With the proliferation of online stockbrokers and “do-it-yourself” investing apps, it seems everyone is getting into day trading. But if you’re thinking of giving it a go, be aware that day trading is risky and can lead to substantial losses.
You’ll need to understand key terms like bid, ask and margin, as well as a variety of strategies.
How to Get Started
Before you invest one dollar in day trading, take a step back and look at the bigger picture. Day trading is a risky endeavor and you should only risk money that you can afford to lose. It is not for everyone and, if you do not have nerves of steel, it might be best to skip it altogether.
If the thought of competing against professional traders in a crowded field for fractions of a penny per trade makes your skin crawl, you might consider a less-risky alternative. Instead of actively trading, you can follow the market passively by investing in a robo-advisor, which automatically manages your investment portfolio. These services track and match the performance of a stock market index and automatically rebalance to keep your portfolio within your chosen direction and risk comfort level.
Another thing to consider is the tax implications of day trading. It’s a good idea to talk to a financial advisor, accountant, or tax specialist before you start investing any money in this area. They will let you know how your profits will be treated in your particular country and state, and what qualifies as a trader’s income.
The first step in getting started with day trading is to find a broker that offers the kind of fast execution that you need. There are many different brokers out there, and most tend to focus on a certain niche. For example, some brokers are best for those who use options, and others are better for those interested in day trading. The broker you choose should offer direct market access so that you can get the best prices for your trades.
Aside from finding a broker, you also need to develop a consistent strategy. The most successful traders stick with one strategy and learn it well, rather than trying out lots of different methods at once. This way, they can focus on what works and discard what doesn’t.
Finally, you should check with your local or state securities regulator to make sure the broker you’re thinking of using is licensed to do business in your area. It’s not a good idea to trust someone who doesn’t have a solid track record.
Stocks to Trade
With more than 2,700 stocks listed on the New York Stock Exchange, it’s important to focus on the ones that meet your day trading strategy and goals. For beginners, it may help to narrow that number down to a maximum of one or two stocks per trading session. That makes it easier to track and spot opportunities.
A key consideration when selecting a stock is its liquidity, which refers to how easily the stock can be bought and sold. A stock with high liquidity is more likely to have low spreads, or the difference between the ask and bid prices for a share, and lower slippage, or the amount of price deviation from what you expect when placing a trade.
Another factor to consider is a stock’s volatility, which measures the amount of change in a stock price from one day to the next. Volatility provides the opportunity for larger profits, but also comes with the risk of greater losses.
Using technical analysis tools, many day traders identify price trends and buy or sell in line with those trends. The most successful day traders make their money on the winners and lose less on their losers, so it’s important to establish a stop loss limit when entering a trade. NerdWallet recommends a stop loss limit that’s a percentage of your total portfolio.
You’ll also need to decide what hours you’ll be able to trade, and how much time you can devote each day to the process. Some people find it more productive to spend just a couple of hours a day trading, and others are comfortable with an all-day schedule.
As a beginner, it’s a good idea to stay up to date on news, earnings announcements and economic reports to keep up with potential shifts in market sentiment that could affect certain stocks. And don’t forget to stay focused on your strategies, because the only guaranteed way to win is by making smart decisions. Losses are inevitable, but careful research, patience and a clear plan can help you minimize them. If a potential trade doesn’t meet your strategic criteria, don’t bother with it.
Options
A day trader must have a solid plan in place before making a single purchase. This includes which stocks to buy and sell, as well as how much money to invest. Knowledgeeager can help take the guesswork out of the equation.
The stock market is the most popular area for day trading because it is large and active, and commissions are typically low or nonexistent. However, a day trader can also trade bonds, futures, commodities and currencies. Regardless of which security to trade, it should offer two essential features: volatility and liquidity. Volatility is the degree to which a security’s price changes frequently, and liquidity is the amount of money available for buying and selling it. Both of these features are created by a combination of factors, including media coverage and investor sentiment.
Another key consideration is whether a specific security can make a profit, which depends on its long-term trend and current market momentum. A day trader can identify trends using technical analysis, which involves observing and plotting price movements. It can be done on paper or with software packages designed for this purpose. Traders can also use backtesting to predict how a strategy might perform in the future, although past performance is not always indicative of future results.
Many day traders find success by identifying and capitalizing on a breakout. This is when a financial instrument surges above a significant area of resistance, such as a consolidation point or downtrend line. A successful breakout must be accompanied by a strong volume surge, as it is easier to sustain a price rally when there is lots of trading activity.
Another common strategy is to buy a security after it has suffered a pullback, which is the extent to which a security retreats from a major resistance level. A pullback can be triggered by many different factors, such as a weak earnings report or negative investor sentiment. A trader can capitalize on a pullback by purchasing the security after it reaches a support level in the range of its primary uptrend line or moving average. This type of entry is often considered less risky than jumping straight into a rising market.
Futures
If you’re ready to expand your day trading portfolio, consider investing in futures. Futures are contracts between two parties whereby the buyer and seller agree to exchange an underlying market for a fixed price at some time in the future. Investors trade futures to speculate on price movement or hedge against exposure to a specific market. Futures can be traded on a broad range of markets including stock indexes, energy, currencies, interest rates and commodities like grain, forestry and livestock.
While trading in futures can be an exciting way to invest, it is important to have a clear understanding of the basics before making your first trade. It is also vital to arrange for the margin money requirement, which can be between 5-10 percent of the contract value, and ensure you have access to an online broker that offers a simulated trading account where you can practice your skills before investing real funds.
You can choose to go long or short in a futures market, and with CFDs, you can gain exposure to both hard and soft commodities such as gold, wheat and oil. We have a wide range of futures to choose from, and you can find the right one for your trading style by considering factors such as volatility and whether it’s suitable for day trading.
The key to successful futures trading is to keep an eye on the expiry date and to roll over your positions into longer-dated ones as they approach. If you don’t do this and you take physical delivery of a commodity, you could face significant losses.
You can use stop orders and limits to manage your risk, and our tastytrade platform gives you the ability to place them directly from your deal ticket. We offer a variety of options, including normal, trailing and guaranteed stops. With our advanced technologies, you can also monitor your trades and get insights from the experts in our Trading Insights section. In addition, our after-hours markets give you the opportunity to trade futures even when underlying markets are closed. This can provide valuable hedging opportunities, such as going long on E-mini S&P 500 futures when tech stocks in the Nasdaq 100 report better-than-expected earnings after the market close.
