In order to thrive in any trading market, one needs to create an effective trading strategy, one that guides your decisions, risk management skills, and chances of success. The major difference between a top-level trader and a not-so-good-one is sometimes the choice of their strategy, which is why, as a trader, you cannot undermine the significance of a trading strategy. With that being said, one very popular type of trading style is the ‘day trading.’ And regardless of where you are in the world, be it the US or Mid-Asia, you can always day-trade. And by the term day trading, we don’t necessarily imply trading only in the morning and evening, just for you to go to sleep at night. Don’t get it twisted!
Day trading is the act of trading (buying and selling) a financial instrument, like a currency, within the same day (be it morning or night) or even multiple times over the course of one day. Day trading can be a very lucrative game when played correctly, but when you fail to adhere to a well-played strategy, it can be a very dangerous game. What’s more, not many brokers are suited to the high volume of trades made by day traders. But have no fears, some US forex brokers do, and you can trade as many times as possible with them. That said, let’s take a quick look at some general day trading principles and strategies.
Knowledge is vital:
In addition to the general trading procedures, day traders need to keep tabs on several factors that affect the market such as the latest market news, Fed’s interest rate plans, events affecting the market, economic outlook, and lots more.
Set aside funds
Before you trade multiple times in a day, be sure to set aside a surplus amount of funds you can trade with. Assess how much you are willing to risk on each trade, which could be 1% – 2% of your overall trading account balance.
Set aside time
Day trading isn’t for the faint-hearted at all because it requires a lot of time. Isn’t that why it is called day trading anyway? It is often advised not to try day trading if you have limited time to spare because you will have to give up most of your day. The process requires traders to track the market and spot opportunities, which can arrive at any time of the day.
For starters, it is better to start small. If your target is a few trades to start with, it will be easier for you to track the market and find opportunities to trade.
Many orders placed by traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A top-level trader may be able to identify patterns and trade successfully around this period. But for a newbie trader, it is always advisable to at least wait a while before making moves.
Before you even start trading at all, be sure to decide what type of orders you’ll use to enter and exit trades. Are you going to use market orders or limit orders? When you place a market order, it will execute the best price available at the time – which offers no price guarantee. But if you place a limit order, it will guarantee the price and not the execution. Hence limit orders can help you trade with better accuracy and precision, thereby limiting your chances of losing money.
What makes a good strategy isn’t its tendency to win every time, but it is the ability to help you win more than you lose. Many successful traders only win about 50%-60% of all their trades. But it can be considered winning because of the profit and loss margin.
To succeed in day trading requires a lot of know-how and practice, and understanding that several factors are involved in the process. First, you have to understand that you are constantly dealing with currencies, and in just a twinkle of an eye, a currency could move in a different direction different to your prediction. And this could happen multiple times in a day.
Day traders try to make money by exploiting price movements and leveraging large amounts of capital to do so. In deciding what to focus on – in say, a stock – a day trader has to look for these things.
Liquidity: Liquidity is what allows you to enter and exit a stock at a good price.
Volatility: This is a measure of the expected daily price range. Greater volatility implies greater your profit or loss.
Trading volume: This is a measure of the number of times a stock is sold or bought within a given time.
Once you’ve been able to identify what kind of stocks (forex, or any other financial instrument) you want to trade, you need to understand entry points – that is, at what precise moment you are going to invest. Don’t worry; you don’t have to do this alone. Some tools that can help you include
ECN Quotes: An electronic communication network or ECN is a computer-based system, which can be a very helpful tool when used correctly. With true ECN, traders can have access to information displayed on the system as it displays the best available bid and ask quotes from market participants and then automatically match and execute orders.
Real-time news services: News moves trades, so it’s important to stay in touch with the latest updates in the, say, the forex market.