Day trading for beginners is exciting but can seem overwhelming. There is a lot to learn, and it can be hard to know what is essential and what is not.
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Day trading is defined as the both purchasing and selling a security within the same market day.
While day trading is appealing due to the quick profit potential, it does come with a great amount of risk.
Many people are also drawn to day trading because it can allow you to work from home and be your own boss.
However, just as with any other career it takes a lot of hard work and dedication to become consistently profitable.
Here are ten steps that will guarantee any beginner trader gets on the right track.
A stock – also called a share – is something that shows some part of ownership in a company. When you purchase a stock, you are, in essence, buying a small percentage of a company.
The term "stock market" is usually referring to one of the major indexes of the stock market. The NASDAQ Composite, Dow Jones Industrial Average, and S&P 500 are the major indexes in the United States. Stock indexes are just stocks that have been grouped together to make them easier to keep track of.
While most food markets invite all to come and buy, the stock market is a little different. You can only buy stocks through a licensed broker. A stockbroker basically buys a stock on your behalf, at your request.
A broker essentially buys and sells the stock you choose, on your behalf. They provide you with a platform and tools to make the trades. Usually, a broker makes their money by charging you a commission for every trade you place. Most brokers now, however, offer no commission trading.
This means you can trade most stocks for free without being charged. These brokers can make money other ways through lending money, and through different types of trades that still have commissions.
There are designated times that you can buy and sell in the American stock market, called the New York Stock Exchange (NYSE).
BUY/LONG- Buying a stock anticipating that it increases in value is called going long.
SELL/SHORT- Selling a stock anticipating that it decreases in value is called shorting.
DAY TRADING- Buying and selling the same stock on the same day. You have to buy and sell a stock for it to be considered a full trade.
SWING TRADING- Entering a trade, by either buying or selling, but not completing it. Swing traders hold on to stocks for days, weeks, or even longer.
OPEN- The price that a stock is at when the market opens.
ASK- The lowest price a seller is asking for a stock.
BID- The highest price a buyer is willing to pay for a stock.
STOP-LOSS-A target price at which you specify your trade to be closed to stop the loss of profit.
TAKE-PROFIT- A target profit price at which you specify your trade to be closed. The amount of money you want to make in a trade.
BEAR MARKET- A market that favors sellers, and is mostly trending down.
BULL MARKET- A market that favors the buyers, and is mostly trending up.
MOMO- Another way to say momentum, or to refer to the momentum day trading strategy.
FOMO - Fear of missing out. This refers to being afraid of missing a big trade or being upset that you did miss one.
BABYSITTING - This refers to holding onto a losing trade for an extended period of time while hoping it turns around.
One of the only books that I would recommend to all traders is The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies by Adam Grimes. It is a great book to help beginners really understand what is happening on the charts.
Many beginning day traders don't realize you can't just throw a hundred bucks into the stock market and trade with it as much as you want. Like we mentioned before, you have to go through brokers and follow specific rules.
The PDT rule, for example, discourages many new traders from continuing on the path as a day trader.
What is the PDT rule? One of the most important rules that affect traders is the PDT, or Pattern Day Trader Rule. This is a rule implemented by the Securities and Exchange Commission(SEC). This states that you can't make more than three trades a week in a margin account unless you have a balance of $25,000 or higher.
How do you avoid the PDT Rule? You can avoid the PDT rule by using a foreign stockbroker or by trading with $25,000 or more in your account. The problem is that U.S. brokers now how no commissions, and the foreign ones do. This means that when you use an international broker, you will have to pay each time you make a trade.
Things to Remember about Brokers:
The two basic account types that you can open with a broker are Margin and Cash.
Margin Account- You can trade with borrowed money. For example, if you only have $2000 in your account, you can buy $3000 worth of stock. It just borrows from your broker.
Cash Account- You can only trade with the amount of money you have in your account.
The PDT rule applies to both of these types of accounts until you have a minimum of $25,000 in the account. With a margin account, you can trade with borrowed money, but only have three full trades per week. With a cash account, you have unlimited trades with your own cash, but you have to wait a day for that before you can use that amount to trade again.
Paper trading allows you to practice trading the real stock market without using real money. However, to get the most out of paper trading, you have to treat it like it's real money. If you don't it just becomes a game. You want to make your paper trading experience the closest. One of the best and most commonly used platforms for Paper Trading is Think or Swim by TD Ameritrade.
Studying your trades will help you learn from your mistakes, and how to hopefully not repeat them. Traders study their trades and charts for the same reason that sports teams watch game film. You want to learn what you are doing right and wrong so that you can continually get better.
Things to consider when studying your trades:
Being honest with yourself and taking each trade seriously will help you learn from your mistakes and get better much faster.
Studying your trades can help you find the best trading strategies that work for you.
Momentum Trading: Finding stocks to trade that are the big movers of the day or have the most movement in price. Traders use technical analysis and metrics, such as volume and price range, to analyze big movers and if see if they will keep their momentum.
Reversal Trading: With reversal trading, you look for stocks that stretch to new highs or lows. The rubber band example is often used in trading. This example is that if a stock goes up and up, it must rest at some point and come back a little or a lot. Traders using this strategy look to take advantage of reversal, and enter the trade as the price goes the opposite way.
Pull Backs: A stock often has a few price pullbacks when it has or is gaining momentum. When trading pullbacks, you find a stock that is a big gainer for the day and way to enter a trade on its first couple pullbacks. It can get riskier as the stock has more pullbacks, as it's a sign that it may lose momentum and reverse.
Getting into the action and trading is the best way to learn. However, the second-best way and without risking your own money is to watch others do it. You can gain stock trading experience without the nerves and worries. We all learn how to do things through experience and trial and error.
The internet and YouTube have loads of free content related to the stock market, and people trading it live. The problem is there is a lot of fluff, total nonsense, and people specifically just wanting to sell you something.
It is good to watch and learn how others do things and what they are thinking while trading. Learning how people think while trading stocks can help you better predict what will happen next. Checking YouTube before the market opens each day can be a great way to find stocks to trade as well.
With all the useful videos, free webinars, and other info, everyone will try to sell you something. Most of these courses are expensive and unnecessary for success. They will probably help, no doubt, but don't waste too much on these courses. Take in everything you can, and realize that no one person has the secret to successful trading.
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”
Anyone can get lucky here and there, but you want consistency when learning to day trade stocks. To get consistent, you should consider making a trading plan.
Some things a Trading Plan may include:
The market is pretty chaotic, as you may know, or will soon learn. Planning your trades is critical to seeing past the roller coaster of emotions you may experience daily. If you do not prepare and plan properly day trading is just gambling. With no preparation, it is just like throwing your money into a slot machine. When this happens you are not learning, you are not improving, you are just hoping for success.
When you are planning a specific trade, you need to at least plan where you will have your stop-loss set. This is the price where you want to cut your losses and accept the trade as a losing one. The reason you want to set one is so that if the stock drops rapidly, you won't be in a panic trying to figure out what to do. Setting a take-profit will get your stock sold when it hits the target goal price.
The reason for setting stop-loss and take-profit is to reduce risk and help take the emotion out of it. Bad things can happen if you change plans mid-trade, due to emotion, and take too long making a decision.
It is impossible to always predict what the stock market is going to do next. To be a consistent and profitable day trader, however, you must know how you are going to react to what it does next.
Trading risk management is assessing trade risks so that you can figure out how to minimize or eliminate them.
Risk management is perhaps the most important thing to learn and to keep focused on as a trader. If you learn to manage your risk correctly, you can reduce the chance that you lose money or even blow up your account.
“Risk comes from not knowing what you’re doing.”
- Warren Buffett
A good general rule with money is never to invest more than you can afford to lose. When you feel you are ready to trade for real, keep track of how much you make or lose daily. Many successful traders have daily goals set for how much they can lose before they are done trading for the day. You have to accept this so that you don't get discouraged and quit or end up going all in.
Setting reasonable goals can help keep you excited and motivated for personal growth as a day trader. You can slowly increase your goals as you get better, or take a step back and slow down after a rough stretch.
Some of the basic goals traders set include:
Other, more personal goals may include:
For example, while most traders hope to be right on their trades 8 or 9 times out of 10. A more realistic goal is just to be profitable and be right 6 out of 10 times.
The odds are that most traders are not successful long term. You should always know the odds, but don't let them discourage you. Knowing the odds will help you keep your expectations realistic.
The reality is that most traders fail because they want it to be easy. Most failing traders make the same mistakes over and over.
Top Reasons Why Day Traders Fail
- Have Too High of Expectations
- Lack of Planning
- Give Up When They Don't Get Rich Quick
Your opponent may be other traders like yourself, and maybe some with a little more experience. Most of your toughest competition comes in the form of professional traders who have been trading successfully for years. It is essential to try to learn how others may think and how they react to certain things in the market.
It may sound silly or cliche, but most often you will find that you will be your own biggest opponent. You will find yourself asking, "why did I do that?", probably more than once. Whether you are risking too much or just not selling as the price falls and falls, it will happen.
“The most important quality for an investor is temperament, not intellect.”
You can sign up with a broker and download a trading platform in minutes. If being a consistently profitable day trader is what you want, start immersing yourself in the market. It is easy to get started and can be a very exciting and rewarding thing to be a part of.
Sticking with it doesn't mean you have to pour endless amounts of money into the market after losing time and time again. You have to be smart and find your pace. If it gets challenging don't give and keep pushing and learning every day. The stock market isn't always hot and easy to trade every day. Some days it is better not to trade and when you aren't feeling it simply watch instead. Remember there will be another trade if you miss one and that every single trader has days that they lose.
If there is something related to day trading that you don't understand, or haven't heard of, start researching it.
“I love quotes… but in the end, knowledge has to be converted to action or it’s worthless.”
- Tony Robbins
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