Thanks to technology, trading is no longer a preserve for those who work in the stock market or brokerage firms. Anybody with good internet and some time to spare can make money trading securities. Day trading has emerged as one of the most lucrative ways to make money by buying and selling securities within a given day.
Unfortunately, most people end up losing money due to poor strategies. This article looks at the 10 things you should research as a beginner day trader to avoid making the same mistakes.
1. Day Trading Markets
Before you begin trading, you will have to decide which day trading market is best for you. Factors such as accessibility and capital will determine which market is best for you. The most popular markets include stocks, crypto, forex, futures, and options.
- Stocks: The stock market is where traders buy and sell a company’s shares before the close of business. It requires a large initial investment. In the U.S, traders must maintain a minimum equity balance in their account to be allowed to day trade stocks.
- Forex: The forex market is where the global currency is traded for another. Unlike the stock market, traders don’t need a lot of capital to get started.
- Futures: These are agreements between buyers and sellers to purchase a specified amount of assets at a future date. The futures market requires less capital than forex or stocks.
- Crypto: Cryptocurrency refers to a virtual currency that is secured by cryptography. Unlike other standard currencies, crypto is usually more volatile. The most valuable crypto out there are Bitcoin, Ether, and XRP.
- Options: This security gives the holder a right but not an obligation to buy underlying assets. Options are classified into the call and put options. Call options give the holder a right to buy, while put options give the holder a right to sell.
2. Pattern Day Trader Rule
The pattern day trader rule requires that the number of day trades on a margin account be less than 6% of the total trading activity within 5 days. If you exceed this limit, the account is flagged. You will be required to maintain a minimum balance of $25,000 before resuming trading.
This rule is put in place to discourage excess trading of the same asset. A PDT flagging can inhibit your ability to trade. It would help if you tried to avoid it at all costs. Here are some of the loopholes you can use to get around this rule.
- Limit trading to three-day trades in a five-day period, which is below the pattern day limit.
- Open multiple trading accounts with different brokers.
- Trade outside the reach of the Financial Industry Regulatory Authority.
- Resort to swing trades that you can hold for longer than just 24 hours.
3. Day Trading Strategies
Having the required capital for day trading is only half the equation. To be profitable, you will need to learn about different strategies. As a beginner, it is best to perfect one strategy before trying to learn about the next. This approach avoids confusion and loss. Below are some of the common trading strategies you can use for day trading.
Momentum: This trading strategy relies heavily on news and announcements. The idea is to use this information to identify opportunities for making profits. For best results, hold your position as long as possible and get out when you notice signs of the price drop.
Scalping: This strategy involves taking advantage of minute price changes. The idea here is to close on a trade as soon as it becomes profitable. This approach requires impeccable timing but prevents losses.
Breakout: This strategy revolves around an asset or security’s resistance and support levels. To make money, the trader should enter a long or short position depending on the prices in relation to support and resistance.
Reversal: This strategy is a bit dangerous for beginners but works when used correctly. Reversal refers to trading against the trend. The idea is to identify possible pull-backs and also predict their strengths to be successful with a reversal strategy.
Brokers are financial institutions that provide traders with a platform for selling and buying securities. With thousands of brokerage firms, finding the right fit is often challenging. Before approaching any broker, identify your needs. For instance, different brokers deal in various types of trading. If you want to trade stocks, only look for brokers in that area of the market.
The best approach is to identify three of the best and compare them to get the best for you. If you plan to learn from scratch, brokers with a tone of learning resources may be a better fit. You will also need reliable support in case you run into problems. Other factors to consider include commissions, spreads, ease of deposit/withdrawal, and regulatory compliance.
5. Trading Lingo/Terminology
Like most professions, traders use industry-specific terminologies. You will be at a huge disadvantage if you can understand what the terms mean. Any resources provided for learning purposes will make no sense to you. Here are examples of the common day trading lingo you should know about.
- Market Cap: It is the mode of measurement used to determine the size of the company. The measure is based on the value of shares currently held by shareholders.
- Equity: It refers to the ownership of stocks or shares in a company. It is also used to refer to ownership assets after debts and liabilities are subtracted.
- Blue Chip: This term refers to companies that have been around for a while. Such companies are often worth billions and are considered reliable.
- Bearish: The stock is expected to go down in prace
- Bullish: The stock is expect to go up in price
Read More: Guide to Trading Terminology
6. Chart Patterns
Most trading strategies rely on the analysis of market trends. This data is often presented graphically in the form of charts. Isolating patterns from this data can help you speculate possible future prices. One common tool in charts is the trend lines. Learning how to read and use these chart patterns is essential.
However, this only works if you know what to look for. The distinctive shapes identify chart patterns. Reversal patterns indicate that the current trend is about to change in the opposite direction. On the other hand, bilateral chart patterns indicate that the market could go in any direction.
7. Risk Management
Risk is part of day trading. Your success depends on how well you mitigate the risks. According to a 2006 study, only 20% of day traders make profits in any given day after fees. Adopting risk management strategies can help you stop the bleeding and end the day on a high.
Generally, the best strategy is to avoid betting on the same or related securities. Instead, find multiple uncorrelated positions. This spreads the risk since one outcome does not affect the rest. A common strategy is the one percent rule. Under this approach, you never risk more than 1% of your account’s value on one position.
8. Research Tools and Equipment
There is a lot of research that goes into staying profitable as a day trader. It helps to have the right tools for the job. The first thing you need to find is a reliable workstation. This consists of a computer, a couple of monitors, and high-speed internet connectivity. However, these are just the basics. You will also need additional software.
Most of the popular trading platforms provide traders with essential learning and analysis tools. However, these are rarely enough to give you an edge. You may have to look elsewhere for additional trading tools and equipment. To succeed, you will need scanning, charting, and breaking news software — Benzinga Pro is a tool you may find helpful.
9. When to Trade
Day trading is about quality, not quantity. You don’t have to sit in front of the computer the whole day to make money. Successful traders carefully pick out when to trade and when to sit by the sidelines. The exact hours will depend on the type of market. For instance, trading stocks is best during the opening or towards the close.
Similarly, those who trade in the futures market stand to gain more from early trading. This is when the market is most volatile, with plenty of opportunities. However, avoid the first 30 minutes of any day. When it comes to forex trading, there are opportunities all day. Whatever the market, about 5 hours of trading should be enough.
10. Understand Margin
A margin account allows the trader to borrow money against the money in their account. In trading, this is known as leverage. The main benefit is that traders only need to deposit a small amount to buy securities. It effectively multiplies your purchasing power. When shopping for a broker, ask about their leverage policies.
Margin accounts can be handy in certain situations, but they are not always a good idea. The first problem is the fees that come with them. Like all forms of credit, you have to pay extra for the service. The second problem is that it multiplies your risk. It can destroy your account if not used with caution.
Day trading is one of the most controversial subjects today — most people who go in expecting to get rich overnight end up losing money. Don’t be in a hurry to be successful. Take the time to learn before trading with actual money. Approaching it as a business with risks and rewards is the best way to go. With these tips, any beginner can find their footing in the day trading world.