The truth about day trading

An active intraday trading strategy is called day trading and involves opening and closing positions throughout the same day. This means that any transactions made are not kept for an extended period beyond the closing bell for the stock market or for longer than one day for other markets. The intention is to benefit by exploiting the short-term price fluctuations of the securities being traded. Day traders frequently consult charts and technical indicators.

For individuals who can establish profitable trading strategies and master essential strategy execution, day trading can be very lucrative. One of the main advantages of day trading is the capacity to leverage capital through derivatives or a margin account, which allows traders to trade many assets with a relatively small sum of capital. Day trading offers the chance to generate gains quickly in a short time frame.

But it’s vital to remember that day trading also involves many risks. Because positions are opened and closed during the same trading day, the markets can fluctuate greatly. For this reason, to be successful, day traders must have a thorough grasp of the markets, a clearly defined trading plan, a system with an edge, and sound risk management.

Overview of the topics covered in this post

The ultimate day trading strategies guide for beginners will cover a wide range of topics to help new traders understand the basics of day trading and develop the skills they need to be successful. Some of the key topics that will be covered include:

  1. Understanding the market: This section will provide an overview of the different types of markets that are available for day trading, such as forex, stocks, options, etc. It will also cover how to read charts, identify trends, and use technical indicators to make trading decisions.
  2. Setting up a trading plan: This section will cover the importance of having a well-defined trading plan and how to create one. It will discuss the importance of setting clear trading goals, a risk management strategy, and how to create a trading schedule and stick to it. Additionally, this section will cover performing a risk/reward analysis and the setting stop-loss and take-profit orders.
  3. Strategies for beginners: This section will provide an in-depth look at several trading strategies that are suitable for beginners, such as breakout trading, moving average crossover, and support and resistance. It will explain how to implement each strategy, as well as the pros and cons of each one.
  4. Common mistakes and how to avoid them: This section will cover some of the most common mistakes that day traders make, such as over-leveraging, holding on to losing positions for too long, and failing to stick to a trading plan. It will also discuss how to avoid these mistakes to increase the chances of success.
  5. Conclusion: This section will summarize the key points covered in the post and provide a reminder to keep learning and staying up to date with the market. It will also encourage new traders to implement the strategies and create their trading systems.

1. Understanding the Market

Types of markets (forex, stocks, options, etc.)

Traders can participate in several different types of markets, each with unique characteristics and risks. Some of the most popular markets for day trading include:

  1. Forex: The foreign exchange market, also known as the forex market, is the world’s largest and most liquid financial market. It’s a decentralized market where currencies from different countries are traded against each other. The forex market is open 24 hours a day, five days a week, making it an attractive market for day traders.
  2. Stocks: The stock market is a market where shares of publicly traded companies are bought and sold. Day traders can buy and sell stocks on various exchanges, such as the NYSE, NASDAQ, and AMEX. The stock market is open during regular business hours, making it less attractive for traders who want to trade outside of normal working hours.
  3. Options: An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a specific date. Options trading can be complex and risky, but it can also offer high returns if done correctly. Day traders can buy and sell options on various exchanges.
  4. Futures: A futures contract is an agreement to buy or sell an underlying asset at a specific price on a specific date in the future. Futures markets can be highly volatile and risky, but they also offer the potential for large returns. Day traders can buy and sell futures contracts on various exchanges such as the CME, CBOT, and NYMEX
  5. Cryptocurrency: Cryptocurrency refers to digital or virtual currency that uses cryptography for security. The cryptocurrency market is highly volatile, operates 24/7, and is a marketplace with various levels of liquidity depending on the token traded. Popular cryptocurrencies include Bitcoin, Ethereum, and Dogecoin.

It’s important to note that each market has unique characteristics, risks, and opportunities. Day traders should carefully research and understand the market they are interested in before starting to trade. They should also be aware of the rules and regulations of the market they are trading in and the taxes and fees associated with trading.

How to read charts and identify trends

Charts are a vital tool for day traders, as they provide a visual representation of the price movements of a security over a certain period. By analyzing charts, traders can identify trends, patterns, and potential buying or selling opportunities. Traders can choose between several different types of charts, including raindrop charts, bar charts, and candlestick charts, to name a few. Each chart type has unique features and can analyze data in different types of ways.

To read and interpret charts, traders must be familiar with basic charting concepts such as support and resistance levels, trendlines, and technical indicators.

Support and resistance levels are key levels that the price of an asset tends to struggle to move above or below. A support level is a price level where the demand for an asset is strong enough to prevent the price from falling further. A resistance level is a price level where the supply of an asset is strong enough to prevent the price from rising further.

Trendlines are straight lines that are used to identify a current trend in the market. They are created by connecting at least two price points and are used to determine whether a market is trending up or down.

Indicators are mathematical calculations based on the price and volume of a security. Day traders use indicators to identify potential buying and selling opportunities and confirm the strength of a trend. Some popular indicators include moving averages, the relative strength index (RSI), and the moving average convergence divergence (MACD)

Once traders become familiar with these concepts, they can start analyzing charts to identify trends. A trend can be defined as a general direction in which the price of a security is moving. Trends can be upward, downward, or sideways. Traders can use trendlines to identify the trend’s direction and indicators to confirm the trend’s strength.

Day traders are trying to identify and go in the path of least resistance for each daily period or enter near the extreme peaks of moves that have gone too far and too fast and are due to reverse. Technical indicators are tools for helping you use both of these strategies.

How to use technical indicators

Technical indicators are mathematical calculations based on the price and volume of a security. They are designed to help traders identify potential buying and selling opportunities and confirm the strength of a trend. Many different technical indicators are available, each with unique features that can be used to analyze different charts and develop entry and exit signals. Summaries of some popular technical indicators include:

  1. Moving Averages: A moving average is a line plotted on a chart that shows the average price of a security over a certain period. Moving averages can identify trends and potential buying or selling opportunities. For example, a moving average crossover occurs when a short-term moving average crosses above or below a long-term moving average, signaling a potential trend change.
  2. Relative Strength Index (RSI): The RSI is a momentum indicator that compares the magnitude of recent gains to recent losses to determine an asset’s overbought and oversold conditions. It’s usually plotted on a scale of 0 to 100, with levels above 70 indicating an overbought condition and below 30 indicating an oversold condition.
  3. Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that calculates the difference between two moving averages. It is usually plotted as two lines on a chart, one representing the difference between the two moving averages and the other representing a signal line. A buy signal is generated when the MACD line crosses above the signal line, and a sell signal is generated when the MACD line crosses below the signal line.
  4. Bollinger Bands: Bollinger Bands are a volatility indicator that consists of a moving average and two standard deviation lines plotted above and below the moving average. They are used to identify potential overbought and oversold conditions and potential breakouts.
  5. Stochastic Oscillator: The Stochastic Oscillator is a momentum indicator that compares the closing price of a security to its price range over a certain period. It is usually plotted on a scale of 0 to 100, with levels above 80 indicating an overbought condition and below 20 indicating an oversold condition.

It’s important to note that technical indicators should not be used in isolation but in conjunction with other analysis tools, such as chart patterns and price action, to make more informed trading decisions. Also, traders should not rely on a single indicator and use multiple indicators to confirm a trade setup. The key to successful day trading is creating a positive expectancy through good risk/reward ratios. Technical indicators are tools for quantifying your trading price levels of risk and reward.

2. Setting up a Trading Plan

Defining your trading signals and risk management parameters

A trading plan is a written document that outlines a trader’s signals, strategies, and risk management techniques. It’s a crucial tool for day traders as it helps them stay focused and disciplined, and it also helps them manage risk. A trading plan is crucial for a day trader to allow speed of execution with little need for real-time decision-making.

Defining your trading signals and risk management strategy: Setting clear and specific trading parameters is important in developing a trading plan. The day trader’s overall system should be realistic and achievable and consider the trader’s risk tolerance. A risk management strategy is also an important aspect of a trading plan. It should outline the steps a trader will take to manage risk, such as setting stop-loss, trailing stop, and take-profit levels while limiting the amount of capital risked on any trade through position sizing guidelines.

Creating a trading schedule and sticking to it

Creating a trading schedule is also an important aspect of a trading plan. A trader should set aside a specific time each day for trading and consider taking time off to rest and recharge. By sticking to a trading schedule, traders can ensure that they make trades opportunistically and avoid making impulsive decisions. Most day traders only trade the first few hours of the trading day for stocks where the most liquidity and movement happens. Few day traders need to sit and watch their screens all day. Many day traders also avoid trading big news events due to the outsized risks and volatility of the moves. Day traders must limit their screen time to only what is needed to execute their intraday trading system.

How to perform a risk/reward analysis

This analysis helps traders determine the level of risk they are comfortable taking and the potential return they can expect from a trade. Traders should always consider the potential risk and rewards before entering a trade. Day traders must define whether the risk is worth the probabilities and magnitude of the reward.

Setting up a stop loss and taking profits

Stop-loss and take-profit orders are used to manage risk and lock in profits. A stop-loss order is placed at a level where a trader is willing to exit a trade if the price moves against them. A take-profit order is placed at a level at which a trader is willing to exit a trade if the price moves in their favor. By using stop-loss and take-profit orders, traders can limit their losses and lock in profits, which helps them to manage risk. Orders set with brokers to automatically execute at these levels can increase the speed of execution and decrease screen time.

3. Strategies for Beginners

Breakout trading strategy

A breakout occurs when the price of a security moves above or below a key level of resistance or support. The breakout trading strategy involves identifying key levels of resistance or support and then buying or selling when the price breaks through these levels. Traders can use technical analysis, such as trendlines and chart patterns, to identify key resistance and support levels. This strategy attempts to enter at the beginning of a new trend in price beyond the previous trading range and capture a large move.

Moving average crossover strategy

The moving average crossover strategy involves using two moving averages with different periods, such as a 5-candle moving average and a 20-candle moving average. When the short-term moving average exceeds the long-term moving average, it generates a buy signal. When the short-term moving average exceeds the long-term moving average, it generates a sell signal. This is a momentum strategy trying to profit from a sustained directional move.

The Ultimate Day Trading Strategies Guide for Beginners
Chart Courtesy of TrendSpider.com

Support and resistance strategy

The support and resistance strategy involves identifying key support and resistance levels and then buying or selling when the price reaches these levels. Traders can use technical analysis, such as trendlines and chart patterns, to identify key support and resistance levels. This is a reversion to the mean strategy of buying and selling at old extremes, looking for a reversal back to an average price or the opposite extreme.

A detailed explanation of how to implement each strategy

Breakout trading strategy

  • Identify key resistance and support levels using technical analysis such as trend lines and chart patterns.
  • Look for a breakout of the resistance or support level.
  • Wait for a confirmation of the breakout through a cand pattern or a high volume.
  • Place a buy order above the resistance level or a sell order below the support level.
  • Set a stop-loss order at a level that gives the trade room to breathe and limits potential loss.
  • Take-profit order can be set at a level where the price is likely to find resistance or support again.

Moving average crossover strategy

  • Use two moving averages with different periods, such as a 5-candle moving average and a 20-candle moving average.
  • Plot the two moving averages on the chart.
  • Wait for the short-term moving average (5-MA) to cross above the long-term moving average (20-MA)
  • This generates a buy signal.
  • Wait for the short-term moving average (5-MA) to cross below the long-term moving average (20-MA)
  • This generates a sell signal.
  • Set a stop-loss order at a level that gives the trade room to breathe and limits potential loss.
  • Take-profit order can be set at a level where the price is likely to find resistance or support again.

Support and resistance breakout strategy

  • Identify key support and resistance levels using technical analysis such as trendlines and chart patterns.
  • Place a buy order above the resistance level or a sell order below the support level.
  • Set a stop-loss order at a level that gives the trade room to breathe and limits potential loss like a return into the previous range.
  • Take-profit order can be set at a level where the price will likely find resistance or support again based on a previous price zone consolidation level farther back on the chart

It’s important to note that the above steps are general guidelines. Traders should consider their risk tolerance and goals and adapt their strategies accordingly.

Pros and cons of the strategies

Each strategy has its own set of pros and cons. For example, a breakout trading strategy can offer high returns but carries a high-risk level, as breakouts can often be false signals. The moving average crossover strategy is simple and widely used but can also generate false signals. The support and resistance strategy can effectively identify key levels, but it can also be subjective, as different traders may identify different levels based on different time frames.

4. Common Mistakes and How to Avoid Them

Common mistakes are a part of the learning process for every trader, but it’s important to be aware of them and take steps to avoid them. Some of the most common mistakes that day traders make include:

Over-leveraging and risking too much capital

Over-leveraging occurs when a trader uses too much-borrowed margin money to trade in the market. This can be a dangerous practice, increasing the potential for large losses. Traders should always be aware of the amount of capital they risk on any trade and never risk more than they can afford to lose. Trading too big of a position size in futures contracts or options can also lead to losing all your trading capital due to the built-in leverage of these derivatives.

Holding on to losing positions for too long

Traders make this common mistake when they are unwilling to accept that they made a mistake or a good trade turned against them. Holding on to a losing position in the hope that the market will turn around can result in significant losses. Traders should have a plan in place for exiting losing trades and should stick to it. Huge losses will make you unprofitable regardless of previous wins.

Failing to stick to a trading plan

A written document outlines a trader’s process, strategies, and risk management techniques. Failing to stick to a trading plan can result in impulsive and emotional trading decisions, leading to significant losses and randomness. Traders should always have a trading plan and stick to it, even when things are not going well.

Chasing after hot stocks or trading outside your system’s parameters

Many traders make the mistake of chasing after hot stocks or crypto based on hunches or news. This is a risky practice, as it is difficult to make money on random price movements outside the context of your trading system. Instead, traders should focus on developing and sticking to a preset watchlist and a solid trading strategy with an edge.

Encouragement to start implementing the strategies and creating your trading plan

The strategies and techniques outlined in this guide are a great starting point, but traders should also develop their own strategies and adapt them to fit their own goals and risk tolerance. Creating a trading plan can help traders stay focused and disciplined and will also help them manage risk effectively. Each trader must develop a day trading system that fits their own personality, beliefs about the market, and psychology. Also, the amount of screen time you want each day will be a big input to system design.

5. Conclusion

I hope the ultimate day trading strategies guide for beginners has provided valuable information that can help aspiring day traders get started. By keeping up with the market price action, learning how to create day trading strategies, and constantly adapting and improving, traders can increase their chances of success in day trading. It’s important to remember that success in day trading takes time and effort, and traders should be patient and persistent in their approach.

Day trading can be a profitable venture for those willing to take the time to learn the skills and strategies needed to succeed.

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.