How to Day Trading Stocks Effectively?
With the emergence of online trading platforms, day trading has become a popular trading strategy among speculators trying to take advantage of the market price movement to achieve returns within a short period of time. This trend has been further fuelled by the rise of social media trading ‘gurus’.
Achieving consistent returns as a day trader is challenging even for seasoned traders. Therefore, it is not a surprise that the majority of day traders lose money in the long run. Those who succeed may be able to outperform market returns.
What is Day Trading?
Day trading stocks typically involves buying and selling a stock or several stocks within the same day. Day traders always seek to close their positions before the markets close for the day, regardless of whether they are in profit or not.
Unlike swing traders, who usually anticipate large price movements in the medium term, day traders seek to benefit from short-term market price action. So, instead of waiting for a large price move, most day traders will trade several small moves within the day.
Notably, day traders are not equal. Every trader has preferences, depending on their level of capital, trading skills, and objectives. Generally, however, day traders fall within four groups, as elaborated below:
Scalpers - This type of trader attempt to profit from small price movements by quickly buying and selling shares. They typically hold positions for a few seconds to a few minutes, aim to profit from small price movements, and my make dozens or even hundreds of traders in a single day. Scalpers essentially try to make many small amounts of profit which can round up to a large figure at the end of the day.
News Traders - These traders use news and other publicly available information to make trading decisions. They specifically focus on trading opportunities that arise from news events, such as economic data releases, corporate earnings reports, and political developments. Their objective is to capitalize on the short-term price movement that occurs in response to news events. For example, if a company announces strong positive earnings that are better than expected, and it is anticipated that the stock price may rise rapidly. News traders may attempt to profit from this price movement by buying the stock immediately after the news release and letting it go a short time later, once the price has increased.
High-Frequency Traders - As the name suggests, these traders execute a large number of traders at extremely high speeds (usually in microseconds) enabled by the use of advanced trading algorithms and low-latency trading technology, for the purpose of profiting short-term market inefficiencies and price differences. High-frequency traders typically hold their positions for only a few seconds and they make hundred or even thousands of trades in a single day. This method is usually adopted by large institutional investors, such as hedge funds and investment banks who have access to advanced technology and market data, that can be quite costly for the average retail trader.
Intraday Traders - This group consists of traders who enter trades and hold their positions for anywhere between an hour and the entirety of the trading session. Most day traders fall within this group. Intraday traders use technical analysis, market news, and other charting tools to identify short-term price trends and make their trading decisions.
Why are Day Trading Stocks So Popular?
Day trading stocks is a popular trend for several reasons.
The need for instant or short-term gratification is a key factor that attracts some day traders. Unlike long-term investing, which involves holding your positions for days, months, or years, these day traders may feel relief closing their positions within minutes or hours.
For some traders, day trading is a risk-management strategy. Unlike forex markets, stock exchanges are only open for a few hours daily. However, the flow of news, rumors, and discussions on quoted companies does not stop, which means that sometimes, certain stocks open with huge gaps from their previous session's close. For retail traders with small accounts, closing trades by the end of every day's session is a way of avoiding large losses in case a stock's price reverses overnight.
The proliferation of stock brokers offering commission-free trading has also contributed to the rising popularity of day trading. Commission-free trading allows traders to buy and sell stocks without paying any fees or commissions, which can save them a significant amount of money. This prospect is very attractive for traders with smaller accounts or those whose strategies revolve around making multiple trades daily.
Additionally, the rise of CFD providers with intuitive platforms and mobile apps contributes to the popularity of day trading too. However, traders need to understand that CFDs are derivatives and not exchange-traded stocks
Finally, and perhaps unfortunately, the recent popularity of day trading stocks is driven by the desire to keep up with the plethora of trading experts who relentlessly flood social sites with screenshots of their 'profits.' These so-called gurus draw in large numbers of inexperienced traders who harbor dreams of making it big in the market. Unfortunately, most of these traders end up with massive losses and regrets due to a lack of understanding of the stock markets.
Day Traders “Look Out”?
As the saying goes, “If you fail to plan, you plan to fail”. Day traders like any other traders or investor, typically plan and look out for certain parameters to filter through the massive list of exchange stocks to plan their trade. These parameters might include:
Volatility – stocks with high volatility have larger intraday price swings leading to more potential entry or exit points.
Liquidity – Higher liquidity usually means tighter bid and ask spreads which reduces the amount of slippage incurred and provides for easy entry or exit during the day.
Industry and Sector-specific – some industries or sectors may garner more market interest and trading volume during a specific arising from its seasonal cycle.
News and Events – economic data releases such as employment reports, and consumer price index (CPI) can affect market sentiments and lead to significant price movements in individual stocks or the market as a whole. It is important to note that news and events can be unpredictable, and their impact on the stock market can be difficult to predict.
Day Trading Stock “Holy Grail”?
Unfortunately, in the world of trading or investing there is no “Holy Grail”. Becoming a day trader is more than what it seems from social media or the internet. The journey involves countless hours of research and backtesting, not to mention psychological fortitude.
Education is key - Before you start trading, it is important to educate yourself about the stock market and trading strategies. Many resources are available online, such as trading forums, educational materials, and webinars, that can help you get started.
Choose a Suitable Broker - Choose a broker that fits your needs and trading style. Things to look out for includes and not limited to trading fees, a user-friendly trading platform, good reviews, and good customer support.
Practice with a demo account - Many brokers offer demo accounts that allow you to practice trading with virtual money. Open a demo account and use it to get a feel of the market and test out different trading strategies without risking your own money.
Develop a trading plan - A trading plan is a set of rules and guidelines you follow when trading. A typical plan includes entry and exit points, risk management strategies, and trading goals. A trading plan can help you stay disciplined and avoid making impulsive decisions.
Keep your eyes on the market - Day traders need to constantly monitor the market, analyze charts and news, and make quick decisions. This is how you spot moves before they happen and determine the market sentiment about a given stock. Various tools and resources are available online that can help you stay up-to-date on market trends and news.
Practice proper risk management - Day trading is extremely risky, and your focus should mostly be on protecting your capital rather than making huge profits. This involves limiting large losses by setting stop-loss orders to reduce your loss sizes, diversifying your portfolio, and not investing more than you can afford to lose.
Conclusion
To sum it up, day trading stocks is never an easy venture. It requires significant amount of knowledge, discipline and risk management skills. Majority of day traders lose money in the long run, therefore it is crucial to approach the market with a well research and defined strategy as well as proper risk management skills.
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* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.
