Day trading (or short-term trading) is one of the most misunderstood trading techniques. The fast pace of moving investment positions within a single trading day leads to a sense that day trading is riskier or more volatile than other types of trading. Let’s put these theories to the test with an overview of day trading and some helpful short-term trading strategies for beginners and experts alike.
What Is Day Trading?
By the strictest definition, a day trade is a position that is entered and exited in a single day. Day trading refers to market positions which are held only a short time; typically the trader opens and closes a position the same day but positions can be held for a period of time as well.
The position can be either long (buying outright) or short (“borrowing” shares, then offering to sell at a certain price). A day trader or intraday trader is looking to take advantage of volatility during the trading day, and reduce “overnight risk” caused by events (such as a bad earnings surprise) that might happen after the markets are closed.
How Much Risk Is Involved in Day Trading?
According to experts at Online Trading Academy, the fact that day trading positions are processed in a single day actually makes it safer rather than riskier.
Because day traders don’t hold their positions overnight, they avoid the possibility of a surprise in an overseas market, unfavorable economic news or an earnings report that comes out after the markets are closed. Even though after hours trading is available for many securities, the market is thin and it’s likely the position will “gap down” (open at a dramatically lower price) the next day after a negative overnight event.
In addition, day trading tends to reduce, not increase, market volatility. Day traders are typically looking for their profits in small price movements up or down. Their trades provide liquidity which keeps markets running smoothly, as compared to lightly traded markets which are subject to dramatic price swings.
And no, day trading is not a way to get rich overnight. Done properly, it is a conservative investing approach that is utilized by many institutions as well as well-educated individuals who do it as a profession. It’s their choice whether or not to use leverage (buying securities with a brokerage line of credit) which can magnify profits, but also increase potential losses.
Day trading got a bad reputation in the 1990’s when many beginners began to day trade, jumping onto the new online trading platforms without applying tested stock trading strategies. They thought they could “go to work” in their pajamas and make a fortune in stock trades with very little knowledge or effort. This proved not to be the case.
Yet day trading is not all that complicated once you learn a simple, rules-based strategy for anticipating market moves, such as that taught at Online Trading Academy.
10 Tips on Day Trading for Beginners
Beginners can get overwhelmed by what they perceive to be the fast paced and aggressive strategies necessary to generate large returns through day trading. This doesn’t have to be the case, as Online Trading Academy’s patented and proven core day trading strategy relies on patience and a good understanding of how to analyze risk and reward scenarios on any trade. While it takes some work to fully learn and rely on guiding principles of day trading or intraday trading, beginner traders can give themselves a head start with some basic tips to craft a well-developed trading style.
Here are ten proven strategies that can help refine your day trading strategy. From beginners to day trading experts, these tips will help traders of all experience levels develop more effective strategies for their portfolios.
- Look for scenarios where supply and demand are drastically imbalanced, and use these as your entry points.The financial markets are like anything else in life: if supply is near exhaustion and there are still willing buyers, price is about to go higher. If there is excess supply and no willing buyers, price will go down. At Online Trading Academy, students are taught to identify these turning points on a price chart and you can do the same by studying historical examples.
- Beginners should always set day trading price targets before jumping in.If you’re buying a long position, decide in advance how much profit is acceptable as well as a stop-loss level if the trade turns against you. Then, stick by your decisions. This limits your potential loss and keeps you from being overly greedy if price spikes to an untenable level. Exception: in a strong market it’s acceptable to set a new profit goal and stop-loss level once your initial target is achieved.
- Insist on a risk-reward ratio of at least 3:1 when setting your day trading targets.One of the most important lessons in stock trading for beginners is to understand a proper risk-reward ratio. As the Online Trading Academy instructors point out, this allows you to “lose small and win big” and come out ahead even if you have losses on many of your trades. In fact, once you gain some experience, risk-reward ratios of as high as 5:1 or even higher may be attainable.
- Day trading requires patience, so be a patient trader.Paradoxical though it may seem, successful day traders often don’t trade every day. They may be in the market, at their computer, but if they don’t see any opportunities that meet their criteria they will not execute a trade that day. That’s a lot better than going against your own best judgment out of an impatient desire to “just do something.” Plan your trades, then trade your plan.
- Day trading also requires discipline, especially for beginners.Beginners need to set a trading plan and stick to it. At Online Trading Academy, students execute live stock trades in the market under the guidance of a senior instructor until right decisions become second nature. If you’re trading on your own, impulsive behavior can be your worst enemy. Greed can keep you in a position for too long and fear can cause you to bail out too soon. Don’t expect to get rich on a single trade.
- Don’t be afraid to push the “order” button and execute your trades.Novice day traders often face “paralysis by analysis” because they get wrapped up in watching the candles and the Level 2 columns on their screen and can’t act quickly when opportunity presents itself. If you’re disciplined and work your plan, actually placing the order should be automatic. If you’re wrong, your stops will get you out without major damage.
- Only day trade with money you can afford to lose.Successful traders have a “little bucket” of risk capital and a “big bucket” of money they’re saving for retirement or another long-term goal. Big bucket money tends to be invested more conservatively and in longer-duration positions. It’s not absolutely forbidden to use this money occasionally for a day trade, but the odds should be very high in your favor.
- Never risk too much capital on one trade.Set a percentage of your total day trading budget (which might be anywhere from 2% to 10%, depending on how much money you have) and don’t allow the size of your position to exceed it. Otherwise, you may miss out on an even better opportunity in the market.
- Don’t limit day trading to stocks.Forex, futures and options are three asset classes that display volatility and liquidity just like stocks, making them ideal for day trading. And often one of them will present appealing opportunities on a day when the stock market is going nowhere.
- Don’t second-guess yourself, but do learn from experience.Every day trader has losses, so don’t kick yourself when the occasional trade doesn’t go your way, especially if you’re a beginner. Do, however, confirm that you followed your established day trading rules and didn’t get in or out at the wrong time.