Day trading: get started with the basics
|What’s day trading?|
|The possible risks of day trading|
|How to get started as a day trader|
|Day trading strategies|
|So, should you start day trading?|
Day trading is buying and selling financial instruments multiple times in the same day. Because of the large number of trades made, not all brokers are suited to this type of trading. And even though profiting from even small price changes could add up quickly if done right, day trading can be especially risky for individuals who aren't careful or don't have a solid plan.
That's why we made a general guide for new traders who want to start learning about day trading. Hopefully it'll help beginners avoid some of the early losses that lots of seasoned traders have made. So, keep on reading to get your first lesson on day trading basics, risks and strategies.
What’s day trading?
Day trading takes advantage of the price changes that happen over the course of a trading day. When expectations aren't fulfilled or exceeded, markets respond with fast, big changes that could benefit day traders if they play their cards right. It's most often done on the stock market and foreign exchange (FX) market. It's also not really investing in the conventional sense; lots of securities are purchased and sold within a single trading day, or sometimes even within a matter of minutes. What's more, day trading traditionally involves far higher risks than buy-and-hold investing (particularly if you trade on leverage).
So, what makes a successful day trader? Well, for starters, you can’t guarantee success. That goes for all kinds of trading. But, some common factors that can help you start strong is to have savings specifically set aside for trading, as well as a deep understanding of the financial markets. It also doesn't hurt to pay close attention to news that might create sudden shifts in the market. Economic data, company earnings, and interest rate announcements are just a few examples of regularly scheduled events that can affect market expectations and market psychology, which impact day traders' decision-making.
The possible risks of day trading
Clients might lose more than the amount invested. Risk is a pretty inherent part of day trading. For example, in just a day you could lose the primary amount invested, plus any cash borrowed through a margin account and returned with interest. Yes, it's also possible to earn big, but we'd rather you have a clear, straightforward picture of the good and the bad. Here are a couple more risks you could face as a day trader.
Losing money through margin trading
It's normal practice for day traders to borrow funds from their broker, so that they can increase the size of their stakes. How do they do that? By trading on margin. Using leverage in this way can increase a trader's returns, but it also exposes them to more risk, and the borrowed funds can come with a hefty interest rate.
Giving up a whole lot of free time
Day trading takes significant amounts of time spent in front of a computer or phone screen, checking out the prices of various assets and reacting to market fluctuations with speed. There's no surefire payback for the time and effort you put into researching and practicing different strategies. For some people, day trading starts as a fun activity but can quickly become a time-consuming, serious side gig. So, consider your schedule and whether that's something you can handle.
Your budget can take a hit
Costs can add up while day trading. Traders often pay a variety of fees, the sum of which will depend on factors such as the types of transactions and the brokerage or trading platform you use. A trader's expenses can quickly add up because of things like learning courses, online tools, and resources that are essential to practice your skills and trade, but that can also eat away at your potential profits.
How to get started as a day trader
Now, let's take a look at a few steps you should take to start off. Make sure you've got these ticked off your list before diving into the world of day trading.
1. Open a brokerage account
A trader's first tool is a brokerage account. That's pretty crucial if you want to access the financial markets. Choosing the best brokerage firm for your needs is essential, and luckily you have several options to consider that can be found online. If you're looking to trade local MENA and global markets with zero commission, check out our amana trading app and see if it's a good fit for you.
2. Build a watchlist
Global marketplaces facilitate the trading of a diverse range of assets. Obviously, you can't keep tabs on all of these assets at once. Therefore, you should collect a group of assets and organize them into a trading watchlist. Using a stock scanner might be helpful in creating this list of assets; however, platforms like amana's have a dedicated in-built section to grow your own watchlist.
3. Don't give up on your research
Most day traders who've been at it for the long-term could be considered industry veterans. That means they have a deep familiarity with the financial markets. Meanwhile, people who try day trading without a strong understanding of how the market works are more likely to go broke. So, a good place to start would be to start learning about technical analysis and how to read charts, and never stop learning. That's right, if you want to make smart trading decisions, you need to know as much as possible about the assets you're dealing with.
4. Set up a healthy budget
You should have a healthy fund set aside before you start. Profiting from intraday price fluctuations, which may be cents or fractions of a cent, typically requires a sizable budget spread across multiple positions. Not to mention that the best way to day trade is with money you can afford to lose. This safeguards you against the possibility of losing all your money, which can also help you make more rational trading decisions aka not driven by emotion, but strategy. Plus, day traders who want to employ margin accounts with leverage need sufficient money set aside. The sudden possibility of large margin calls as a result of volatility is a real risk. Don't take it lightly.
Day trading strategies
Now that you have a basic understanding of day trading, we can go over some of the most effective methods used by beginners and seasoned traders.
When there is a large disparity between the market's starting price and the previous day's closing. When a gap like this occurs, day traders may try to capitalize on the change by placing a trade in the opposite direction of the gap.
The goal of this approach, which is common among day traders, is to make a series of modest profits during the trading day by taking advantage of subtle price fluctuations.
This strategy, which is exactly what it sounds like, looks for trading opportunities during the heightened volatility that occurs before, during, and after major news events and headlines.
When a security's price moves in a constant range between its high and low points, this is known as a trading range or a price channel. Day traders attempt to profit from a trading range by making buy and sell choices at the range's low and high points.
So, should you start day trading?
People who are thinking about day trading should think about the pros and cons. Day traders usually know a lot about the markets and keep a close eye on news and market conditions that could affect the price of different stocks. They're used to acting quickly and even on the smallest changes in price.
That's why day trading can be hard for people who are trying it out for the first time, especially if they don't have a good strategy. It's the opposite of buy-and-hold investing because it's not based on long-term results and can be a whole lot riskier. But remember, even the most experienced day traders will inevitably face moments of losses. So, while mastering day trading can be a tough feat, the basics we talked about should help you get started. On top of that, you should do a lot of research, give yourself time to practice, and stick to an organized, customized plan.