Contributor Since 2017
The idea of becoming a stock trader overnight is deceptively accessible and even easy, at first glance. The concept of day trading has to do with, as the name suggests, trading for short periods during the day. The main difference between swing trading and day trading is the market exposure time.
A lot of day traders got a bad taste for the practice when it experienced a boon in the 90's. This is due to an influx of poor decisions and market volatility because decisions were made on emotions and inexperienced risk-taking. There's a lot of homework and attention needed in day trading in order to be successful and not crash and burn.
Because the barrier for entry is essentially finding a stock broker and having some money to get started, the likelihood of people becoming burned-out or failing to stay in the black is extremely high. It is estimated that 90% of new traders will bust out before their first calendar year. This sounds pretty damning about day trading's viability, but all it takes is a little preparation and a solid work ethic.
Search for situations where free market activity are definitely rocky, and utilize these as your entrance focuses. The markets resemble whatever else in life: if supply is close to spent and there are purchasers ready, cost is going to go up. On the off chance that there is overabundance of supply and no purchasers, cost will decrease. Experienced traders are instructed to recognize these defining moments on a value graph and you can do likewise by concentrating on past cases.
Set Goals and Measure Risk
In case you're purchasing a long position, choose ahead of time how much benefit is in play and have a stop-loss in-mind if the exchange betrays you. At that point, stick with it, if you try to make any last-minute changes, it could worsen your losses or compromise your initial gains. Only in the special case of a bear market is it smart to set further goals after exceeding your initial expectations.
Shoot for a three-to-one ratio starting out. You really can't afford any more risk than that when you're just getting your feet wet. Big losses can really make you step outside your comfort zone and put a lot of pressure on you to make up for that money lost. You're going to lose a lot, but if you're hitting your ratio, they won't matter to you, as you'll be coming out ahead, even if you have a couple bad days.
In fact, it is actually wise to take a day off if you experience a rough bout of day trading. Forcing yourself to trade every day can lead to boredom; and boredom leads to dumb trades, oftentimes. Being disciplined may not be as "fun" or glamorous as a day trader, but it produces the best results.
Be Prepared, but Go with your Gut
With all this talk about discipline, calculations and planning, it can be easy to become overwhelmed. Stock trading can produce a lot of second-guessing and overanalyzing, putting you almost in a trance. That's why it is important to have a balance of confidence and discipline. When the time comes, you must be able to come to a decision quickly, else risk missing a critical order. This comes with experience and the trust of your own strategy.
Stick to your plan and you can't hurt yourself from a timely order made in haste. The only way to do that, of course, is to trade with money that is already counted as excess, or a sum that you are ready to lose. This is known as risk capital. Never take your entire savings and put it on a "sure bet" because there's really no such thing. Also, putting all your eggs in one basket is already a terrible idea, anyways. You don't want to strike it big and win off of one trade. That is a strategy that says you're not really serious about being a day trader.
Beyond Basic Day Trading
Budgeting is integral to day trading. Take your total budget for trading and break it down to 10% portions, this will be your goal to stop at each day. Doing this allows for stacking up your risk capital to the point where you won't need to worry about missing out on a big order because you lost too much on the previous day's trading.
For maximum trading opportunities, keep your eyes on other avenues of opportunity, such as options, futures, and Forex assets. There will be some days where slow crawls of the stock market causes the mind to wander and attempt to squeeze blood out of a turnip. These other options can give you something to look at on your designated trading days.
As long as you're following your own rules, rather than making excuses and breaking them, you'll progress as a day trader and get a feel for more advanced techniques/analytics. Just don't bite off more than you can chew.
We will try our best to keep this blog full of knowledge nugets supported by our research from swingalpha.com