1. Knowledge Is Power
In addition to knowledge of procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This included the Federal Reserve System’s interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you’d like to trade. Be informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
2. Set Aside Funds
Assess and commit to the amount of capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000). Moreover, only trade with suitable online brokers and trading platforms.
Earmark funds you can trade with and are prepared to lose.
3. Set Aside Time
Day trading requires your time and attention. In fact, you’ll need to give up most of your day. Don’t consider it if you have limited time to spare.
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.
4. Start Small
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding prospects is easier with just a few stocks. It’s now common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon.com (AMZN) shares are trading at $170, many brokers will now let you buy a fractional share for as low as $5.
5. Avoid Penny Stocks
You’re probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over the counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these. Finding really undervalued stocks can be demanding.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, it may be better to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile. Then, the movement begins to pick up again toward the closing bell. Though rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses with Limit Orders
Decide what type of orders you’ll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available, with no price guarantee. It’s useful when you want to enter or exit the market and don’t care about getting filled at a specific price.
A limit order guarantees the price but not the execution.2 Limit orders can help you trade more precisely and confidently because you set the price at which your order should be executed. A limited order can cut your loss on reversals. However, if the market doesn’t reach your price, your order won’t be filled, and you’ll maintain your position.
More sophisticated and experienced day traders may also employ options strategies to hedge their positions.
8. Be Realistic About Profits
A strategy doesn’t need to succeed all the time to be profitable. Traders can be successful by only profiting from 50% to 60% of their trades. However, they need to profit more from their winners than they lose on their losers. Ensure the financial risk on each trade is limited to a specific percentage of your account and that entry and exit methods are clearly defined.
9. Reflect on Investment Behavior
For day traders, frequent reflection on investment behavior is crucial. It helps them identify patterns, learn from past mistakes, and fine-tune their strategies. This fosters continuous learning and adapting to ever-changing market conditions. In addition, it encourages discipline and emotional control, which are key to successful trading.
10. Stick to the Plan
Successful traders must move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula and methodology closely rather than try to chase profits. Don’t let your emotions get the best of you and make you abandon your strategy. Bear in mind the mantra of day traders: plan your trade and trade your plan.
