Day trading refers to the act of buying and selling a financial instrument within the same trading day, or even multiple times over the course of a day. Taking advantage of small price movements can be lucrative if done correctly. Yet, it can be dangerous for beginners who do not have a well-thought-out strategy. 

In this article, we take a look at a few day trading tips traders should know. Make sure to keep reading below to learn more about this topic.

Gain knowledge

Aside from gaining knowledge of how day trading works and its procedures, day traders need to keep up with the latest stock market news and events that affect stock trading prices. This can include any interest rate plans, leading indicator announcements, and other economic, business, and financial news. 

As such, traders need to make sure to do their homework. It is best if they make a list of stocks they would like to trade. After making the list, they should keep themselves informed about the selected companies, their stocks, and general markets. This can be done by scanning business news and bookmarking reliable online news outlets.

Set aside funds

Traders should assess and commit to the amount of capital they are willing to risk on each trade. Many successful day traders usually risk less than 1% to 2% of their accounts per trade. For instance, if a trader has $40,000 in their trading account and is willing to risk 0.5% of their capital on each trade, their maximum less per trade would amount to $200. As always, traders need to make sure they mark down the amount of funds they can trade with and are prepared to lose.

Commit time

Day trading requires a lot of time, attention, and commitment to see things through. In fact, traders may need to give up most of their days to monitor, execute and plan their trades. As such, day trading should not be considered if a trader only has limited time to spare. 

As day trading requires a trader to track the markets and spot opportunities that can arise anytime during trading hours, being aware of what is happening in the markets and moving quickly are key to doing well with this strategy.

Start out small

For novice traders, they should start out small when day trading. Begin by focusing on a maximum of one to two stocks during a single session. After all, tracking and finding opportunities is easier with just a few stocks. Recently, it has also become increasingly common to trade fractional shares. That lets traders specify small dollar amounts that they wish to invest in.

Avoid penny stocks

While most traders are looking for deals and trades with low prices, it is best they stay away from penny stocks. These are stocks of a small company that trade for less than $5 per share. While some of them can be traded on large exchanges, most of them are traded over-the-counter (OTC). As a result, these stocks are often considered illiquid and the chances of succeeding with them are increasingly low. 

In fact, many stocks trading under $5 a share tend to become delisted from major stock exchanges and are then only tradable over-the-counter (OTC). Unless a trader is seasoned, experienced and has also done their research, it is best to steer clear of these.

Time any trades

Many orders placed by investors and traders begin to execute as soon as the markets open in the morning. This can contribute to price volatility. A seasoned investor may be able to recognise patterns as open and time orders to be able to take advantage of them. For beginners though, it may be better to read the market without making any moves for the first 15 to 20 minutes. 

The middles are typically less volatile. Then, movements will usually begin to pick up again toward the closing bell. Though rush hours tend to offer opportunities, it is usually safer for beginners to avoid going to them first.

Cut losses with limit orders

Traders also need to decide what type of orders they will use to enter and exit trades. For example, will they use market orders or limit orders? A market order is often executed at the best price available at the time, with no price guarantees. It is useful when a trader just wants to pop in and out of the market and does not care about getting filled at a specified price.

On the other hand, a limit order guarantees the price but not the execution. Limit orders can help traders trade with more precision and confidence because they are the ones who set the price at which their orders should be executed. A limit order can help cut any losses on reversals. However, if the market does not reach the desired price, then the order will not be filled, and a trader will simply maintain their position. 

More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.

Stay cool

With the stock market being so volatile and fluctuating often, there will be times when the stock markets may test traders’ nerves. As day traders, they need to learn to keep strong emotions such as greed, hope, and fear at bay. Overall, financial decisions should be made and governed by logic, and data, not emotion in the long run.

Stick to the trading plan

There is no doubt that successful day traders have to move fast, but they do not necessarily have to think fast. Why is that? Because they have likely developed a trading strategy far in advance, as well as cultivated the discipline to stick to it. It is important to follow any formulas closely rather than simply trying to chase potential profits. As such, traders should not let their emotions get the best of them and make them abandon their trading strategy. A simple mantra for day traders to remember is – plan your trade and trade your plan.

Deciding what and when to buy

What to buy

Day traders typically try to make money by taking advantage of minute price movements happening in individual assets (such as stocks, currencies, futures, options and more). They usually leverage large amounts of capital to do so. In deciding what to buy, a typical day trader looks for three things:

Liquidity: A security that is considered liquid allows traders to buy and sell it easily, and hopefully, at a good price. Liquidity is considered an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage or the difference between the expected price of a trade and the actual price. 

Volatility: This is a measure of the daily price range – the range in which a day trader operates. More volatility means greater potential for potential profit or loss.

Trading volume: This is a measure of the number of times a stock is bought and sold in a given time period. It is commonly known as the average daily trading volume. A high degree of volume showcases a lot of interest in a stock. An increase in a stock’s volume is often an indication of a price jump, either up or down.

When to buy

Once a trader knows the stocks they want to trade, they need to identify entry points for their trades. Tools that can help them include real-time news services, electronic communication networks (ECNs) and intraday candlestick charts.

Traders should define and write down the specific conditions in which they will enter a position. For instance, buying during an uptrend is not specific enough. Instead, try writing something more testable such as – buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend on the two-minute chart in the first two hours of the trading day.

Once a trader has a specific set of entry rules, they can scan more charts to see if their conditions are generated each day. If that is so, they have a potential entry point for a strategy.