Day trading refers to a process of buying and selling a security in a single trading day. A common phenomenon in foreign exchange and stock markets, day trading can also be done multiple times in a single day. Today day trading scenario has gone to the virtual space, allowing day traders to trade online from anywhere. With the help of a few tools and resources, day trading is possible by simply sitting at home.
Most day traders are well-educated and well-funded. They use leverage and short-term strategies to capitalize on minor price movements in liquid currencies and stocks. They use arbitrage to keep the market running and provide liquidity to the market. But day trading requires traders to follow specific trading guidelines and norms, which aren’t that complicated always.
Day trading concepts for beginners
If you are a beginner, you can follow a few simple strategies for day trading effectively:
- Make supply/demand imbalance the entry point – If the supply of securities is more than the number of willing buyers, the price of securities will be pushed down and vice-versa. You can scan charts to monitor market movements and accordingly trade in securities. This becomes your entry point to the market.
- Price targets – You need to set price targets before you execute a trade. If you are making a trade, you need to decide well in advance how much profit is expected and the stop-loss level lest the trade goes against you. This restricts your potential loss and prevents you from trading during untenable price spikes.
- Focus on a risk/reward ratio – A risk/reward ratio makes profits big and losses small. The ideal risk/reward ration depends completely on your strategy and performance. In reality, there’s no good or bad reward-risk ratio. Although day traders usually focus on achieving a ratio of 2:1, it is very subjective and individualistic.
- Trade with losable money – As a day trader, you should only trade with money you can afford to lose. As a beginner, you shouldn’t trade in your “big bucket” savings, which should be traded more conservatively in the long-term. Use your short-terms savings in day trading because they can be replenished within a short duration.
- Go beyond stocks – Futures, foreign exchange and options are volatile, liquid asset classes are ideal for day trading. One of these classes presents good trading opportunities when the stock market is down. So consider trading in these asset classes for a smooth flow of money.
Remember, you may have to take losses initially, that’s normal. The name of the game is perseverance.