What is day trading? Day trading is essentially buying and selling a financial instrument within the same day and even multiple times during one day. Day trading takes advantage of small trade moves and can quickly turn sour if it is not played out well enough.
Not all brokers are suited to the high volume of trades made by the day traders. But if you’re a beginner looking for a good day trading strategy, then this blog is the right place for you!
In this blog, we are going to be talking about effective day trading strategies that you can use as a beginner. There are several ways through which you can do day trading, and in this blog, we are going to attempt to cover most of them.
1. Prepare Everything Beforehand
There are only a limited number of instantaneous decisions that you can make in a limited time. The best way to do it is by preparing everything beforehand and doing your research before sitting down for trading.
The best way to do any type of trading is to know your market beforehand and also to do a little bit of research and analyze some graphs and charts before the market opens. Proper research can help you preplan and carry out actions that can help you in generating profit.
2. Sit Tight For The First Hour
For the first hour, the market is more volatile than usual, and there are a lot of pending orders from the last day waiting to be executed. You need to sit tight and not do anything in the first hour.
Interestingly enough, you cannot entirely skip the first hour of the market either. The first hour of the market is vital because it sets the trend for the rest of the day. For the first hour, you will need to brainstorm and analyze the market through graphs and trends.
This analysis will help expose you to opportunities where you could invest and take benefit from. Professional traders often sit back and watch the market trading in the first hour to be able to get a feeling of the market mood for that particular day.
3. Stay In Touch With Market News
While news channels and the political market might seem like a tedious task, it is something that you have to do. The happenings around the world play a huge role in how the stocks function, and a lot of external factors end up playing a massive role in the stock market prices.
Staying in touch with the market trends can help you gain an excellent idea of how the market operates. It can also help you in setting the tone and can help you predict future stock movements quite accurately.
4. Find Oversold And Overbought Financial Instruments
Remember the bitcoin? The bitcoin rose to a sky-high level a couple of years ago, and many investors predicted that it would fall badly and thus advised people not to invest in bitcoin anymore as it is overbought.
Instruments that are overbought tend to crash down, and the same goes for the tools that are oversold. To protect yourself from buying in an overbought or oversold stock, you need to check its RSI.
The RSI is a standard tool used by investors and is readily available on many different trading platforms. Using the RSI is very simple as well; all you need to do is apply the RSI to your charts and then read the value it gives you.
A value above 70 indicates an overbought stock, whereas a value below 30 means a stock that is oversold. Once you have identified both these types of securities, you need to then steer clear away from them.
5. Trend Following Can Earn You Some Profits
Following the trend is actually how many traders have ended up making large profits. While many people might discourage you from following trends because they don’t last for very long, for day traders, this is a perfect strategy by following directions you can manage to make a few quick bucks.
How do you find these trends? Spotting these trends is very simple because all you need to do is use a simple peak and trough analysis or a technical indicator such as the ADX. Markets in uptrends form higher highs, and lower lows and markets in downtrends form consecutive lower lows and lower highs.
If you want to follow the ADX indicator, then you need to follow the value of the ADX line. Values below 25 indicate that the market is not trending, whereas values between 25 and 50 suggest that the market is trending.
One way through which you can do this is by identifying the – DI and the +DI lines to help you in determining the direction of the trend. If the -DI line is above the +D, I line, then you see a downtrend. Similarly, if the +DI line is above the -DI line, then you are dealing with a downtrend.
6. Have A Risk Management Plan
You may be able to devise the best and the most foolproof strategy in existence, but without a robust risk management plan, your strategy can turn to dust no matter how good the policy is.
Risk management helps you to always stay in control. It enables you to allocate and proportion your risks successfully, lets you proportion all your trades, and helps you identify regions where you can make profits and avoid areas where the chance for loss is very high.
In finance, there is a famous saying that says, don’t put all your eggs in one basket. Risk management works on the same principles. It is always wise to diversify your risks and not put all your investments into a single stock.
Diversifying your risks helps you in more ways than one. It enables you to gain a somewhat standard rate of return. If a specific investment of yours is not performing well, then another of your investments can cover for it.
It can also help protect your money. In case a particular stock crashes, your entire earnings, and investment will not crash with it.
7. Make Percentages And Stick To Them
The best way to control your losses and protect them from going out of control is by risking a fixed percentage of your trading account on any single trade. Most investors follow the rule of 2%; they don’t risk anything more than 2% of their trading account on a single trade.
If you have a trading account worth $1000, then you should not be risking more than $20 on any single trade. 2% is the most considerable amount of risk that you should take for any given investment; however, this rule isn’t set in stone.
If you are a risk-averse investor, then you can set your maximum limit at 1% or 0.5%. The percentage can be anything that you feel works for you.
8. Use Pending Orders
One of the most popular tools day traders uses the pending orders feature. Pending orders is a fantastic feature because of many reasons. These orders include stop and limit orders that become market orders when these conditions are met.
You can place a pending order through a simple procedure. All you need to do is place a pending order above or below a potential breakout point, and the pending order will work on its own and execute an order once the price reaches the specified levels.
The benefit of a pending order is that you don’t have to keep eyeing the stock prices, and you don’t have to keep tabs continually. Whenever the price reaches your specified amount, the pending order feature will execute the command for you.
9. Keep A Trading Journal
Many people build a perception about traders that do high-intensity work and are always trading stocks in the blink of an eye. However, that is far from the case, and most traders often spend much time analyzing the market.
Expert traders don’t trade a lot each day. Instead, they spend much time looking at their trading journals and analyzing their past decisions. To be able to evaluate yourself better and fine-tune your market movements, it is better for you to include all the relevant details in your trading journals.
The details should include the reason why you undertook a specific trade, the entry levels, their stop losses, and they take profit levels.
Keeping a well-maintained journal will help you in more ways than one. This journal will help you gain an idea of your trading pattern and your trading behavior from time to time. It will also help you in identifying recurring trading mistakes that have led to losing trades.
10. Watch The Market Before Executing
For beginners, this is a great way to know whether or not your analysis is right or wrong. If you’ve successfully been able to analyze a particular stock and you feel that its market price will go up, then you should wait for a while to see if other people in the market think the same as you.
To be able to make a good profit, you need to ensure that you are thinking and behaving like the market. The only difference is that you are acting slightly late. All you need to do is watch the stock that you think is going to go up.
As soon as the market starts moving in your preferred direction, you can buy the stocks and gain profit. For new traders, this is an excellent strategy as it protects you from making unnecessary trades and saves you from the transaction fees.
11. Stop Losses Are Your Best Friends
Any trader that does not use stop losses is waiting for a disaster to happen. No matter what trading style you use, whether it is day trading, swing trading, or even scalping, you should always use stop losses.
Without stop losses, you will not be able to apply most of the percentage rules you might have set up for yourself, and most of your order execution will be complicated.
The best kind of stop-loss you can put is the stop-loss known as chart stops. Most traders prefer using chart stops to protect themselves against losses; some traders prefer one of the other three types of stop losses. These stop losses are the volatility stops, time stops, and percentage stops.
Chart stops use essential technical levels in a chart that can help you find the exact stop-loss order points.
12. Don’t Hold Trades Overnight
Holding your trades overnight can be a risky affair. Day traders are known for executing day trades only and releasing their trades by the end of the day. Holding your trades overnight is dangerous because there might be a market shift overnight that could not work in your favor.
If your trades are still open by the end of the day, you need to close them and take whatever loss and profit you can manage, holding your trades overnight is not completely bad and can be done. Many traders that follow different styles of trading sometimes hold their deals for weeks and even months.
Day traders do not operate in this manner, and while the idea may seem reasonable to you, it is always better to stick to your predecided trading plan and follow the rules that you have set for yourself.
With the current COVID-19 situation, there is much panic in the trading world, and even the most seasoned of traders are withdrawing their investments and halting trades because of the market unpredictability.
For beginners, this is a good and a bad thing. It is a good thing because stock prices are meager and affordable, which means that they can afford more. The problem with this is that there is also a high chance that the stock market will crash even more. Therefore the best strategy you can use right now is sit back and observe the market trends and use these trends to make your final decisions.