Getting started in day trading requires several critical things, the first being a strategy. If you’re a novice trader, you should focus on simple and proven strategies as there is a high learning curve. Once you progress and become more experienced, you can begin to utilise more advanced trading methodologies. Find a plan that you’re comfortable with and stick with it until you’ve mastered it.
More Knowledge more power
With everything in life, the more knowledge you have, the more likely you are to succeed. When it comes to day trading staying connected to financial or business news outlets along with tuning into intentional and local news is vital. World events can affect stocks whether it be directly or indirectly. Good news can put shares on an upward trend, but you can make money on bad news via shorting stocks. Mastering technical trading charts is a necessity, as they let you know about specific trends.
What exactly makes up a trading strategy may differ according to the methodology, but it’s always objective.
Trading strategies consist of conditions required for entering and exiting trades:
- Researching and executing the math behind the plan.
- Analysing the stock’s past performances to determine its feasibility.
Simple Moving Averages
Simple moving averages (SMA) are traditional trading strategies with easy formulas to figure out. Take a stock’s closing price for X number of trading days, then add them together and divide by the number of trading days. That number is your SMA for that timeframe. Traders usually go with 5, 10, 20 or 50 trading days to determine the SMA, but the number of days in question depends on whether you want short-term, intermediate-term or long-term trends. Day traders most often use the five-day SMA, as it the most reactive. Experienced day traders may use SMAs based on hours or even minutes of a stock’s price. The SMA is among the easiest trends to follow in a chart.
With SMA, you’re on the lookout for a stock breaking out – heading upward – or trending downward. The latter is for shorting purposes. Day traders don’t want to bother with “sideways” stocks, or those with SMA that rise a little bit then fall a little bit, but rarely make a significant move. Such stocks can get stuck sideways for months or even years.
A breakout occurs when a stock increases above its resistance level. The resistance level is a level that a stock previously didn’t seem to rise above and high volume accompanies this benchmark. Positive news about a company or a new management team may push a breakout. That volume may last a few hours. You’ll find stocks with breakout potential through technical trading charts. As you learn to decipher chart symbolism, you’ll notice that virtually completed flags, head and shoulders and triangles often indicate breakouts.
Fast action is necessary for successful breakout trading because timing is crucial. However, even though you have to act fast, you must confirm the breakout trend is legitimate. Otherwise, your breakout could end up a fake-out. The fake-out happens when the stock appears positioned to increase above the resistance level but does not. If the breakout is valid, stay focused on your charts, but if the breakout heads south, cut your losses. In this case, to properly exit the trade use the stock’s previous support level to determine the exit price.
Momentum Day Trading
Day traders want to find stocks that have a great deal of momentum. Meaning, traders desire security that moves a great deal in a trading day. The concept behind momentum trading is identifying and buying those stocks before their big moves. The stock’s momentum in either direction determines how long the trader holds on to the stock. For some stocks the hold is 10 minutes for others, it can be the entire trading day. To cash out before the security begins to head in the other direction a day trader has to aim for the point just before the top of the momentum. Momentum in the stock usually occurs after a specific event like earnings growth topping expectations, or the company making an acquisition.
A Personal Risk Strategy
Day trading is inherently risky. There’s no getting around that fact. Even experienced traders only profit from about half of their trades. What those traders do have is a personal risk strategy, and it’s wise to develop your risk strategy as soon as possible. Successful traders don’t risk vast amounts of capital on any one trade. At best, any individual trade accounts for between 1 to 2 percent of their trading funds. When you’re starting out, stick near using 1 percent of your capital per trade.
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