Day trading is a trading model where traders both purchase and sell securities within the same day to generate profits from daily market price fluctuations. Although day trading is high-volume in general, the precise volume and frequency of trades completed within the span of any day will vary depending on the trader’s market knowledge, strategy, budget, risk tolerance, experience, and the day itself.
While there is certainly potential for earning profits through day trading, there are financial risks to consider as well. The risk is much higher for beginners because they lack the necessary knowledge, understanding, and experience to avoid common mistakes or recognize opportunities in time. Nevertheless, those risks can be mitigated by newcomers with thorough preparation. Let’s discuss a few crucial tips and proven day trading strategies that will help with that preparation.
Complete a Crash Course in Day Trading
If you are new to the idea of day trading, you will need to learn the basics first. After that, there are more advanced concepts such as interpretive market analytics and day trading strategy building to learn about. Get started with the basics by reading this post about how to buy on TradingView. Although there is no shortage of online day trading courses for beginners, joining an expensive certification program is not necessary. Instead, look for a short, precise, and free crash course that’s designed to educate traders.
Decide on a Budget
A budget for day trading primarily consists of a capital and a risk allowance percentage.
- Capital – The total available amount in your day trading account.
- Risk allowance percentage – A percentage of the capital you are willing to risk per transaction/trade.
- Maximum loss limit – The maximum amount of money that you are willing to risk losing per day.
For example, if you have a capital of $10,000 and allow for a risk percentage of 1%, you are risking a maximum loss of $100 per trade. If you set your maximum loss limit for the day at $500, all trading should cease immediately for the rest of the day if your total loss in a day ever equals that amount. These limits can be preprogrammed and integrated into your trading account as defaults.
Set Budget Limits Based on Your Risk Tolerance
All limits mentioned above should be in line with the trader’s risk tolerance. Risk tolerance in this context would be the maximum financial risk that you are both willing and able to take while day trading, should the risks not fall in your favor. Day trading can be profitable despite the associated risks, but it’s important to acknowledge those risks practically by never going above your maximum risk tolerance.
A high risk tolerance indicates that the party can risk losing a considerable amount in the short term, without being catastrophically affected by that loss. A low risk tolerance signifies that the party cannot afford to risk a heavy financial loss without being severely affected by it. If you are not sure about your own risk tolerance, visit the U.S. Securities and Exchange Commission website for more information.
Work with a Momentum Strategy
A momentum strategy consists of buying securities that are going up in price and selling them at the highest possible profit. Ideally, the securities should be sold just after they reach their peak point for the day, or at least as close to it as possible. Note that in order for a momentum strategy to succeed, the trader must sell back the securities at a price higher price than what they purchased them for before the end of the day. Therefore, the potential for profiting from a momentum strategy depends on two main factors.
- How much the price went up after you invested in it.
- How close to the peak point you managed to sell it back.
Identifying securities suitable for a momentum strategy can be streamlined by keeping your selections in line with the following suggestions.
- Find companies that are trading at least 5 million shares on the stock market within a day’s time.
- Keep an eye on real-time news concerning major geopolitical, medical, and industrial updates that are likely to be volatile for the share market.
- Look into areas of the stock market that are most likely to be positively affected by the temporary volatilities.
- Find securities in those sections of the market that are riding the temporary hike.
To minimize risks, beginners should start with safer stop-loss orders when implementing the momentum strategy. For example, you can place a stop-loss order to be triggered as soon as the stock’s price shows its first or second decline after a halt in the upward momentum. This will ensure that you don’t end up suffering a loss, although it may also limit your chances of earning a bigger profit.