What you need to know about day trading

What you need to know about day trading
Table Content
So, what is day trading?
Where to start?
What you need to know
Which financial product to choose?
Buy and Sell
Remember

Day trading is risky, but it can result in greater gains over time when done right and given the right tools. Defined as the practice of buying and selling stocks, day-to-day trading differs from long-term trades in terms of both timeframe and strategy. Typically, long-term traders will buy and hold, and invest, whereas day traders can rely on a day’s risk and avoid negative price gaps to buy and sell within a single day. For you to day trade successfully, you will need a good knowledge of the markets and a bold risk analysis and strategy to best evaluate when to buy and sell your financial product of choice. 

So, what is day trading?

Day trading has seen a dramatic increase in popularity ever since the outbreak of the COVID-19 pandemic, and quite rightly so. Attracted by dynamic volatility and high growth in retail stocks, people saw an opportunity to trade online and become familiar with trading strategies. 

Do not forget that day-to-day trading is a high-risk investment strategy, especially when not backed by highly sophisticated trading algorithms. You will be competing with very skilled people whether you like it or not. And it’s not just about the amount you’re ready to take out of your savings; there are still many penniless stocks with no value. So beware and inform yourself so you can increase your odds and increase your chance of success.

Where to start?

Read, read, read

Remember all those movies where many people stand in a big room facing a large black screen with a threatening graph? That’s the stock market. It’s filled with opportunities and sometimes may change from one moment to the next. It’s all about knowing when and what to read before you pick up your phone and start trading. So, what’s out there to read? First, as a day trader, you need to be on the lookout for what can affect stocks. These factors can include companies’ news and earnings results, key economic indicator releases, central bank meetings and speeches, as well as geopolitical risks that may affect specific markets, or sometimes all markets. You can also keep yourself informed on other companies and their stocks and scan reliable business news daily. Don’t be impatient; it may take a few tries before finding your method to keep up to date quickly and effectively. Just remember it’s important to diversify; going global will give you a chance to pick up foreign and sometimes even cheaper alternative financial products.

Capturing the moment

With all of that said and done, why don’t long-traders just shift to day trading? Well, day trading requires a lot of rigor; most day traders are able to gain profits by looking at the minute and sometimes millisecond price movements in their assets. While some rely on software, they also usually leverage large amounts of capital once they get their eye on the winning financial product. 

In deciding what to buy, you should look at three things:

  • Liquidity: what that means is that you get more security to buy and sell easily, and that’s a big advantage for day traders. It can also refer to the difference between the bid and ask price of a product or the expected price of a trade. All in all, it gives you more information on what you’re up against.
  • Volatility: This is hugely important. Volatility is an everyday trader’s rule of measurement for daily ranges in price. The more volatility you get, the bigger the potential to win or lose. 
  • Trading volume: Same idea. With the trading volume, you can understand the number of times a product is bought and sold within a selected timeframe. As an average, it can show you whether that product is attracting high or low interest and predict whether the price is likely to jump or not.

What you need to know

The goal of intraday trading is to profit from intraday fluctuations. Day traders implement a variety of strategies to accomplish this. The most popular of these strategies is trend following, which works by identifying the market’s current direction and trading in that direction. In contrast, mean reversion trading works by trading against intraday trends to position against extremes (tops and bottoms). Additionally, there are non-directional trading strategies like scalping, which aims to make money from quick fluctuations in market prices. Additionally, we have volatility strategies known as news traders that seek to capitalize on short-term volatility spikes brought on by macroeconomic releases or any other flash news. On the other hand, high-frequency trading (HTF) is considered a day trading strategy, but that’s an institutional-grade strategy because the advantage of this strategy is the speed and technology to make thousands of trades for tiny profits, which is rarely available to retail traders.

· List of the most Popular Intraday strategies:

Trend following

Mean reversion

o Volatility High-frequency trading (HTF)

Which financial product to choose?

Intraday traders primarily look for three factors when selecting financial instruments (volatility, liquidity, and cost). In simplified terms, they’re looking for moving assets with high trading activity and low trading costs. It’s a good thing you didn’t have to do your excise and look for the best instruments for intraday trading. In day trading, there is a well-known popular instrument. In the world of FX, the EUR/USD is the most traded instrument, with more than a trillion dollars in average daily volume, according to the BIS. And when it comes to commodities, we have Gold and Crude oil (Brent and – WTI). Among indices, S&P500 is very popular, and so is DAX40. There are numerous instruments to trade intraday, but if you want to try out new products for intraday trading, don’t forget to check out the three factors!

Buy and Sell

Intraday trading is not the same as buying only a trading system, as most investors do. It’s considered to profit from intraday fluctuations by buying or selling any financial instrument. That’s why intraday traders typically use CFDs (contracts for difference) to buy or sell with margin!

  • Real-time news services
  • Real-time news is a must for intraday traders; beside your charts, that’s the only thing you should look at. Specifically, you should check the economic calendar to see when there’ll be high-impact releases related to the instrument, and you should keep an eye on the market’s news and wire for any flash news that may affect your trades.
  • ECN/Level 2 quotes
    • Pricing and execution are key for day trading. ECN/Level 2 quotes show the supply and demand for a specific instrument, as well as the prices and quantities involved. This is useful in determining short-term price movements as well as the instrument liquidity as well as volatility. You need to have access to see and trade the best prices at the minimum cost. This is not a big deal for investors who trade three or four times a year, but these small details matter for intraday traders who make many trades daily.
  • Intraday candlestick charts
    • Many people consider intraday trading to be technical analysis-only trading. True for a certain level, but ignoring market updates is simply a bad idea! Since we have technical analysis, the main tool is charts. Intraday traders typically use OHLC charts (Open - High - Low - Close), with Candlesticks being one of the most popular OHLC charts. And they primarily focus on intraday time frames ranging from 15 minutes to 5 minutes and down to 1 minute. This provides traders with the necessary information about the instrument’s price action for decision-making.

Remember 

· Learn to mitigate risks long-term. Rome was not built in a (trading) day.

· Know when to exit your trade. Set a maximum loss per day that you can afford. 

· Familiarize yourself with trends to unleash opportunities.

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