Just imagine how great your life would be if you could get up when you felt like it, analyze the financial markets and place a few trades each day, and watch the profits roll in – all from the comfort of your home. It may sound far-fetched, but if you master the skills of day trading and build a solid portfolio, you could achieve financial freedom and live life by your own rules in just a few years. Here are six day trading tips for first timers.
Just because a lot of people seem to be making money on the financial markets, it doesn’t mean that you can register for a trading account and make a fortune overnight. In order to buy and sell at the right time, you need to have a firm understanding of financial markets and how they function. Without this knowledge, you’ll just be guessing, and gambling your capital on random trades. Fortunately, there is a wealth of knowledge about financial markets available online, from investment websites to YouTube tutorials and online courses – choose the information source that works best for you and become an expert before you start trading.
Once you understand how the markets work, you’ll want to put your knowledge to the test by setting up some real trades and measuring your investment performance. When you’re first starting out, it’s best to place virtual trades (trades that are placed without using real money, also known as stock-picking) and see how you do for the first few weeks. Patience and careful planning are essential when you’re first starting out, so don’t be disappointed if your first virtual trades aren’t that successful. Analyze your trades, see what you did right and wrong, get the information and advice you need to improve, and come back to the markets better prepared.
There are two extremes you’ll want to avoid when it comes to trading strategy: placing trades impulsively because you want to ‘see some action’ in your portfolio on a given day, and analyzing every chart, graph, corporate press release and political briefing without acting on the information they contain. In the first scenario, you’ll probably make impulsive trading decisions that will make you lose money, while the second extreme will result in paralysis through analysis and you’ll end up not making money because you didn’t place your trade in time. Instead, spend your time studying the markets until you see a unique opportunity – and then act on it.
Depending on the type of trades you like to do, be they forex, commodities, or shares and equities, you’ll need to understand the level of risk that’s involved in each type of trade and decide how much you can tolerate. Over time, a carefully-planned trading strategy should allow you to maintain a risk to reward ratio of between 3:1 and 5:1, allowing you to lose small and win big. This should ensure that your gains outweigh your losses and allow your portfolio to grow over time.
Since trading is fully automated and takes place online, there are a number of useful tools that your trading platform will offer you to control your gains and losses. A feature-rich platform, like the one offered by Stern Options includes a very useful tool known as a stop loss system. Simply put, when you buy equities or forex using the platform, you can set up an automatic sell order that will protect you from losses if the trade turns negative.
For example, if you buy a share at $5.50 and set the stop loss level at $4, the system will automatically sell the share if it falls below $4. This system is a lifesaver for busy traders who may not be able to track all of their trades throughout the day, and it will also protect your portfolio at times when the markets become volatile.
There are four famous tactics used by day traders to make regular profits: scalping, fading, momentum, and daily pivots. Scalping is a simple strategy, where you sell a share as soon as it moves higher than the price you paid for it. The logic behind this technique is that you’ve made money on the trade and it’s best to bank your profits. Scalping can be an effective strategy, but make sure that fees and commissions don’t wipe out the profits you make on each small trade.
Fading is a form of shorting (or betting against the market) where you short a stock as its price rises, assuming that it has been overbought and will return to a lower price level on the same day. This strategy can also be effective, except when a share surges and stays at a higher level for days or weeks at a time.
Momentum is a strategy that can be summed up by the phrase “a rising tide lifts all ships”. Basically, when good economic and political news is released, the markets tend to rise as traders become optimistic. Similarly, bad news tends to depress the markets for a few days. Forex traders should be careful when using momentum, because bad economic news can sometimes cause currencies to strengthen as the equities markets weaken.
Daily pivots take advantage of the up-and-down motion that most stock prices display during the course of a trading day. By buying when the share is at its lowest and selling when it rises, daily pivots allow you to make and bank profits each day. This is similar to the strategy used in scalping.
Now that we’ve covered the basics of day trading, you’re free to take up the challenge. Start out by learning how the markets operate, read up on tried-and-true trading methods, and make a few virtual trades using the systems that appeal to you the most. When you’re ready, choose a small amount of money that you’re willing to invest at a higher risk level, and you can start placing your first day trades. Here’s to your success as a day trader on the financial markets.