Day trading is the practice of buying and selling stocks on the same day. The goal of day trading is to earn small profits with each trade, and eventually these trades compound over time. Essentially, day traders attempt to predict the market in order to buy in at a low price and sell at a high price.
This is a very hard skill to master and takes a lot of research and knowledge to be able to not only be able to do this accurately but also consistently. Day trading and investing are often mixed up. However, these are very different from each other. Investors rely on the market to improve over to make long term profits. On the other hand, day traders aren’t generally interested in the way the market is moving. Instead, day traders focus on which stocks offer the most potential increase and the least potential for downside, on the day of course. Investors mainly follow the simple rule of “buy and hold” while day traders preach “buy low, sell high”. Day trading is very appealing to people because it offers a way to quickly make money from the comfort of your home.
“Predicting” the Market
In order to “predict” the market, day traders follow simple patterns of a specific stock in an attempt to buy the stock at the lowest point possible and sell the stock at the highest point possible. The most common focus of day traders is on previous resistance and support levels. When a stock hits its resistance, it means that this stock has previously had trouble breaking past this price and has shown that at this price, traders do not believe a stock is worth more than said resistance level. In other words, when a stock reaches a previous resistance level, it will likely drop. On the other hand, when a stock hits its previous support level, it means that this stock has previously increased when the stock is at this price point. Therefore, the stock price will likely increase.
However, just because a stock reaches a previous resistance or support, this does not mean that the previous patterns will be followed. A stock may increase at its resistance level and continue to decrease at its support level. This is where risk management comes in.
As a day trader, managing risks is one of the most important strategies that will determine how profitable a day in the market will be. The basic rule of thumb that many experienced day traders follow is the 3:1 rule. This means that wherever entering a trade, you calculate the potential profit and loss of the trade. This can be done using previous support and resistance levels. If the potential profit to potential loss of the trade is not at least a 3:1 ratio, you should consider trading another stock.
Another thing one can do to manage risks is to set a stop loss when entering a trade. A stop loss is just one way to buy a stock. When one sets a stop loss, the stock is sold at the price the stop loss is set at. For example, if someone bought a stock at $1.00 and set a stop limit at $.90, the stock would automatically sell if the stock hits $.90. The purpose of this is to cut losses and limit the money lost on trades that have gone south. Losses in the stock market are inevitable, and one way to minimize losses is to manage your risks.
There are many platforms to begin your day trading career like TD Ameritrade, Fidelity, E*Trade, Interactive Broker, and much more. However, it is recommended that beginner day traders start out with paper trading instead of trading with real money.
Paper trading, or simulation trading, is an excellent way for beginners to prove to themselves that they can profit off of day trading as well as practice different strategies and techniques they plan on using while trading, with essentially no risk. Paper traders can even participate in a virtual stock market game with other people. While paper trading, the trader is able to trade stocks without the risk of losing money. Once you’ve gained some experience with paper trading, traders can make the switch to live trading and profit off their trades.