You may be wondering how you can make some extra income, start a new hobby, or just simply learn something new. Maybe you’ve seen day trading in the news lately, and it sparked your curiosity.
Day trading is the buying and selling of stock during the same trading period. With the right strategy, day trading can be lucrative, but you have to make sure to do research beforehand. This blog is your guide to begin day trading. Continue reading to learn easy steps towards becoming a day trader.
Choose What You’re Going to Trade
There are several types of trading options out there for you to trade. Many day traders trade stocks, forex, or the futures market. Before determining what you’re going to trade:
- Determine your risk tolerance, goals, and most importantly, come up with a trading plan. Your goals, risk tolerance, and trading plan will help determine what type of trading would be the best fit for you.
- Do your research. As a new trader, you’ll most likely be bombarded by “get rich quick” tactics. Ensure that you’re doing your research to get reliable information to ensure you’re formulating your trading plan and risk tolerance on quality information.
Day trading stocks means that you’ll be buying and selling shares of a company on the same day. This type of trading is probably what comes to mind when you think of day trading. If you plan on trading regularly, you will need to familiarize yourself with the Pattern Day Trader rule, which requires $25,000 in capital by law.
Foreign exchange, or forex, trading is the buying and selling of currencies. The minimum capital required is $500 to begin trading forex. While you can trade forex at any time of day, make sure to do research to learn what times work best for different pairs of currency.
Futures trading lets day traders purchase a contract for an asset or commodity at a certain price and time. The futures contracts have an expiration date for when it ends. Trading futures is great if you’re planning to diversify or looking for more liquid markets.
Choose a Strategy and Learn Risk Management
There are plenty of day trading strategies for you to choose from. Many day traders recommend finding one strategy that works for you and sticking with it. A few examples of trading strategies include:
- Momentum: Focusing on stock momentum following news releases.
- Scalping: Buying and selling the stock in a very short amount of time, usually once it becomes profitable. This is a very popular form of trading.
- Gap Trading: Focusing on when a stock moves sharply up or down.
- Trend Following: Trading on the idea that if a stock is rising or falling, it will continue for a period of time.
These are just a few day trading strategies, and make sure to do research on each to determine which is best for you.
Risk management is important so you can better protect yourself from massive losses. The general rule is to never risk more than 1% of your total capital on a single trade, and no more than 3% of your total trades. As always, make sure to do the proper research, and only risk what you are comfortable with.
Learn the Terminology
If you aren’t already familiar with the markets, make sure to learn the trader terminology to make sure you understand the terms you might hear from educators, other traders, your brokerage, and other places. Here are just a few of the terms you should know:
- Ask Price: The price traders are currently asking to sell the stock at
- Bearish: The stock is expected to go down.
- Bid Price: The price traders are currently bidding a stock at.
- Bullish: The stock is expected to go up.
- Buying Power: Your cash balance, plus your margin.
- Earnings Per Share: EPS, a portion of a company’s profit allocated to a person’s share of the stock and is a large metric for analysts.
- Fill Price: The price the trades are executing at with your broker and eventually becomes your average cost.
- Margin: The line of credit to your account for trading and allow you to trade on borrowed money.
- Stock Split: An issue of new shares in a company to existing shareholders in proportion to their current holdings.
How to Create Your Own Day Trading Strategy
Doing your research in terms of what types of trades you’d like to participate in as well as researching which brokerage will work best for you is a step in the right path. However, there are a few key things to consider and plan out prior to beginning your trades. Here are a few things to implement into your day trading strategy:
- Paper Trading is a great way to test out the trading waters. It can help you determine your risk tolerance while helping you practice buying and selling. There’s no better way to see where you’re at in terms of trading skill set than by participating in simulated trades.
- Determining your risk tolerance – paper trading can help you determine this without actually having to engage in trial and error with real money. Determining your risk tolerance will also depend on the type of trading style you decide to participate in. Risk tolerance is important to ensure that you don’t engage in unnecessary risky trades and have to make decisions on a whim.
- Set risk/reward ratios. It may be beneficial to assess your ratios weekly/monthly. Having goals keeps you grounded in your trading strategy.
- Set entry/exit rules. This is a very important one and something that many traders overlook. Having strict entry and exit rules reflective of your trading style helps you avoid unnecessary risk and yield the most profits.
- Keep trading records. Keeping track of your successes and most importantly failures can help you improve as a trader. Analyzing what trades/strategies worked and didn’t work will only prove for more success in the future. Remember, there’s always room for improvement. Use your failures as a tool for learning how to be better.
Practice, Practice, Practice
Before you begin trading, you’ll want to practice your strategy. The best way to do this would be to use a paper trading account or trading simulator to practice with virtual money. The purpose of this is to put yourself in the situation of the markets and see if your strategy works out well. Practicing can help you solidify your trading strategy and allow you to make tweaks for once you’re ready to actually begin trading.
Once you’ve practiced, it’s time to get your account set up and start trading.
Set Up Your Brokerage Account
Before you even can begin to trade, you’ll need to set up a brokerage account. It’s important to take time to research the different brokerage accounts to compare and contrast their different offers. Depending on your trading strategy, certain brokerage accounts may not offer you the tools necessary to execute your trades correctly. Some brokers offer paper trading within their platform. Your brokerage will be executing your trades on your behalf.
Nowadays, most brokerages are commission-free, so the extra features they offer will help you determine which is the best option for you. Find which brokerage is right for you.
Once you’ve done your research, decided on your strategy and practiced, it’s time for you to start day trading. Remember, make sure to do the proper research before you begin day trading. Don’t be afraid to start slow and work your way into day trading. Benzinga Pro offers a FREE two-week trial. Sign-up today to see if Benzinga Pro is the right trading platform for you.
Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. We will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.