Day trading means taking advantage of same-day price fluctuations in stocks, futures, or forex. Learn more about becoming a day trader, reading charts and trading strategies.
To become a day trader you’ll first need to decide what markets– stocks, commodities or futures– you want to trade in and how much capital you need. You’ll need proper equipment and access to a trading platform. Day traders can see big price swings so you’ll need strategies like the 1% risk rule to manage risk. Lastly, you should practice trades using a demo account before jumping into live markets.
Its not easy to make money day trading and most day traders end up with a net loss. While other factors may influence the outcomes of your trades, statistically speaking, your success depends upon four numbers– how much risk you take on, how much you profit from winning trades, how many trades you make and how many of those you end up winning. Its more important to find the right balance of those factors with a higher amount of capital.
On a candlestick chart, each candlestick indicates the open, high, low, and close price for the time frame the trader has chosen. The top or bottom of the candlestick indicates the open price, depending on whether the asset moves higher or lower during the period. Thin lines above and below the candlestick– wicks or shadows—represent the movements above and below the open and close prices.
Best day trading stocks are those that have price volatility and robust trade volume. Volatility allows traders to take advantage of price movements while trade volume provides the opportunity to get in and out of positions quickly. You could trade on the stock’s price range over a defined time period or utilize a trending strategy to trade its general price direction.
If you’re starting out, consider practicing your strategies using a demo account or a trading simulator. You can find those at your brokerage or a trading platform such as NinjaTrader. Its an easy way to hone your skills without risking your money. It is recommended for amateur day traders to practice for at least three months with profitable demo performance before transitioning into live markets.
Day trading and swing trading are both fast paced trading strategies, but there are some key differences. Day traders may open and close multiple positions within the same day. Swing traders have a short to medium-term horizon with trades that take place over days, weeks or months. That means day trading has greater potential for risk and rewards and requires more active trader involvement.
Day traders can trade currency pairs in the foreign exchange (forex markets). Unlike day trading equities, there are no minimum capital requirements for forex day trading, and you could start with as little as $100. Forex markets are open 24-hours and offer higher leverage opportunities, but that also makes them more volatile with potential for substantial losses.
According to FINRA, a pattern day trader is someone who executes four or more day trades in five business days that exceed 6% of the total trades in their margin account. Pattern day traders are required to maintain a minimum $25,000 in the margin account they place their day trades in but they may trade up to four times the maintenance margin excess. Brokers may levy additional requirements.
A trailing stop loss is a type of day trading order that lets you set a maximum value or percentage of loss you can incur on a trade. If the security price rises or falls in your favor, the stop price moves with it. If the security price rises or falls against you, the stop stays in place.
A margin call occurs when a trader is told that their brokerage balance has dropped below the minimum equity amounts mandated by margin requirements. Traders who get a margin call must quickly deposit more cash or securities into their account. If they don't, the firm may begin liquidating the trader's positions to cover margin requirements.
Technical analysis is one way to analyze potential investments to determine if or when to buy or sell. It’s based on the idea that supply and demand affect the price of a security and that changes in it can forecast future movement. On a more granular level, technical analysis uses the study of past price movements in an effort to determine future price movements of a particular security or group of securities.
Scalping is a short-term trading method used to profit from the volume of trades placed rather than trying to get the most gain on each trade.
Relative strength is a measurement used by day-traders to evaluate the performance of a stock. It tells a trader how a stock's price trend compares to trends in the market, an index, or a stock.
A short position is a trading strategy where an investor aims to earn a profit from a falling share price. Investors can borrow shares from a brokerage firm in a margin account and sell them. Then, when the share price drops, they can buy the shares back at the lower price and return them to the broker, earning the difference in share price as profit.
Price action trading is a method of day trading where traders make decisions about trades based on price movements rather than on indicators derived from technical analysis.
Futures represent an agreement to buy or sell a specific quantity of a stock, security, or commodity at a set price on a certain date in the future. Short for "futures contracts," these agreements are legally binding. They must be fulfilled either by physical delivery or cash settlement.
Bollinger Bands are a technical indicator developed by John Bollinger. The indicator forms a channel around the price movements of an asset. The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend's direction, spot potential reversals and monitor volatility.
Points typically refer to futures trading. One point is the smallest price increment change that can occur on the left side of the decimal point. For example, S&P 500 E-Mini (ES) futures might experience a price change from 1314.00 to 1315.00, which is a price change of one point.
A penny stock, more formally known as a microcap stock, is a share of a company that typically has a market capitalization of less than $300 million. Nanocap stocks, also a type of penny stock, are issued by companies that typically have a market capitalization of less than $50 million. Penny stocks usually trade for less than $5 per share.
The risk/reward ratio, sometimes known as the R/R ratio, compares the potential profit of a trade to its potential loss.
A stop-market order is a type of stop-loss order designed to limit the amount of money a trader can lose on a single trade. It can be an order to buy or sell, and it will only trigger if the market price for that stock, security, or commodity hits the specified level.
Most day traders focus on the win rate or win/loss ratio. The allure is to eventually reach that stage where nearly all their trades are winners. Your win rate is how many trades you win out of all your trades. For example, if you make five trades a day and win three, your daily win rate is three of five or 60%.
The moving average bounce trading system looks past short-term ups and downs to find the general direction of a stock. It follows the "bounces" to find opportunities to make a winning trade as a stock moves back and forth in a trending direction.
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