Day Trading is a speculative trading style that involves buying as well as selling financial instruments within the same trading day. This is also referred to as intraday trading since the positions concerning each trade close within the same day.
Day Trading taps on available opportunities to make quick profits out of short-term fluctuations in the prices of financial instruments.
However, to make quick short-term margins, day traders have to conduct a detailed analysis of the financial instrument in which they want to trade and then formulate a strategy. Without this, day trading can be a dangerous quagmire.
In this article, we will look into:
- How Does Day Trading Work?
- Prerequisites for Day Trading
- Types of Day Trading
- Commonly Used Day Trading Strategies
- Suggestive Times for Day Trading
- Useful Resources
- Risks and Rewards in Day Trading
Let’s dive right in!
How Does Day Trading Work?
Day trading can be done in various types of financial products such as stocks, forex, indexes, options, and so on. There is no actual delivery of the financial instrument in case of day trading.
Day trading works on the basic principle of volatility in the market. The traders use the margin money to take a stock position, which simply means that an investor borrows the funds in the form of margin money. They try to settle the position by the end of the trading day in such a manner that they buy at a low price and sell at a higher price. The difference between the selling and the buying price gives rise to return for the investor. The trading site appropriates the investor’s account for the returns, after accounting for commission and taxes, if applicable.
Needless to say, keeping an eye on real-time news about what’s happening in the market is critical to ensure that you make profits while day trading. An excellent source of such news is The Motley Fool. You can find everything you need to know on this website.
Prerequisites for Day Trading
If you are planning on entering the intra-trading business, you may consider doing the following things to make sure you do not end up becoming a victim of day trading.
- Develop a strategy for your day trading activity. To formulate a strategy, you may vigorously monitor the live trading of the financial product and its price movement. This can be done really well with the help of MarketXLS. MarketXLS is a Microsoft Excel-based software that excellent tools to track your investments closely. It makes a huge difference to the way you approach day trading.
- Get access to a virtual trading platform like DayTraderPro and apply the strategy developed at the earlier stage. The more you practice, the better you will get. If you feel that you are getting good at it, you move to an actual trading platform like EasyMarkets.
- There are requirements regarding minimum capital that a trader needs to deposit in his trading account. An investor will need to comply with such capital requirements. Further, capital requirements may be different for different product types.
- If you do not have enough experience in intraday trading, you may need to appoint a broker. Make sure that the broker you choose enjoys a good market reputation and provides reasonable rates of commission. Go over and take a look at PairTradeFinder to discover long/short trading options as well. Alternatively, you can invest using platforms like Public, which offers a commission-free investment option.
- It would also be advisable to take up an online trading courses like Trading Lesson or Knightsbridge Trading Academy . There are lots of such online courses available online. A simple Google Search will bring you a lot of results.
Types of Day Trading
There are different order types we may have to choose from when we operate in the intraday market. Let us understand some commonly used order types.
Market Order
Market orders let the investor trade the security or any other financial product at the existing market price. You may use this order type when the prices are changing very quickly and you want to either enter or exit from a position.
Sell Limit Order
Investors use this order type when they need to take a short position. They place a limit for the price at or above which they wish to execute the sale transaction. The public uses such an order type to set a price target for exiting a long position with profits.
Buy Limit Order
These order types let its user buy at or below the limit price. Traders make use of this order type to set an upper cap of price to exit a short position with profits.
Sell Stop Order
The order type allows a user to sell at a price equal or less than the current price. Apply this when you want to exit from a long position, and; this serves as a stop-loss.
Buy Stop Order
It is used for placing buy orders at a price equal or above the prevailing market price. Use this to exit from a short position. It also serves as a stop-loss feature.
Commonly Used Day Trading Strategies
Here are some of the most commonly used strategies in intra-day trading.
Scalping
Scalping is used popularly in forex trades and deploys minute changes in prices for reaping maximum benefits. While we’re on the topic – if forex is an area of interest for you, take a look at ForexMentor for some excellent guidance on how to operate within the forex market. Idea is to trade in bulk quantities and exits are made as soon as profitable prices are reached.
Breakout
A trader following this strategy takes a short position after the asset rises above the resistance level. As an alternative, traders may enter a short position when the asset falls below resistance. Volatility increases when the asset trades beyond the set price barrier. Also at such a point of time, price usually moves in the direction of the breakout.
Momentum
A trader who adopts this strategy takes a long position for those securities that are rising and take a short position when the prices become high. The trades are done based on some market news or announcements.
Reversal
This strategy is extremely risky for beginners and only those traders who have relevant market experience shall apply this strategy. In this strategy, a trader trades against the existing trend after analyzing the possible upsides and downsides.
Suggestive Times for Day Trading
You may trade for hours and still not achieve the desired results. It is very important to trade at the right hours. The best hours for trading are the morning hours when the market opens until 11 a.m. There is a lot of price movement in this period of time and thus trades placed in such hours may bring you sufficient profits. The lunch hours being 11 a.m. to 2 p.m. tend to be slow hours and are not suitable for day trading. After 3 pm till 4 pm, when the market closes, there is again a lot of hustle in the market, and trading at such hours may bring major gains.
Talking about the best days to trade, it has been observed that Wednesday is the most prominent day to trade, followed by Friday.
Useful Resources
As you may have gauged by now, day trading is a profession fraught with risk. You have to be extremely careful with your research and analysis before investing anything into the live market. Even with a lot of research, though, it’s far too easy to go wrong or make huge mistakes in the day trading market. That’s where DayTraderPro with Guy Gentile comes to the rescue.
This revolutionary app offers you access to one of the most comprehensive day trading courses on the internet. You can get everything from lessons on the basics to tips on how to make your mark and earn big in the day trading market. DayTraderPro lets you practice on a simulated trading market with professional day traders before you get on the live market itself.
The biggest benefit of getting DayTraderPro, however, is that it allows you 3 months of access to the DTP Live Trade Room with Guy Gentile and his team of experts. It also offers a daily trade plan, which can be incredibly helpful.
You should also take a look at OneBillionSignals to help you improve your trading skills in the forex and cryptocurrency markets. The timely updates offered by this platform go a long way in helping you ensure good profit margins.
Top Dog Trading offers some insightful tools and lessons in trading to help you along the way.
Risks and Rewards in Day Trading
We have discussed that intra-day trading is based on speculation. When such types of orders are placed, they bring with themselves a significant amount of risk. If the speculations that an investor makes comes out to be true, they will be able to make huge gains, without having to take actual delivery of the asset. On the other hand, the downside risk is that the investor may incur significant losses in case the prices move in the opposite direction.
Day trading may sound like an interesting opportunity to make quick gains. But it requires a lot of experience and research to carry out successful trades. If you are a beginner you must begin your journey with a demo trading platform.