how to become a day trader - day trading strategies

Day trading refers to a form of share trading where a person purchases and sells online within one day.

The idea is to earn a profit as a result of price fluctuations. These price movements are usually small and within highly liquid currencies or stocks.

Day traders watch out for events that may cause short-term moves within the market. As a day trader, you’ll need to be able to make decisions quickly.

This type of trading involves dedicating time to purchasing and selling several assets per day. 

With most other investment methods, individuals seek to earn due to price fluctuations over a long time frame. Day trading relies upon a polar opposite strategy.

Day trading commonly occurs in forex stock markets, however not exclusively. These following tips and day trading strategies will help you on your way to becoming a day trader.

How to Become a Day Trader

Determine pricing targets

Your target is a pre-set price level at which you close trading.

For instance, if you purchased a stock at $11.55 and you had a target of $11.65, you put that price in place and close when the amount is reached.

All-day traders should determine their pricing targets before jumping into the market. It’s useful to decide beforehand which level of profit is reasonable.

You should also decide the level at which to stop if the trade turns.

Outlining a plan in advance can help to limit loss and helps traders make sensible decisions about price spiking.

If the market is strong, it’s fine to increase your profit goal once you reach your primary target.

Carefully consider position size

In the world of day trading ‘position size’ means how much money is allocated to a specific transaction.

For example, if you wanted to invest $150, you could purchase 10 units, which cost $15 each. It’s advisable not to risk too much money on a single trade.

Traders should set their position size as a small percentage of the budget for that whole day. The percentage will be determined on the specific budget and might be between 3 and 10%.

If your position size is larger than your set percentage, you may miss a more attractive trading opportunity. This can happen if you have all your funds allocated to just one or two trades.

A greater position size also means a higher (potential) loss figure.

Balance reward and risk

Day trading requires focusing on a win-loss ratio. The idea is to aim for a stage where the great majority of your trades are wins.

If a day trader makes 7 trades a day and wins 4, their win rate is 57.14% (4 out of 7). Traders can calculate their win-loss ratio when they determine wins and divide this figure by losses.

For instance, if you traded 100 times per month and achieved 70 wins and 30 losses, your win-loss ratio would be 2.33.

When you are starting out with day trading, it’s advisable to keep your risks low. You can risk losing just $1 to earn $3.

Consider timing 

Day trading markets are often volatile. If you’ve been trading for some time, you are likely able to identify patterns, which will help you to achieve profits.

On the other hand, when you’re a beginner, it can be harder to understand the market.

Regardless of whether you are an experienced trader or a beginner, it’s helpful to remain consistent. Choose the hours you’ll trade each day, and stick to them.

For stocks, the first two hours after opening is considered one of the best periods to trade. Bear in mind that these hours are volatile, and beginners may want to start trading in the middle hours of the day first.

The middle hours are usually less volatile, which means less risk. The end of the day usually sees some sizable price moves, and therefore lots of profit potential. 

Do your research

As with any new venture, the more knowledge you acquire, the better set up you are to achieve success.

Research the stocks that you are interested in trading in and stay up to date on general markets. You should also keep up to date with the events and news which affects stocks.

You might start by reading trading based publications, for instance, Technical Analysts of Stocks and Commodities. This is one of the top publications when it comes to economy and trading.

Anyone looking to get started in trading stocks or other securities should check out this long-running and iconic magazine.

Investor’s Business Daily is another excellent resource for learning about short-term fluctuations in the markets.

Top Day Trading Strategies

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There are several different day-trading strategies; day traders might focus on one or a combination.

Either way, you’ll need to learn about all of them, and meet each day with a pre-determined strategy plan. Let’s consider the different day-trading strategies out there:

1. Momentum Trading

Momentum trading uses a technical analysis, which involves analyzing recent price movements in stock.

Traders also look at purchase-and-sell signals, including patterns, trends, and formations. Those who use momentum trading tend to purchase when a stock breaks a pattern and reaches a new high or low.

When a stock enters new territory, traders take the opportunity to cash in on the short-lived momentum.

With this type of trading, there is no concern with purchasing or selling at any exact highs or lows. The concept is to purchase a moving stock and sell it prior to inflection.

In the world of day trading, momentum trading is one of the most popular methods to adopt.

2. Swing Trading

Swing trading involves looking for short-term patterns. The idea is to trade based on these patterns and the hope that they continue.

For instance, a trader might look at a stock and determine which level it has peaked at over the last three weeks. From here, they assume that the stock will carry on peaking at about this level.

The trader uses this level to gauge when is the best time to sell.

3. Market Neutral 

The trader seeks to hedge the trade by choosing a long position and a short position within two connected stocks.

This strategy aims to make money on the performance of one stock against the other. It’s also the idea to offset overall risk within the sector.

4. Scalping

Scalping involves selling stocks almost immediately after purchase.

Traders who use the scalping technique are concerned with quantity as opposed to quality. They hope that their efforts throughout the day will result in large returns.

It’s common to capture price movements below 1 percent and then close these trades in a few minutes.

With using the scalping technique, large orders are common. Scalping traders use strict stop order strategies, ensuring that the trade is exited when it starts to fail.

Traders will need consistent access to stock charts and trading data (in real-time) to use scalping techniques.

5. High-Frequency Trading 

High-frequency trading uses computer programs to make a huge number of orders, in seconds. It works by using algorithms to analyze multiple markets and then carries out orders based on these conditions.

Usually, those traders who can make trades faster will be more profitable. High-frequency trading is, imaginably, associated with high turnover.

As you can see, there are many different day trading strategies. There are also several more things to consider as a day trader:

More Day Trading Tips

Don’t purchase penny stocks

Penny stocks are those that trade for under $5 each. Often these low-value stocks are associated with low value companies.

These companies will often make claims that they are approaching some kind of breakthrough project, which means that you can buy low now and make huge profits in the future.

However, it’s often the case that these big profits are never realized. Buyers drive the prices upwards, but after a while, those who hyped up the shares will sell, and thus the shares begin to crash.

Stocks trading under $5 are often taken off the major stock exchanges.

Be realistic 

When you’re starting out, it’s better to focus on a lower amount of stocks and build yourself up. You’ll want to focus on about one-two stocks in every session and no more.

Jumping in the deep end may mean you’ll lose both money and confidence. Once you’re a more experienced day trader, you can ramp up your stock activity, and feel confident that you have the expertise to do so.

In the beginning, the main thing is to pick the right market, choose the equipment you need, and start small.

What do I need to start day trading?

To get started, you need a reliable computer and trading platform software.

A trading platform is a program that uses an electronic marketplace to process transactions using stocks. These tools convert market data into a simple format that the trader can interpret.

Depending on the trading platform, traders can purchase and sell, use charting techniques, and access live-streamed data. An effective trading platform should provide technical analysis, entry order functionality, and excellent market accessibility.

Above all, working as a day trader takes discipline and commitment. You will need to remain consistent with your methods and be patient. It can take a little time to gain momentum and start earning those nice profits.