Basics of Day Trading

If you’ve ever considered day trading stocks, then you’ve probably thought about the rewards that can be achieved and the benefits that working for yourself has to offer. At some point in your dreams, however, you will also have realized there is a real risk of losing money. Whilst that is certainly true this risk can be minimized, and your profit maximized, by being properly prepared and following a few basic rules.

The first thing to realize is that day trading is a job, not a hobby. You can’t just pick it up and put it down when you feel like it. Sure, you need to build some winning trading strategies, but you also need discipline and commitment. You need to work at it and separate it from your ‘real’ life. Just as if it were the job that you travel to every day.

So you need a dedicated space – your office – that’s set up just for you. Make sure you feel comfortable there, and design the layout with you in mind, even down to the color of the walls.

Have a great internet connection – a second line in as an emergency back-up is always a good policy – and powerful computers on which to run your charts and trade execution system. While we’re discussing systems for day trading, do your research and find the best one for you. Give consideration to what markets you’ll be using and the support you’ll receive.

Once you’ve designed and built your office (dedicated to your work, remember, not a playroom for the kids) and you’ve got your internet and computers up and running (don’t forget a firewall and antivirus protection), then it’s time to think about what else you need to be a winning trader.

Perhaps the biggest reason for failure in this lucrative business is lack of capital. At the outset of your new career trading stocks, you need to ensure you have enough cash in your account to cover your living expenses while you’re perfecting stock picking and trading.

You need starting-out capital, and then there’s the broker margin that will be required to support your trading activity. If you’ve got all these adequately covered, then you’ll be more relaxed and make better trading decisions. You’ll avoid the mistake of chasing the fast buck.

When first starting out, you’ll need to build up experience to hone your stock trading strategies. You wouldn’t expect a person, who has never even looked under the hood of a car, to fix the carburetor at the first attempt, so don’t expect to make that first million on your first trading day. It takes time, education, and experience to learn the business, though sticking to the basics is an essential first step.

There are plenty of courses and other ways to perfect your ability, including simulators that give you ‘real time’ experience of trading. These are great tools, as they allow you to learn how to use different order types and integrate them into your stock trading strategies without losing a dime.

When you’re at ease with trading on a simulator, then you can move over to the live trading environment, better informed and with a greater chance of success.

Many day traders continue to use trading simulators to test new day trading strategies, or hone existing ones. They succeed when they do this because they record everything, even down to how they feel when placing trades, so that they can analyze and perfect. Some traders won’t trade at certain times of the day, because their simulated trades have shown that every time they do so they lose money! Trading success takes that level of detail.

When considering how you are going to earn your money day trading, you’ll need to build your stock strategies. This means gaining the experience to know what type of trading you are best suited to, and understanding how and why your strategy works. The first thing to note here is that, in the majority, day traders use technical analysis – examining past performance and looking for trading patterns to predict share price movements on charts – to pick and time their trades.

Some strategies involve placing simultaneous buy and sell orders, attempting to trade little and often both ways. Should you employ this type of strategy, then you’ll be acting like a market maker and generally your stock position will be small. Market making is lower risk, but also lower margin. It requires hard work and a disciplined approach.

Other traders prefer to focus on buy and selling within an identified range. On charts, levels of support are identified at which to buy stock, and resistance levels are used to trigger sell orders. This type of strategy offers larger margins than market making, but if the stock breaks up or down through levels of resistance and support then losses can be larger, too. Concentration is the key here.

Gap traders exploit stocks that have seen large price moves with little to no volume (for example after the announcement of results), and swing traders seek to profit from a reversal of trend.

Both gap traders and swing traders might have an open position for minutes, hours, or a few days, as will position traders, who look at longer term chart patterns, possibly in conjunction with stock fundamentals.

Position traders will very often augment their trading profits by employing one or more of the other strategies mentioned and trading around the position.

So, summarizing the essentials, you need discipline, concentration, and adequate capital, a great office space with fast and high powered computers, and strategies that you work at and perfect by maintaining and analyzing trading records.

If you keep to these day trading basics, then you’ll have a rewarding career as a day trader, with your risks kept to a minimum.

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