Beginners Day Trading
Day trading was formerly a strategy exclusively used by large institutions or hedge funds. But now, with the rise of apps like Robinhood, Webull, and other platforms built to simplify trading, it’s never been easier to learn day trading.
But is day trading right for you? We’ve all heard stories of someone who claimed to have accumulated massive profits in just a few hours. Everyone wants a quick win, but like anything else, if you want to day trade with your money then you're going to need a plan.
Today we'll break down some basic principles to understand before attempting to day trade. We’ll discuss:
The best time of day to look for a day trade
Key indicators for day trading
How to identify a stock that’s viable for a day trade
How to mitigate risk when day trading
What is Day Trading?
Day Trading is a trading technique that involves the buying or selling of a stock or security all within the same day. Sometimes, a trader may even buy or sell a stock multiple times within the same day depending on market conditions and their own objectives. This style of trading is a contrast to swing trading, where you may hold a stock for several weeks before looking to profit. When day trading, a trader may hold a stock anywhere from a few seconds to a few minutes, or even a few hours. A day trader will analyze the daily charts of a stock while looking for opportunities to capitalize on the minute-to-minute changes of the stock’s price.
Why Do People Day Trade?
To make small quick gains in the short-term
To quickly capitalize on breaking news affecting a stock's price
To capitalize on market sentiment during very favorable conditions
To profit gains during high volatility
Because most trading platforms no longer implement transactional fees for each individual trade
Don't Forget to Zoom Out
Below features a chart from one of our traders
In this case, the trader was looking to play NXPI off a head and shoulders pattern
By monitoring the volume (bottom bar) and zooming out we're able to clearly see the pattern form
All in all, its important to also monitor the trends to make sure you have proper tailwinds before opening a trade.
What Are Some Key Indicators for Day Trading?
When day trading, you're watching stock charts by the minute to look for any immediate changes or swings. Since your time frame may only be hours or even minutes, it's important to know some of the key indicators when day trading.
Key Indicators to Look for When Day Trading
Time of Day
Did you know that the opening bell tends to be the most volatile time in the stock market? The opening bell is when all of the trades that were previously queued up get executed, and this tends to lead to a move in a stock price. Many day traders may look to open and close a position sometime between the opening bell and noon.
Trading volume is another key indicator that should be referenced when looking at a day trade. Stocks that trade with heavy volume are more susceptible to quick moves in price. Day traders look for stocks with high liquidity, and volume can be a meaningful way to measure that.
Nothing moves a stock price quicker than breaking news. Has there been any notable news that would affect either the stock or the industry it's in? If news breaks regarding a similar stock to the one that you're trading, all stocks within that sector are likely to be affected by the news as well. Additionally, when key news breaks about a stock while the markets are closed, you may be able to profit by placing a trade during the next opening bell.
Technical Indicators to Help Perform a Day Trade
These indicators are used to help assess the potential price movement a stock could make. These types of indicators help predict price movement before it happens. One of the most common types of leading indicators include Relative Strength Indicators or RSI:
- RSI: This indicator is used to track a stock’s momentum. It can also be used to identify if a stock is currently overbought or oversold. Relative Strength is identified as a numerical value on a line graph between 1-100. A low RSI may indicate a stock that has been oversold, while a high RSI may indicate a stock that’s been bought up too high.
Lagging Indicators These indicators help generate signals after certain conditions have already been met. These indicators may only become apparent after a large shift has already taken place. These are helpful in confirming trends. A common type of lagging indicator includes Moving Average Convergence Divergence or MACD:
- MACD: These are trend-following indicators that can once again be used to track a stock's momentum. These indicators show the relationship between two moving averages within a stock's price. MACD is a popular indicator and can be a useful tool with day trading.
How to Manage Risk When Day Trading
As with swing trading, the more information you know about a stock or industry, the more likely you are to execute a successful trade. Day traders should only look to trade stocks within sectors or industries that they have already had a deep understanding of. Trading in sectors you fully understand may allow you to better anticipate how a stock may react to sudden news or industry changes.
- Sector familiarity may allow you to better anticipate how the stock may react to positive or negative earnings?
- Or it may provide a better understanding of how the industry reacts to the news.
As with any form of trading, position size is key to managing risk. Though trading can be very lucrative, you should never invest or trade with money you can’t afford to lose.
- One way to ensure you aren’t overspending on stocks is to set aside a certain amount from each paycheck, like your 401K.
- Putting the same amount of capital into the market, at regular intervals regardless of market conditions, is known as dollar-cost investing.
Identify A Strategy That Works for Your Trading Style
You should always, always have a plan when executing any stock trades. It’s best to try multiple strategies during varying market conditions to confirm or deny any potential hypothesis. You want to find a proven strategy and something that has been validated over time. Always keep learning, always do your research.
Keep a Trading Journal
Any established trader understands the importance of documenting your trades. This can be a helpful tool when looking for new trading strategies or when assessing your performance. A good trading journal should capture the following:
Date, time, and Trade Rationale: You should always document when you opened your position and why. This is especially important when reviewing any trade that didn’t work out. What were your indicators? And why did you think this trade could be successful?
Exit Strategy: Every good trader always has an exit strategy. Whether you’re only up a few percentage points, or you’ve had a huge run, always have an exit plan. The best way to turn a winner into a loser is to not take profits. Remember, day trading changes minute to minute so be realistic about your goals. A quick 5% gain in just a few minutes should always be viewed as a win.
Maybe the most important thing to do for any trade is to establish parameters for calling a trade a loss. A stop-loss helps ensure your losers don’t run wild. A 5% loss may not be ideal, but a 50% loss may force you to hold a position much longer than anticipated in the hope of recouping lost capital.
Don’t be afraid to try out any new strategy in a safe practice environment. When finding a strategy that suits your trading style, it can be advantageous to simulate those trades in a practice environment without using your hard-earned dollars.
Day Trading Summary
Day trading can be a popular trading style given its ability to turn profits quickly.
As with any form of trading or investing, it’s best to have a plan and identify a strategy that works for you.
Since day trading looks at charts minute by minute, you need to establish what key indicators you’ll be using to identify potential trades.
Heavy trading volume can quickly move a stock’s price, but nothing moves prices faster than unexpected news.
When assessing your own trading effectiveness, always use a trading journal to document your rationale. And don’t be afraid to use a paper trading platform as a way to safely identify strategies before risking your own capital.