7 Best Day Trading Strategies for Beginners - Step-by-Step Guide

What is Day Trading?

Day Trading can be defined as the process of buying and selling stocks or assets within the same day. This can happen in any marketplace, but it is most common in "Stock Exchange" and "Foreign Exchange Market" (Forex).

Investing money can be an aggressive and frightening task for the beginners. Traders buy and sell securities within the same day in order earn a profit on small price variances. It is one of the risky methods of placing your money into resources like foreign currency and shares.

Day Trading can be defined as the method of earning a quick profit with a higher risk. The joy of this type of trading is that the benefit can be incomparably more considerable than the traditional forms of investments.

Day Trading started in the UK in the year 1974. It can be a risky task for those people who are new or have less experience in the investment industry.

It can be performed in any commercial centre like Foreign Exchange Market and Stock Market or can be done online by having an online trading account, they use modern approaches and leverages to benefit from a small price in the marketplace.

Not everybody is able to day trade and of those who lose money may stay in the game and not recognise that they are not able to win.

Human life is full of experiences and learning. Similarly, the investor tends to learn every day. However, when it comes to investors, the main question is how they learn.

Types of Day Trader:

Unlike financial advisors, there are two divisions of day traders: one consists of traders who work alone, and other consists of traders who work for some organization.

Institutional Traders:

Day traders who work for a large institution have access to various resources like leverage, capital and dealing desk. These day traders can make benefit by using computer-assisted trading opportunities. The assets to which they have access allows them to benefit from less unstable trades.

Large organisation traders manage dealing desk and use technical analysis to produce a high profit. Day traders expect to purchase stocks at low price and sell at high price.

Individual Traders (or Retail Traders):

Individual traders work for themselves, or in a partnership. They usually operate with their own money. They can also borrow money from other people and may use that money for trading. Retail traders mainly spend the whole day trading online.

Requirements for Day Trading:

Here are some essential requirements for day trading:

Market Knowledge: One should have sufficient knowledge and information of the market. A person who wishes to go for day trading without any understanding of the market frequently results in losing cash.

Adequate Capital: In trading, risk capital has vital importance. Day trading is mostly accomplished by using risk capital. Loss of risk capital can be bear by the investor.

A Great Strategy: Day Trading requires a grand strategy and a present mind. There are many unique techniques that informal investors can take advantage of, like trading news, swing or long-term trading and computer-assisted trading, etc. These approaches are refined until they are compatible for financial benefits and prevent losses.

Characteristics of a Day Trader:

Real-Time Analytical Capability:

To be an active Day trader, you must have the capacity to explore the market rapidly, and when a high rate presents, you should perform exchange of stocks with speed and certainty.

Day Traders must have the capacity to deal with trade and manage risk and reward accordingly. It can be more enthusiastic than different sorts of exchanges.

Resources:

Day traders need to have specific characteristics and should have access to particular resources, information and involvement in the business sectors. They must be familiar with market essentials.

Trading Plan & Strategy:

Day Trading requires a trading plan and a great strategy for success. Most business plans address short and long-term objectives, capital reinvestment, matrices and reporting. Traders should isolate themselves from their sentiments and should never act excitedly.

Electronic Communication Systems:

Day Trading requires modern electronic communication systems. High-Speed Networks and fast computers. Numerous informal investors utilise analytical software to look for stock rates, execute the trades and oversee accounts.

Institutional traders work with different traders and PC loaded exchanging rooms. Retail traders work from home or their workplaces.

Day Trading is a full-time job. As a part-time job, it is conceivable, yet it is a worrying and risky task because one cannot update himself from the current market situation and rates.

Day Trading Strategies

Day Trading is one of the most challenging tasks which require perfect trading plans and methodologies. Success in day trading demands mental focus, analysis and technical precision. The key points for making continuous progress demands a lot of planning and constant analysis of graphs, charts and price movements.

Most of the time people try to follow many different strategies at the same time which results in loss of money. Day Trading demands close attention on the stock market. Attempting to process huge pieces of data is hard, and will divert your attention from your methodology. Your strategy wouldn’t remain effective.

While you want to implement a strategy that works for you, try to follow the same planning throughout the day without any modifications. Most of the time beginners lose money when they try to put together their own approach.

Following are best trading strategies which are used by most of the day traders:

1. Scalping:

In Scalping, a trader or a scalper buys or sells stocks more than once, or sometimes even hundreds of times a day. A trader using a scalping method usually deals with very large volumes of shares.

These types of traders stay very active, and the reason is that they aim to make multiple small profits of a large amount of trades and that these small profits sum up to big profit at the end of the day.

2. Daily Pivots:

Daily Pivots is most commonly used trading strategy. Pivot points are used to determine the support and resistance level. The Pivots points are important to determine the trend of the overall market, the entry point by analysing graphs, tables and previous records. Pivot Point is calculated using the following formula:

Central Pivot Point (P) = (High + Low + Close) / 3

The high, low and closing prices are taken from the previous trading day.

3. Fading:

Fading is a counter-trend trading approach in which the trader will be buying when the prices are falling, and selling when the prices are rising. This investment strategy requires the trader to go completely against the trend.

This methodology can be beneficial for day traders, but this strategy is based on some insights which are as follows:

  • Overbuy of shares in the market.
  • Early buyers those want to gain maximum profit.

4. Analyzing, Tweaking Trading Strategies:

In the beginning, new day trader thinks that he can make the profit with insignificant efforts and strategies, but in reality, day trading is very complicated. By implementing consistent and well-defined methods they can increase the chance of success. In this strategy, the trader analyses the profit and loss rates.

Evaluation of tweaking performance in day trading is quite challenging. Most informal investors study the rates of profit and losses and draw their result on the graph. By analysing the graphs statistics, they make their decisions about the market.

5. Momentum Reversal Trading Strategy:

The strategy works by examining the combination of technical analysis and market fundamentals. It requires a broker to examine traded currency to build up mid to long haul trend.

This mechanism uses the information of price moves and values of market reversals. The system permits the trader to enter the market when the price is low and gives a considerable benefit potential through money management.

All exchanges are planned and decided in advance. The system functions admirably on all significant US Dollar crosses. It creates between 1-5 signals in each month. All exchanges are entered and held for several weeks. The Momentum Reversal Trading Strategy has been adopted for the last two years.

This methodology utilises a couple of indicators which are as follows:

  • Fibonacci retracements
  • Stochastic Oscillator (multi-time span)

After building your potentiality and long-haul drift through commitments of traders report, charts, diagrams and search for price inversion stage.

To define the price reversal status trader has to cut apart the price on diagrams first and answer some straightforward questions like:

  • Is the market price falling or not?
  • Is the graph showing over-bought or over-sold?

6. Heikin-Ashi Candles:

Heikin-Ashi candles is somewhat an extraordinary method for reviewing the business sectors. Heikin-Ashi policy uses the concepts of the candle in which the value of candle is ascertained by analysing previous candle chart patterns. The price action of each candle is influenced by the earlier candle value. This chart is somewhat slower as compared to candle outline chart.

On the diagram below; bullish candles are shown in green and bearish candles in red.

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7. Forex Trading Technique:

Forex trading techniques are mostly based on technical analysis, chart patterns, fundamental analysis or news based to plot whether to buy or sell a currency pair at the given time frame. These strategies can be either automated or be created manually for trading signals that will initiate the buying and selling.

Manual buying and selling will require the forex trader to sit continuously in front of the computer and watch for trading opportunities whereas in automation he can develop a particular algorithm which will automatically find trading signals and execute the trade in the forex market.

Some of the essential components of an effective forex trading strategy are Position sizing, Selecting the correct currency pair, Entry and Exits points & good tactics.

Pros of Day Trading

  • The significant advantage of Day Trading is that one can earn a large amount of money but the risk factors cannot be ignored.
  • One can make a profit before the day gets over. For earning hyped profit one has to envision the internal workings of the market. Having a well-developed methodology and trading capabilities one can build profits through leverage.
  • It takes capital to make a profit. Utilizing a lot of money to make smaller exchanges expands potential returns.

Cons of Day Trading:

  • Day traders play a huge role in the commercial market. Day Trading has a high-risk factor. There is never an assurance that you will make profit.
  • According to the U.S. Securities and Exchange Commission, Day traders normally endure great monetary losses in their initial months of trading.
  • Day Trading is costly. They requires expensive software, tools and the high-end PCs to recognise the price fluctuation and get the essential money related data.
  • Another negative side of day trading is that your profit is dependent on the present market condition.
  • At the point when the market is in an unsettling period, no upward or downward fluctuation of money takes place, then the chances of losing money increases.
  • It is a high-weight, distressing task that takes training and experience.
  • The greatest disadvantage is that it requires minute-to-minute details of the market. One has to analyse the market and has to make decisions rapidly. It’s troublesome for a beginner, that’s why most informal investors lose cash. It’s difficult because their timetable doesn't permit it. It requires split-second planning and execution. It doesn't oblige those people who are moderate in settling on choices and commitments.
  • Day Trading can be exceptionally exhausting! When the prices of stocks are moving quickly, Day trader has to make quick choices. The greater part of their time is spent sitting and simply watching the market position doing nothing significant. One of the drastic facts about day trading is that you see your benefit and loss proclamation, fluctuating up or down rapidly, and have the brutality of the time barriers.

Manhani and Bernhardt (2007), experienced that speculators earn profits while the new one continues to lose but the total performance must be positive. Moreover, it should also represent upper bound when it comes to returns in day trading.

To understand the logic behind this statement, let’s take an example. Suppose every year there are 21 or more new traders trading stocks. Out of those 21 traders, only 1 is skilled which means 20 investors are unskilled.

The unskilled traders work for almost a year and after losing $1, they decide to quit. On the other hand, the skilled experienced traders continue to trade for nearly 10 years, making $1 every year and then quits. This makes the total profit of the inexperienced traders every year -$10 since the skilled ones traded in the market longer than the unskilled ones. The skilled experienced traders are responsible for the bigger fraction of the active experienced traders (10/30), while the unskilled ones have a lower fraction (1/21).

For the new speculator, the profit for the expected lifetime is (1/20)$10+(20/21)(-$1)=-$0.476. It is important to note that the total annual profit when divided by the total number of new speculators every year = the profits of expected lifetime.

Note that aggregate annual profits divided by the number of new traders each year are equal to expected lifetime profits ( $10/21 =-$ 0.476). Also, the total per annum profit divided by the total number of speculator in that year 10/30 = -$ 0.333) are same in sign but the magnitude is lower than the expected profit.

Trading Tips from Professionals

If you are a stock trading beginner and want to try your luck in Day Trading (however, we do not recommend it because you will probably lose money) you should ensure that you use stop-loss feature and also trade only products which you understand and are traded on real exchanges like NYSE, Xetra, CME, Globex, Comex, Eurex etc.

You should only invest in products which you completely understand and with established rules like Stocks, Bonds, Futures or Plain Vanilla Options. Special products which can only be traded with the party who has issued the product (and only traded for the price set by the issuing party) are not in favour of the trader.

On non-exchange regulated trading products (this is common for FX, Binary Options or CFD) the opposite party can ask any price for the product. For example, when the real Futures Gold Contract trades at 1399/1400 at the CME, the opposing party in the non-regulated market will give a similar price but a so-called "dealer" or "backend plugin" will change the price to any price against the favour of the trader.

In a non-regulated environment, the stock broker might change the Gold price to 1398 precisely in the second when you sell and to 1402 just in the second when you buy (against the 1399/1400 in our example). It will be hard for you to understand this because the price movements are fast and you would need a detailed analysis to understand this.

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