the theoretical profitability.
While it can be useful to test day trading under simulated conditions, it is not a substitute for real trading where you have money to invest. Here are some additional tips to consider before diving into this field.
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Day trading is just one way to get into the stock market — it has little use for most investors. Here are some resources to help you consider less-intensive and simpler ways to grow your bankroll.
About the Author: Dr. James F. Royal, former author. His work has also been featured in The Washington Post, The New York Times, and the Associated Press. read more
Sam Taube writes about investing. Since graduating with a degree in economics in 2016, he has covered investments and financial news. continue reading
Sign up and we’ll send you nerd articles on the money topics you care about most, as well as other ways to help you get more from your money. Trading Strategies for Beginners: In this article, we provide you with a comprehensive guide. Go through the basic steps beginners need to take to start their trading journey. What follows is the strategy to know before trading.
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Millions of people enter the stock market, but only a few succeed. Someone makes a lot of money with one strategy, but the same strategy doesn’t work for someone else. this
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