Day trading is not for the faint of heart. It requires ample time, discipline, a courageous attitude, and a reasonable amount of free liquid capital to day trade stocks. This article explains seven essential aspects of day trading, provides examples and explains various chart types for technical analysis.
1. Learn Every Aspect of Day Trading
Day trading is called the kings-class of active trading. Retail traders compete against well-educated professionals and institutions with immense computing power. That’s one of the reasons why beginner day traders often struggle when getting involved with day trading. Therefore, it is indispensable to learn from the best in the first step and attend day trading courses to keep up with experts. There is no real alternative to this step because the chances of long-term success in this business decrease without excellent day trading education.
2. Set Realistic Day Trading Goals
While many trading gurus tout 100%, 200% or 500% gains per year, it’s not the norm. Don’t get dazzled up by irrational advertising. Set a realistic goal, like, for example, outperforming the S&P 500 average yearly performance. If investors can beat a passive index, they’re already ahead of the game.
Once investors archive a goal successfully, they can approach the next one. The first goal, for example, can be to make a certain amount of profits using a paper trading account. The second one can be to make a specific profit by trading with low volume adopting the right trading strategies.
3. Give The Portfolio Time to Grow
Don’t stare at the account balance. It’s easy to daydream about how to consume an unrealized gain, only to watch the profits get washed away. Know from the start that until you cash out, the money is not yours. In day trading, things can change from one second to the other. Day trading is fast, but it is not a sprint. It is needed to be successful in the long term over weeks, months and years.
4. Aim to Win in the Long Run
Prioritize long-term capital growth over short-term profits. When starting out, there will be a lot of bumps in the road. So instead of fixating on gains, focus on better decision-making, spotting trends more quickly and avoiding past mistakes. Of course, day trading is about short-term profits. But only the accumulated profit counts in the long term.
5. Learn Technical Analysis
When learning how to start investing money, one should consider getting used to the major chart types, trading patterns and indicators.
Technical analysis is all about support and resistance. If the plan is to buy a stock, then aim to enter at a well-supported price level and try to sell at a resistance level.
Technical indicators and chart patterns can help identify those support and resistance zones. In addition, it helps to keep a close eye on liquidity, volume, volatility, and stock float.
Chart Types
Line Charts: Line charts are the simple price charts often seen. They plot the price history of a particular stock. For day traders, the price history of a line chart does not contain enough information. Instead of line charts, most day traders use bar charts and candlestick charts.
Bar Charts: A bar chart extends the data. It plots a stock’s open, high, low and close for each day. Graphically, it’s a long vertical bar, with small horizontal bars sticking out at the various data points. If the bar closes in green, it means that the close of the period was higher than the open, if it is red, the close was lower than the open, and if it is grey, the open and close prices were the same.
Candlestick Charts: A candlestick chart is a variation of a bar chart. It plots the same open-high-low-close as a bar chart but has a thick ‘body’ in the middle, which is color-coded. A green body represents a positive close for the stock, while a red body represents a negative close.
6. Evaluate Brokerage Costs
There are geographical distinctions regarding brokerage commissions. In the U.S., for example, most brokers use the payment for order flow method to re-finance their expenses, while most other countries in the world require investors to pay commissions for trading stocks, options and futures.
Most online brokers offer discounts to highly active traders on commissions, and it is always worth it to ask for a rebate.
Brokerage Commissions Example
A trade always consists of a buying and selling transaction. An investor who places and executes 10 buy orders and 10 sell orders a day makes 20 trades.
If each trade costs $5, the total commission paid to the brokerage is $5*20=$100.
Those commissions are one of the biggest hurdles for day traders. Let’s say an investor made $200 in gross profit with those 20 trades. Now, the commissions reduce the gross profit of $200 to a net profit of $100 after commissions.
7. Consider The Account Minimums
Many investors prefer day trading U.S. listed stocks due to the high liquidity. One thing to keep in mind is that if a brokerage account held in the United States is used, the minimum account size to day trade is $25,000. Once the account balance falls below $25,000, day traders can no longer day trade. With less than $25,000, the trade frequency will be limited to less than four trades per five trading days. The SEC implemented this rule in 2011.
Brokers based outside the United States typically do not have such limitations. However, their fees and commissions for U.S. listed stocks are often higher. Detailed research and a business case are needed to make a well-informed decision.
Conclusion
Starting a day trading business requires the right mental approach. Some days can make investors feel invincible, while others will feel like they can’t throw a penny in the ocean. Day trading is a real challenge, where investors have to perform at their best and need to increase their knowledge in a competitive world. It will be quickly apparent if day trading is suitable for an investor or not. If not, it’s better to proceed without day trading activities and consider other trading styles and strategies instead.
