Day trading consists of buying and selling a financial instrument on the same day or even several times during a day. You have to know how to take advantage of small price movements in order to create a lucrative momentum. But it can be a dangerous game to play for beginners or people without a well thought-out strategy. Day trading is only profitable when traders take it seriously. It’s not a simple game. You can’t day trade without understanding how it works. You have to do your research and learn your way round the financial markets before you start. You also have to think of day trading as a job, not a hobby. So, treat it like what it is. Be diligent, focused and objective, and let go of your emotions. In this article, we will help you to decipher the mysteries of day trading.

What makes day trading difficult?

Day trading requires a lot of practice and skill, and there are several factors that can make the process difficult. First of all, you should be aware that you are up against professionals whose careers revolve around trading. These people have access to the best technologies and connections in the industry. So even if they fail, they are conditioned to succeed in the end. They are highly experienced experts in the field. And you charging in without thinking just means more profit for them.

Remember that you will also have to pay taxes on any gains you make. So ultimately, what you make is not the net value of what remains in your portfolio. So be aware that a few losses can wipe out all your gains.

Also, as a starter day trader, you may experience emotional and psychological fluctuations. These can cause you to make rash decisions and lose money. Professional traders are generally able to control their emotions. This allows them to protect the money they put on the line and stick to their trading strategies. But as a starter day trader, you are investing your own capital, so you may get carried away by your emotions more easily. However, what day trading requires is great stability and emotional control. Fortunately, you can learn to deal with this, but it takes time and most importantly, learning to let go. This is not easy when betting your own money.

Deciding what and when to buy

Day traders try to make money by exploiting minute price movements in individual assets (shares, currencies, futures and options). They usually do this by raising large amounts of capital in order to achieve meaningful gains. When deciding what to focus on, a seasoned day trader looks for three things:

• Liquidity: This allows you to enter and exit a share at a good price. For example, this includes tight spreads (or the difference between the bidding and asking price of a share) with small slippages (or the difference between the expected price of a trade and the actual price).

• Volatility: This is simply a measure of the expected range of a daily price, i.e. the range within which a day trader operates. More volatility means greater profits or losses.

• Trading volume: This is a measure of the number of times a security is bought and sold in a given time period, more commonly known as the average daily trading volume. A high volume indicates great interest in a security. An increase in the volume of a share is often the sign of an approaching price movement, upwards or downwards.

Identifying entry points

Once you know what type of securities or other assets you are looking for, you must learn to identify the entry points, i.e., when exactly you will invest. Follow the news services in real time. The news can indeed cause shares to move. It is therefore important to subscribe to services that will inform you when news likely to cause the financial markets to move is published. This will allow you to define some of your entry points.

Deciding when to sell

There are several ways to exit a profit-making position, including trailing stops and profit targets. Profit targets are the most common exit method, which involves waiting for the profit of a trade to reach a pre-determined level. Some common price target strategies are:

Scalping: This is one of the most popular strategies. This involves selling almost as soon as a trade becomes profitable. The target is essentially “You have made money on this trade”.

Fading: This involves selling shares after a series of rapid upward movements. It is based on the assumption that either the shares are overvalued, that the first buyers are ready to start collecting their profits, or that existing buyers are scared for whatever reason. Although risky, this strategy can be extremely rewarding.

Daily pivots: This strategy consists of taking advantage of the daily volatility of a security. This is achieved by trying to buy at today’s low price and sell at today’s high price.

Momentum: This strategy usually involves trading based on the news or finding strong trend movements backed by a high volume. A momentum trader will buy based on the news and follow a trend until it shows signs of a reversal.

Just as with your entry point, you should define exactly how you will exit your trades before entering them. The exit criteria must be specific enough to be replicable and testable.

How can you limit losses in day trading?

To limit losses in day trading, you must set stop losses. Define exactly how you will control the risk of your trades. The strategy consists of defining two stop losses:

An actual stop loss placed at a certain price level that suits your risk tolerance. This is the actual maximum amount of money that you will allow yourself to lose on each trade.

A mental stop loss set at the point when there is a significant threat of breaching your entry criteria. This means that if the trade takes an unexpected turn, you will immediately exit your position.

Whatever your decision, the exit criteria should be specific enough to be testable and repeatable. It is also important to set a maximum loss per day that you can afford to bear, both financially and mentally. In addition, you should always stick to your trading plan and your limits.

This means that once you have defined your method for entering trades and where you position a stop loss, you can assess whether the potential strategy matches your risk limit. If the strategy puts you at too much risk, you need to modify the strategy in some way in order to reduce the risk. And if the strategy is within your risk limit, the test begins.

Basic strategies for day trading

Once you have mastered certain techniques, developed your own trading style, and determined what your end goals are, there are a number of strategies you can use to help you in your search for profits. Here are some popular techniques you can use.

• Following the trend: Anyone who follows the trend will buy when prices rise or sell short when prices fall. The assumption underpinning this is that prices that have steadily risen or fallen will continue to do so.

• Investing against the grain: This strategy assumes that the rise in prices will reverse and decrease. We buy when the trend is downwards or sell short while the trend is upwards, in the hope that the trend will change.

• Use scalping: This trading style involves exploiting small price differences. This technique normally involves entering and exiting a position quickly, within minutes or even seconds.

• Trading based on the news: Investors using this strategy will buy when good news comes in or short sell when there is bad news. This can involve greater volatility, which can lead to greater profits or losses.

Conclusion to this article on day trading

Day trading is difficult to master. It takes time, skill and discipline. Many who try to day trade fail, but the techniques and guidelines outlined above can help you to create a profitable strategy. With enough practice and a consistent assessment of your performance, you can dramatically improve your chances of beating the odds.
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