The global online trading market was estimated to have a market value of $8.7 billion in 2021. Experts predict that by 2028, this market can grow to $12.16 billion.
Such an optimistic forecast suggests more opportunities for new traders to enter this market. One of the ways beginner traders can participate in online trading is through day trading.
What are the different day trading strategies you can utilise? How can you refine their day trading strategies?
Are there any tips for beginners who want to engage in day trading? Once you become a more experienced trader, how can you refine your day trading strategies?
Do beginner traders and expert traders use different strategies? Which strategies are the same for both novice and expert traders?
If you’re new to day trading, you’ll benefit from the tips we’ll give you to help you get started. These tips will help you develop essential and useful strategies as you engage in day trading.
Whether you’re a novice or an expert trader, you can learn the various day trading strategies that can help improve your day trading performance.
This article also discusses how you can refine your preferred trading strategy, limit your losses, and understand other basic techniques that benefit beginners and expert day traders.
As one of the fastest-growing forex and CFD (contract for differences) brokerages worldwide, Zenfinex strives to provide traders with instant access to numerous markets, flexible leverage, tight spreads, and quality customer service.
Day Trading Strategy: Trading Strategies for Beginners
Before considering engaging in day trading, beginner traders must first understand what it involves and what it can offer:
The Basics: Day Trading Explained
Day trading is speculative trading that considers opening and closing positions within the trading day.
Day traders can buy and sell multiple assets several times daily to take advantage of small market movements. At the trading day’s end, traders close their positions and start fresh for the next day.
Also called intraday trading, day trading often takes time, dedication, and focus to succeed. So, part-time traders sometimes switch to full-time if they want to succeed in day trading.
Day trading also involves making decisions fast and executing numerous trades for a relatively small but consistent profit.
Think of day trading as the opposite of most investment strategies, where you attempt to benefit from price movements happening over an extended period of time.
Is Day Trading Good for Beginners?
Despite the profit opportunities in day trading, some traders may still experience losing money. However, education and experience can help increase your chances of success.
One way for beginners to learn day trading is to use a demo trade account to learn the ropes and test strategies. They can also utilise day trading tips before investing their capital in actual money trading.
What Are the Benefits of Day Trading?
The chance to earn huge profits on the stock market from the comfort of home can be alluring for new investors dreaming of day trading for a living.
If you’re someone who can manage their emotions and stand up to the inherent pressures of day trading, you can reap these benefits of day trading:
- No overnight risk: Day trading involves closing all trades by the day’s end so that no trades are left open overnight.
- Limited risk: A day trader opens short-term trades that usually last about one to four hours, minimising the likelihood of risks associated with long-term trades.
- Flexible trading: Day trading can be appealing to those who prefer flexibility with their trades. For example, traders can enter one to five positions and close them after hitting the profit objectives or stop-loss limits.
- Multiple trade opportunities: Day traders can enter local and international markets, including forex markets, and open and close numerous positions within 24 hours.
What Are the Drawbacks of Day Trading?
Like any form of investing, day trading comes with challenges.
When you day trade, you must be ready for a higher level of risk caused by the short period involved in the process.
Here are the potential setbacks of day trading that you should consider:
- High levels of discipline: Because day trading is a fast-paced activity, traders must have focus and discipline. Some traders may also find the learning curve steeper than other trading methods.
- Flat trades: Some positions only move a little within the day, so making a profit from trading these positions can be challenging.
Traders who want to engage in day trading should note these important reminders:
- Day trading can be profitable in the long run, provided that traders do their research and take this activity seriously.
- Day traders must be focused, diligent, and objective and keep their emotions in check.
- Day traders should consider looking at liquidity, volatility, and trading volume when determining what stocks to buy.
Prior to Day Trade
When starting your career as a day trader, remember that day trading involves investing a significant amount of time as you pick trade opportunities and monitor the resulting positions daily.
Before trading, you need research tools and a clear objective to determine what trades to place. Practice your trading methodology in advance, through a demo account, before using a live account and incorporating that methodology into your trade plan.
Another way to prepare for day trading is to learn about fundamental factors that cause market movement and influence the financial markets you choose to trade.
Also, consider avoiding markets you have yet to completely understand unless you have tested your strategy in these markets.
Deciding to Buy: What to Buy and When to Buy
Day traders attempt to make money by analysing slight price movements in individual assets, like stocks and forex, and buying and selling these assets based on those movements.
When deciding what asset to buy, check the following:
- Volatility: This factor measures the daily price range in which a day trader operates. A higher volatility means greater profit potential, but there’s also a high risk of loss.
- Liquidity: A highly liquid security means you can buy and sell an asset easily and quickly. When a security’s spread or the gap between the bid and ask price is tight, you can consider looking into assets with high liquidity.
- Trading volume: The volume measures how often a security gets bought and sold within a given period. A high volume suggests a high interest in a particular stock, and an increase in volume often indicates an upcoming price jump.
After identifying the securities you want to trade, you must determine the entry points that signal when you should buy. Tools that can help you identify these points include:
- Real-time news: News can influence price movements, so consider subscribing to news services that alert you on national or global events that can move the market.
- ECN quotes: Electronic communication networks (ECNs) are computer-based systems that show you the best “bid” and “ask” prices from several market participants. The ECN also matches and executes trading orders automatically.
- Intraday candlestick charts: Candlesticks on intraday charts indicate price action that can suggest potential entry points.
When using these tools, define and write down the specific and testable conditions in which you’ll enter a position.
For instance, consider buying when the price breaks above a triangle pattern’s upper trendline, indicating a potential entry point within the first few minutes after the market opens.
After setting specific rules for entering a position, you can scan more charts to see if your conditions are generated daily.
For example, you can check whether a candlestick chart pattern signals a price move in your preferred direction and serves as a potential entry point.
Deciding When to Sell
Once you’re in a winning position and you want to exit (sell), you can apply the following profit target strategies:
- Scalping requires selling immediately after your trade becomes profitable. The price target is any figure that will make you money on the trade.
- Fading involves shorting stocks (sell first, then buy when prices go down) after quick upward moves. Traders who prefer fading assume that the asset is overbought and early buyers are preparing to take profits.
- Daily pivots entail profiting from an asset’s daily volatility by buying at the day’s low and selling at the day’s high. In this case, your price target is at the next reversal signal.
- Momentum involves trading based on news releases or significant trending moves with high volume. Consider the moment when volume starts decreasing as your price target.
Components Every Strategy Needs: How to Create Day Trading Strategies
One significant challenge among new traders is to create an appropriate day trading strategy. Consider the following when creating a working strategy:
- Decide what kind of trader you want to be: Do you want to be a part-time or full-time trader? Do you want to become a day trader or a swing trader?
- Think about the assets you’d like to trade: There are numerous assets you can choose for trading, like stocks, forex, commodities, and exchange-traded funds (ETFs).
- Find pros and cons of the strategy: Each strategy has its pros and cons, so read books, watch videos, or ask someone who has been in the business for years to help you find a strategy that fits your needs.
- Use a demo account: It would help if you use a demo account to create and test your trading strategy.
The Strategies on the Move
One way to become better at implementing trading strategies is to find assets on the move. For example, consider looking for a stock that makes a 20% or 30% move daily.
Once you have identified such stocks, determine your expectations from strategies for stocks on the move. If these assets move sideways (no significant price increase or decrease), you will get little profit, and it will be challenging to work with them. So, look for assets that move up or down.
Criteria to Look For in Day Trading Strategies
When using day trading strategies, you may find some similarities with stocks that move. For instance, if you scan 1,000 stocks for ones that move 20% to 30% daily, there may be 10 stocks that fit these criteria. In this case, consider sticking to those stocks.
Look into these criteria when choosing stocks for day trading:
- The float (number of shares available for public trading) must be under 100 million.
- The stock’s resistance (an imaginary price ceiling that keeps the price from moving higher) is above the moving averages and is not near the current price.
- The stock’s high relative volume is at least twice above average.
How to Find Stocks for Your Strategies
Use stock scanners or screeners to monitor the market for stocks that meet the above-mentioned criteria.
Afterwards, check the candlestick charts to look for an entry point. These charts can reveal pullbacks, where buyers may enter the market. Once the price quickly moves up, you can determine the best entry point.
Stock scanners allow you to receive trade alerts whenever certain stocks meet your criteria. With scanners, you no longer have to manually look at the charts since the scanner lets you see all stocks at their current positions.
Selecting a Trading Strategy: Day Trading Strategies
When selecting a trading strategy, you don’t have to stick to only one. Note that some of the best traders can adapt and shift their trading strategies depending on the opportunity or situation.
Try to learn each trading strategy and combine different approaches so you can adjust to a given market situation.
Momentum Day Trading Strategy: The Anatomy of Momentum Stocks and Real-Life Day Trading Strategy Examples
You may encounter a bull flag pattern in your chart when doing momentum trading. You can identify this pattern as having a strong upward movement, resembling a pole, and gradual pullbacks at the top, resembling a flag.
Suppose Company A’s shares form a bull flag pattern, and you plan to buy them when the stock’s price makes a new high after a breakout. Before entering the position, wait for two or three red (negative or down value) candles in the candlestick chart to form a pullback.
You can enter once you see the first green (positive or up value) candle reach a new high after the pullback. If you have a stop-loss limit, you can place it at the lower end of the pullback.
A volume spike when the candle makes a new high likely indicates thousands of traders positioning and placing buy orders.
Breakout: Entry Points and Planning Your Exits
Breakout strategies involve assets with prices that clear a specific level on the chart and have increased volume. A breakout trader usually enters a long position (buying low and selling high) after the security breaks above the resistance level.
You can also enter a short position (selling high first, then buying low) after the stock goes below the support level (an imaginary barrier keeping the price from falling lower).
After an asset or security trades beyond a specific price barrier, prices often trend in the breakout’s direction, and volatility starts increasing.
Consider the following points that are based on strategies:
- Entry points: Traders should consider taking a bearish position (expecting the price to decrease) when prices are set to close above the asset’s resistance.
Prices that will close below the support level require traders to consider a bullish position (expecting the price to increase).
- Exit points: Use chart patterns to help improve your accuracy in determining the price at which you’ll exit a position.
For example, if the average price swing is five points over the past few days’ swings, consider this point a sufficient target to exit the trade and enjoy the profit.
Scalping is among the popular day trading strategies, especially within the forex market, since this method capitalises on small price changes. In scalping, you’ll want to sell as soon as your trade becomes profitable.
Scalping is a fast-paced but risky way to trade, so you should have a high trading probability to offset the low risk-reward ratio.
Additionally, you must look out for volatile and highly liquid instruments. Try to exit your trades quickly, including the losing ones, before the day ends.
Although this method is potentially risky for beginners, many traders worldwide use reversal trading, also called mean reversion strategy, trend trading, and pullback trending.
This strategy requires you to trade against the trend, meaning you must accurately identify potential pullbacks and their strength. You must have in-depth market knowledge and experience to pull off this strategy.
Consider utilising the daily pivot strategy when engaging in reverse trading since a reversal involves buying and selling at the daily high and low pullbacks.
Pivot Points: Application and Calculating Pivot Points
A pivot point strategy in day trading can help you identify and act on critical support and resistance levels. Range-bound traders often use pivot points to identify entry points.
In contrast, breakout and trend traders use a pivot point strategy to discover potential breakout levels.
A pivot point is a point of rotation where you use the previous day’s high and low prices and the specific security’s closing price to calculate the pivot point.
Note that using price information from a relatively short time frame to calculate a pivot point often leads to lower accuracy.
Here’s how you can calculate a pivot point:
First, add the security’s high, low, and closing values and divide them by three, given the formula:
Pivot point (P) = (high + low + close) ÷ 3
Next, calculate the support and resistance levels by multiplying the pivot by two and subtracting the low (for resistance) or high (for support) value. Use the following formulas:
First resistance (R1) = (P x 2) – low
First support (S1) = (P x 2) – high
You must also compute the second support and resistance levels, calculated as follows:
Second resistance (R2) = P + (R1 – S1)
Second support (S2) = P – (R1 – S1)
In the forex market, for example, you can consider the session’s trading range between the pivot point and the first support and resistance levels.
Forex Trading Strategies
Forex day trading strategies are often risky. Since you must accumulate your profits quickly, you can miss out on the potential profit if you take too long to exit a position.
Still, you can apply any of the abovementioned strategies when trading within the forex market.
Cryptocurrency Trading Strategies
The cryptocurrency’s market volatility usually offers plenty of opportunities for the day trader.
For example, you don’t need to understand the complex technical details of Bitcoin or Ethereum, and you don’t need to hold a long-term outlook on their viability. You can use any trading strategy straightforwardly to profit from this volatile market.
Stay alert for news about cryptocurrencies and blockchain technology, as these can affect the entire crypto market. Some coins are interlinked and affect other cryptos, even if the news starts with only one obscure coin.
Stock Trading Strategies: Moving Average Crossover
For your moving average crossover in stock trading, consider utilising these three moving average lines:
- One at 20 periods for your fast moving average
- One at 60 periods for your slow moving average
- One at 100 periods for your trend indicator
Using the lines above can help you create moving average strategies to generate a buy signal when the fast moving average line moves up and over the slow moving average. On the other hand, a potential sell signal appears when the fast moving average moves under the slow moving average.
Meanwhile, to determine a trend, check if the price bar remains above or below the 100-period line.
Spread Betting Strategies
Spread betting is generally restricted to United Kingdom-based traders only. Still, this strategy lets you speculate on numerous global markets without owning the asset.
Spread betting strategies include:
- Charts and patterns: Consider using charts and patterns if you prefer looking at historical data to predict future price fluctuations.
Most trading platforms today offer the standard line, bar, and candlestick charts.
- Corporate actions: If you prefer to avoid technical analysis strategies like breakout trading, trend reversal, and momentum, consider buying and selling based on news events. Major corporate moves often signal a potential spread betting round.
Developing effective day trading strategies can be complex, but trading instruments like CFDs can help manage the complexity.
CFDs deal with the difference between a trade’s entry and exit points and lets you profit from an underlying asset’s movement relative to the position taken without needing to own that asset.
Day traders who prefer trading CFDs can consider the following strategies:
- Breakout strategy: Requires identifying a key price level for a specific security. Afterwards, you buy or sell that security when its price hits your preferred level.
With breakout trading, you can avoid trades in markets that need to provide clear signals.
- Contrarian strategy: Relies on the knowledge that trends don’t last forever. This strategy involves identifying an entry point where you believe a stock’s price is nearing the end of its trend.
Afterwards, you can enter a buy position where you expect the trend to turn in the other direction.
Picking the Instruments
Before trading, decide what financial instruments you want to invest in, like stocks, ETFs, indices, commodities, futures, or options. Each instrument has its quirks and risk levels.
If you prefer to focus on top-performing stocks, consider trading indices like the Standard and Poor’s 500 (S&P 500) or the Financial Times Stock Exchange 100 (FTSE 100). If you want a larger market, consider stocks or forex.
Whatever instrument you choose, try to make decisions based on your preferred levels of risk. For example, since indices consist of stocks with high market capitalisation, these instruments may have a lower risk than forex.
Stop-Loss Orders Day Trading
Stop-loss orders are like a safety net to limit your losses. Before entering a position, consider setting up a stop-loss order to prevent or reduce the possibility of losing your position if the price movement goes the other way.
Real-Time News Trading
Many stock-market traders check the latest news when buying new assets or selling their current position. Such news can make the difference between making money and losing money.
Events that can immediately affect the market include:
- Press releases on a company’s latest earnings
- Product or commercial service announcements
- Government or private agency reports on the general economic activity
- Federal Reserve policy changes
- Significant political news in a prominent trading country
- Sudden natural disasters
Time Over Sales
Similar to monitoring real-time news, observing real-time sales data can also help improve profitability and help minimise the risk of loss.
For example, when large orders for a stock appear at or above its current asking (selling) price, you can enter a long position to take advantage of this movement.
On the other hand, seeing substantial orders at or lower than the stock’s current bid (buying) price can signal the time to enter a short position and abandon long positions, if any, for that instrument.
Market Opening Gap
A market opening gap occurs when an asset’s opening price is far above or below the previous day’s closing price with no trading activity in between
Many technical analysts consider significant breakaway gaps as indicators that the market will continue to move in that direction. In this case, you can look for opening price gaps in exchange-traded markets exceeding a particular percentage, like 5% or higher.
Once you find such an asset with strong movement during the stock market opening, you can check for timely news affecting the move. Afterwards, you can look for an appropriate entry point and place your stop-loss below the support.
Ichimoku Kinko Hyo Indicator
The Ichimoku Kinko Hyo, or Ichimoku cloud indicator, can provide intraday technical trading signals. These signals include the senkou span, consisting of two lines forming a cloud, and the kijun sen line, which suggests trading signals and a stop-loss region.
When using this indicator, day traders can enter a position when the price moves outside the cloud, suggesting a new trend.
Pullback Trading Strategy
The first step in using the pullback strategy is to find a stock or ETF with an established trend. Try to observe this trend until the price declines from the trend. If the trend is upward, the pullback or downward price movement is a potential entry point to start buying.
A breakout happens when the stock price moves above the previous top resistance price.
The first step in breakout trading is to monitor the stock trading volume or how many shares change hands. Breakout trades on high-volume stocks are likely to be more sustainable at the new higher price than breakouts with less volume.
Trend traders make money by analysing the asset prices’ direction and then buying or selling depending on which direction the trend is taking.
If the trend is upward and prices are making successive highs, traders can take a long position and buy the asset. If the trend is downward with successive lows, traders are most likely to take a short position by selling.
Mean reversion functions on the theory that prices and other value measures like price-to-earnings (P/E) ratios will eventually move back towards the historical mean.
This strategy utilises technical analysis like moving averages to monitor assets whose recent performances are considerably different from the historical average. Traders using mean reversion can take advantage of the assets’ return movement to their usual trajectory to make a profit.
Swing trading involves taking advantage of short-term price patterns by assuming that prices never move in one direction during a trend. Instead, swing traders profit from the up-and-down movements occurring within a short time frame.
Unlike trend traders, who take advantage of long-term market trends, swing traders are more interested in small price movement reversals. Swing traders also attempt to spot these reversals and trade to profit from smaller market movements.
Money flows indicate whether an asset is overbought or oversold using price and volume instead of the asset’s price only.
This method compares the previous day’s number of trades to the current day to see whether there is positive or negative money flow.
A reading of 20 or lower indicates a potentially oversold market and can be a signal to buy. On the other hand, a reading of 80 or higher suggests overbought conditions, so you should consider selling.
Different Strategies for Different Styles
There are different trading styles, depending on the type of market players, from those who prefer short time frames like a few days, hours, or minutes to those who focus on long-term investing.
Some traders like to use technical indicators depending on what the traders need and what they want to analyse, like liquidity, trend, volatility, and trading volume. Others prefer to analyse news, while others rely heavily on studying charts when deciding when to buy or sell.
Day Trading Charts and Patterns
Traders have several trading tools to help them determine buying or selling opportunities. Among these tools are:
- Candlestick chart patterns
- Other technical analyses like trend lines and triangles
- Trading volume
Day traders can use various candlestick setups to find an entry point. For example, reverse traders can use candlestick patterns to place reversal trades by looking for signs like volume spikes and previous support levels.
Momentum Day Trading Strategy Pattern 1: Bull Flags
A bull flag is a chart pattern where a stock has a strong upward trend. It’s called a flag pattern because it looks like a flag on a pole when seen on the chart.
A bullish flag pattern usually consists of the following features:
- The stock has made a strong upward move with a relatively high volume
- The stock consolidates near the top and on a lighter volume
- The stock breaks out of the consolidation pattern, continuing the trend of high relative volume
Momentum Day Trading Strategy Pattern 2: Flat Top Breakout
The flat top breakout pattern has similarities to the bull flag pattern, except that the pullback typically forms a flat top with a strong resistance level.
This pattern often forms when there’s a big-time seller or multiple sellers at a specific price, requiring buyers to buy all those shares before prices increase.
Technical indicators are essential for day traders because these tools can reveal significant trends that traders can use to earn a profit by following complex stock market movements.
Technical indicators day traders can use include:
- Moving averages
- Relative strength index (RSI)
- Price rate of change (ROC)
- Commodity channel index (CCI)
Short-Term vs. Long-Term Trading
Although many try to make money through day trading, some consider this move riskier than long-term investing, which involves buying and holding investment instruments for months or years.
Long-term investors usually consider the history of a specific industry or company and its services and product market potential. On the other hand, day traders glance at a company or investment vehicle before deciding to trade.
Some industry experts think that trading is not any better than common gambling. This perception may have prompted the Securities and Exchange Commission (SEC) to implement rules to protect small fund investors by placing several restrictions on the stock market.
How to Refine Your Day Trading Strategy
It’s not enough to create a trading strategy. You must also refine that strategy by testing it for a few months before applying it in live trading.
Additionally, you must consider the constantly changing market conditions, meaning you’ll need to refine the strategy now and then.
In order to minimise the probability of losing a huge amount of money, you can refine your strategy by testing your methods in a demo account for a few months. You can also observe how other industry professionals trade in the markets.
Finding Stocks for Your Day Trading Strategies
Stock scanners allow you to monitor the market for stocks that satisfy your criteria.
These scanners are valuable tools for day traders because these tools alert traders of potential stocks to trade based on specific criteria. When using scanners, traders no longer have to search the market for that particular stock manually.
Basic Day Trading Techniques
After learning and testing the day trading techniques mentioned in the earlier sections, you must determine your end goals and develop your personal trading styles. Techniques you can refer to when developing your trading strategies include, but aren’t limited to, the following:
- Following the trend
- Contrarian investing
- Trading the news
Risk Management 101: Where to Set Your Stop
Setting stop-loss limits depend on several factors, like what trading style you prefer and how much risk you can take.
For instance, you can set a stop order not far below the first pullback when doing momentum trading.
If your stop is about $0.50 away and the price drops to that level, you can exit your position at a loss and return later or the next day for a second attempt.
When trading, try to balance your risks across all trades. One way to determine your risk is to look at the gap between your entry price and your stop.
If you have a stop at $0.50 and maintain a risk tolerance of $500, you can buy 1,000 shares (1,000 x $0.50 = $500).
A strategy is likely to work if it takes risk into account. If you don’t manage risks, you have a high chance of losing more than you can afford.
Utilising a stop-loss helps prevent or reduce the risk of losing money.
For example, a stock whose price appears to move in the direction you favour can reverse at any time. A stop-loss can help control that risk by letting you exit the trade and incur a minimal loss in case the asset or security doesn’t succeed.
Some experienced traders risk only 1% of their account balance per trade. If you have $25,000 in your account and want to follow this principle, consider risking up to $250 per trade.
Position size is the number of shares you buy in one trade. The right strategy can help you decide on the appropriate position size.
For example, to determine the risk level per share, you can get the difference between your entry point and stop-loss prices. So, if you enter a position at $10 and the stop-loss is $9.50, your risk is $0.50 per share ($10 – $9.50 = $0.50).
Suppose you can risk $250 per trade. To determine how many shares you can buy on one trade, simply divide $250 by $0.50. Your position size should consist of 500 shares.
The Best Time of Day to Trade
The best time to trade depends on your preferences. If you’re using momentum trading strategies, you can trade any time of the day.
Still, many trades often occur during the morning, especially during the first hour. For example, the opening time from 9:30 AM to 10:30 AM, Eastern Time (ET), is among the best times to trade as it offers the most significant moves within a short time. Try to consider this information when trading.
Should a Day Trading Position Be Held Overnight?
Day traders considering holding a trading position overnight can reduce losses on an unfavourable trade or increase profits on a winning trade.
Exiting a position by the day’s end is a relatively easy and fast rule for day traders. Potential risks in holding a day trading position overnight include:
- Additional borrowing costs
- Meeting margin requirements
- The potential impact of negative news
These risks can outweigh any favourable outcome, so think about these risks before holding a position overnight.
Analyse Your Trading Results
Trading is a career involving statistics, and successful traders typically have positive trading metrics.
You can review your profit-loss ratios so you can determine if the strategies you use have the potential to be profitable. After a trading week, try to analyse the results to understand your current trading metrics.
Experienced traders often maintain detailed trading records so they can data mine them to understand what they must improve in their trading.
Entry Checklist Summary
When entering a position, you can use or customise the following entry criteria:
- Use momentum day trading chart patterns like bull flags or flat top breakouts.
- Pick a tight stop-loss limit that supports a two-to-one profit-loss ratio.
- Choose an asset with a high relative volume. Higher volumes mean more interest among traders.
When deciding on when to sell or exit a position, consider following or customising the following exit indicators:
- Once your first profit target has been reached, sell half of your position. So, if you’re risking $100 to make $200 and you reach that amount, sell half of it. Then, adjust your stop-loss.
- If you haven’t sold half your position and you’re using candlestick charts, consider the first candle to close in the red (loss) as your exit indicator.
Different markets have different opportunities and challenges. For example, day trading strategies in one country may be ineffective or under stricter regulations in another.
Additionally, trading strategies may be tailor-fitted for rules that apply within specific regions. For example, spread betting is prominent in the U.K. but not in the U.S.
Limiting Losses: How to Limit Losses When Day Trading
Taking losses is a common occurrence for many traders. While you can’t completely predict an asset’s price movements, you can limit your losses by considering the following steps:
Set Stop-Loss Orders
A stop-loss order helps limit your losses on a position if the trade doesn’t go your way.
You can place a stop-loss below a recent low for long positions, while for short positions, you can place that limit above a recent high.
For instance, you can place a stop-loss order about $0.20 away from your entry if a stock price moves approximately $0.05 a minute. The gap gives the stock price some moving space before it moves in your anticipated direction.
The distance in which you place the stop-loss depends on your risk tolerance.
Set a Financial Loss Limit
You can also set a maximum daily loss that you can tolerate, e.g., if you set a $500 daily trading budget and lose this amount, you can exit your trades, take the remainder of the day off, and resume trading the next day.
Test Your Strategy
Once you’ve defined your entry points and stop-loss orders, it’s time for you to assess whether your chosen strategy fits your risk limit. If your strategy puts you at high risk, you can adjust it to reduce risk exposure.
If your strategy fits your limit, test that strategy by manually going through historical charts to find entry points similar to yours. Note whether you would have hit your price target or stop-loss limits.
Do paper (simulated) trading with a demo account for about 50 to 100 trades, so you can determine whether the strategy is profitable enough and whether the outcome meets your expectations. If the strategy proves unprofitable, you can start over and try a different approach.
Day Trading Tips for Beginners
Not all brokers can handle a high volume of trades. On the other hand, some fit perfectly with day traders.
The following tips can help beginners improve their day trading skills:
Stay Updated With News for More Knowledge
Day traders must stay updated with the latest news and current events, as they can affect stock market prices. These updates include company news, interest rate changes, and other economic and financial news.
News and research can help you create a list of stocks you can trade. It is important to keep yourself informed of news about companies, stocks, and general markets.
Set Aside Funds
Assess your available capital and commit to an amount you’re willing to risk per trade.
Successful day traders often risk no more than 1% to 2% of their funds for each trade.
Suppose you have $100,000 in your trading account and are willing to risk 0.2% of that amount per trade. Your maximum possible loss per trade in this scenario is $200 ($100,000 x 0.2% = $200).
Set Aside Time
Day trading requires you to commit time and focus. In many cases, you have to treat day trading like a full-time job. So, if you have limited spare time, consider other ways to trade or invest.
In day trading, you must monitor the markets and constantly find opportunities that can occur anytime during trading hours. Try to be diligent and take note of these things, so you can move quickly to take advantage of profitable positions.
Beginners should consider trading one or two stocks at most daily. Tracking and finding profit opportunities in a few stocks is more manageable that way.
As you gain experience, you can start trading more than two assets daily.
Starting small also means considering trading fractional shares that typically cost a large amount each. Trading in fraction format makes these shares more affordable.
For example, a share trades at $3,000, and some brokers can let you buy a fractional share for as low as $30, or 1% of the full share price.
Avoid Penny Stocks
Penny stocks provide low prices but are often illiquid (difficult to buy or sell), so your chances of winning a trade are often low.
Many stocks that trade below $5 per share can get delisted from large stock exchanges, meaning you can only trade these stocks over the counter (OTC). Consider staying away from penny stocks unless you’re confident that there’s a significant opportunity with your stock and you performed your research.
Time Your Trades
Traders and investors often place numerous orders that begin to execute in the morning as soon as the markets open, leading to price volatility.
Trading hours during the middle of the day are usually less volatile, and movement picks up again toward the closing hours.
Seasoned traders can recognise such patterns and time orders to generate profits. But beginners may not be as quick or perceptive, so they should consider observing market movements for the first 20 minutes before placing an order.
Cut Losses With Limit Orders
Decide whether you’ll use market or limit orders to enter and exit trades. Market orders execute at the best available price at the time without a price guarantee. Such orders can help when you want to enter or exit the market without worrying about a specific price.
Meanwhile, limit orders let you set the price you want your order to execute. Limit orders can help cut your losses, especially during reversals.
Be Realistic About Profits
Trading strategies cannot guarantee success all the time. Even many successful traders profit from only 50% to 60% of their trades.
To improve your profitability, ensure that you limit your financial risk on each trade to a specific percentage of your account and stick to that limit.
There are moments when the stock market doesn’t go your way, and you end up getting emotional.
Day traders must decide their trades based on logic, not emotion. You must learn to control your emotions, including hope, fear, and greed.
Stick to Your Plan
One trait of a successful trader is being able to develop a plan and stick to it. With this strategy, you can make decisions fast without thinking too much.
When you’ve developed a trading strategy and the discipline to stick to that plan, you can focus on following your formula logically instead of chasing profits emotionally.
What Else Should You Know?
Trading on the financial markets can be overwhelming for some day traders, especially beginners. Before you start day trading a few stocks, try getting a good grasp of the following concepts:
- Costs, including spreads, commissions, overnight fees, and margin rates
- Risks associated with your chosen financial instrument or market
- Indicators, market data, and risk-management tools
- How trading on margin or leverage trading works
- Preventing account closeouts and margin calls
Is Day Trading for You?
Successful day traders are experienced market players who’ve been trading for several years. They have the appropriate behaviour and personality to calmly and objectively deal with financial market volatility.
If you’re attentive and can manage the stress associated with intense daily risk-taking activities, day trading may be for you.
To be a successful day trader, you must commit substantial time to manage your positions and monitor the markets.
You must be well-versed in market research and analysis. More importantly, you must have the discipline to stick to your strategy to improve your profitability.
News Trading Strategy and Tips
A news trading strategy involves trading on news announcements. This strategy requires a skilled mindset since news can travel quickly, especially on digital media.
Strategy tips for news trading include:
- Creating trading strategies based on specific news releases
- Treating markets and news releases as separate entities
- Giving importance to market expectations and market reactions rather than news releases
Benefits of News Trading
New trading provides the following advantages:
- A well-defined entry and exit strategy: Entering and exiting a position depends on how you interpret the news and outline your plan.
- Numerous trade opportunities: Several news events and economic releases that can create trading opportunities occur daily.
Drawbacks of News Trading
News trading also has disadvantages, such as:
- Overnight risk: You can leave your trading positions open for more than one day, depending on the news. However, it should be noted that a daytime win can turn into a loss overnight.
- News trading that requires expert skills: News traders must analyse how announcements can affect their positions and the overall financial market. They must also understand news from a market perspective, not only from their own interpretation.
EOD Trading Strategy
Traders who use the end-of-day (EOD) strategy often trade near the markets’ closing hours. EOD traders become active when there are clear indicators that the price will settle or close.
Benefits of EOD Trading
EOD trading benefits include:
- Suitability for many traders: Beginners can use this strategy to start trading since there’s no need to enter multiple positions.
- Less time commitment. Traders can study the charts and place market orders in the morning or at night, requiring significantly less time spent than other strategies.
Drawbacks of EOD Trading
Overnight risk is one disadvantage of EOD trading, although you can mitigate this risk by placing a stop-loss order.
Swing Trading Strategy and Tips
Swing trading refers to trading on both sides of any financial market movement. Swing traders attempt to buy a security when they believe that the market will rise soon. They sell the asset if they predict that the price will fall.
One swing trading strategy is to use retracement swings (pullback indicators) during strong trends to enter the trend’s direction. Swing traders can buy at the first pullback when the market shows a new high.
On the other hand, when there is a new momentum low, traders can sell at the first rally or continuous price increases.
Benefits of Swing Trading
- Swing trading can be a hobby.
Swing trading can suit people who don’t have much time to devote to trading strategies. This strategy requires research to understand how oscillation patterns work.
- There are plenty of trade opportunities in swing trading.
Swing trading involves trading on both sides of the market, so traders can go long and short across numerous securities.
Drawbacks of Swing Trading
Swing trading has a few disadvantages, including:
- Overnight risk: Such risks can reverse a potentially winning trade into a loss. You can minimise this risk with a stop-loss order on your positions.
- A need for sufficient research: Swing trading requires ample technical analysis consisting of numerous technical indicators and patterns.
Trend Trading Strategy and Tips
In this strategy, a trader uses technical analysis to identify trends and enter trades based on a predetermined trend’s direction.
One way to utilise trend trading is by monitoring for signs that the trend is ending or about to change. Also, decide the timeframe you’ll follow the trend and keep this frame consistent.
Benefits of Trend Trading
The benefits of trend trading include the following:
- Trend trading can be a useful hobby: Traders who have created a trend identification strategy but have limited time to trade can consider using trend trading.
- Trend trading can provide trade opportunities: An ongoing trend can provide many opportunities for entering and exiting a trade. Trend trading can also involve playing both sides of the market, similar to swing trading.
Drawbacks of Trend Trading
Overnight risk is one disadvantage of trend trading since positions open for several days can incur overnight risks that can offset your potential profit. Stop-loss orders are one way to mitigate this risk.
Scalping Trading Strategy
Scalping involves placing short-term trades with small price movements. Scalpers aim to scalp (sell for a small profit) from each trade with the hope that these small profits will accumulate.
Benefits of Scalping
Day traders can prefer scalping for the following advantages:
- Scalping doesn’t involve overnight risk: Trades last only a few minutes or hours at maximum, and traders don’t hold their positions overnight.
- Scalping can provide trading opportunities: Scalpers can open several small positions compared to other strategies that utilise fewer but bigger trades.
- Scalping can be a hobby: Scalping can suit traders who prefer to trade flexibly or at their own time and convenience.
Drawbacks of Scalping
Traders who want to engage in scalping should be aware of the following drawbacks:
- Limited market applicability: Scalping works better with highly volatile assets with high trading volumes. This method is more applicable in select markets like indices, bonds, and certain stocks.
- Extremely tense environment: Monitoring assets for the slightest price movements to earn a profit within a short period can be an intense activity, making scalping challenging for beginner traders.
Position Trading Strategy
A trader engaged in position trading holds a position for an extended period, usually weeks, months, or years. These traders ignore small price fluctuations in exchange for profiting from long-term trends.
Benefits of Position Trading
Position trading can benefit traders in the following ways:
- High potential profits: Position trading lets you trade with high leverage since making a mistake in this trading method has a lower possibility than in conventional trading strategies.
- Less stress: Since position trading doesn’t require constant monitoring of the markets daily, this method is not as stressful as other short-term trading methods.
Drawbacks of Position Trading
Despite the benefits, position trading has the following cons:
- Significant loss: While ignoring minor fluctuations, position traders can miss trend reversals, resulting in significant losses.
- Swap: Swaps are commissions paid to the broker. These commissions can accumulate if the trader holds the position open for a long time.
You can learn about day trading strategies through various sources, including books, blogs, e-books, and forums. Videos are also an effective way to learn about these strategies.
Day trading strategy videos are available online. In these tutorial videos, brokers offer numerous day trading strategies through easy-to-follow online training.
Zenfinex provides educational trading material through video tutorials, market analysis videos, and podcasts. Traders can learn to navigate their trading accounts and understand the market to improve trades.
How to Start Day Trading
To begin your day trading journey, start by following these steps:
Choose How to Day Trade
Your first step in becoming a day trader is deciding what financial instrument you want to trade.
CFDs are convenient for day trading. Since you don’t have to own the underlying asset you are trading, you can open and close your positions faster.
Create a Day Trading Plan
You can create a plan that outlines your goals and make your profit targets realistic. If you want to make a large amount of money immediately, prepare yourself for a steep learning curve and several months of practice before you get used to day trading.
Also, consider creating a plan for entering and exiting the market. If you choose fundamental analysis, your day trades will likely involve analysing company reports, breaking news, and macroeconomic data announcements.
On the other hand, if you use technical analysis, you’re likely to focus on chart patterns, technical indicators, and historical data.
Learn How to Manage Day Trading Risk
Creating a risk management strategy helps you place measures to help prevent or minimise potential losses. Tools like stop-loss orders and limits should be an indispensable part of any trader’s toolbox.
Traders don’t always need to be correct. However, they must be quick to acknowledge when they’re wrong and take action accordingly, so they can make more money on winning trades than lose on ones that go wrong.
Open and Monitor Your First Position
After creating a trading plan, you can open your first trade by considering whether you’ll want a long or short position.
Consider buying an asset if you think its value will rise. On the other hand, consider selling if you believe its value will decline.
As a day trader, you’ll likely open and close multiple trades per day. Keep yourself updated with any breaking news or market events that can impact market prices.
Prior to when the trading day ends, aim to close any trades you’re still holding. It’s important that you keep a record or diary of your successful and unsuccessful trades for future reference.
Markets for Day Trading
While day trading is often associated with markets with fixed closing hours, you can still technically day trade in markets open for as long as 24 hours. Markets convenient for day trading include:
Day trading stocks is a common choice among beginners since there’s a large variety of shares to trade.
In this market, closing your positions at the day’s end is common practice to avoid overnight risk. Overnight news and developments can cause share prices to open significantly higher or lower than the previous trading day’s close.
When trading indices, you’re speculating on the performance of a group of shares instead of only one company.
Examples of indices include the FTSE 100, representing the 100 largest companies on the London Stock Exchange (LSE) according to market capitalisation.
The forex market has high market liquidity and a vast amount of currency pairs to trade, making this market a popular choice among beginner day traders.
Day trading cryptocurrencies is an increasingly common practice, especially since the crypto market is open 24 hours. Individuals trading cryptos can avoid overnight funding costs, so traders don’t need to worry about market movements while sleeping.
What Makes Day Trading Difficult?
Day trading takes lots of knowledge, testing, and practice to get your trades right. With day trading, you’re going up against other professional traders, some of whom have connections and access to the best technologies in the industry.
Another challenge is that you have to pay taxes on any short-term gains at the marginal rate for investments or trades that you hold for one year or less.
Beginning day traders are also prone to emotional and psychological biases affecting trading.
For example, when you’re losing money on a trade, you can become desperate to recover your losses and end up chasing after profits instead of sticking to your plan.
Experienced day traders can usually surmount these challenges through skill, experience, and deep pockets.
Steps to Getting Started on Our Platform
To start trading with us at Zenfinex, follow these steps:
- Visit Zenfinex.com and open a live or demo trading account. You can choose from standard, pro, and VIP accounts, depending on your trading style and experience.
- If you’re live trading, fund your account using any of our accepted deposit methods like bank deposits, bank cards, Skrill, PayU, and other country-specific methods. Deposit fees will apply.
- Choose a market in which you want to trade. At Zenfinex, we offer trading in forex, commodities, metals, indices, and cryptocurrencies.
- Choose your trading platform. We offer trading opportunities through MetaTrader 4, ZenConnect, or MetaTrader 5.
- Trading for a living: Can you make a living with day trading?
You can make day trading a living as long as you can understand and utilise the various day trading strategies, risk management techniques, and money management strategies to help you make money.
Having the discipline to stick to your plan and controlling your emotions are also essential to help minimise or prevent losses.
- What is the 5-3-1 trading strategy?
The 5-3-1 trading strategy applies in forex trading and involves:
- Focusing on only five currency pairs. For example, if you live in the United States, you can pick USD-CAD, USD-EUR, USD-GBP, USD-AUD, and USD-JPY
- Utilising three strategies for trading
- Trading during one time only, the same time each day
- Is fundamental analysis or technical analysis more appropriate for day trading?
Technical analysis is more appropriate for day trading because it helps traders identify short-term trends and patterns essential for day trading.
Meanwhile, fundamental analysis is suited more for long-term investing since this analysis focuses on valuation. The difference between an asset’s intrinsic value and actual price, according to fundamental analysis, can last for months or years.
- Why is it difficult to make money consistently from day trading?
To make money consistently from day trading, you must have knowledge, discipline, trading acumen, experience, and mental fortitude.
With such demanding requirements, beginners can find it challenging to implement strategies like scalping, swing trading, or stop-loss limits.
Additionally, experiencing significant losses and market volatility can make it challenging to stick to one’s trading plan. Beginners should consider practising and testing their strategies for weeks or months to adjust to day trading’s demanding nature.
Zenfinex is an online trading broker fully regulated by the Financial Services Authority. We ensure client money protection by holding funds in segregated accounts in tier-one banks.
Open an account with Zenfinex and start trading today. Subscribe to our newsletter and receive trading insights from our team of expert analysts. We also strive to provide exceptional client support through email, telephone, and WhatsApp.
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