Day trading for beginners in investing isn’t a simple task. While the idea seems self-explanatory, there’s actually a lot of time and effort that goes into the process. Day traders spend countless hours studying stocks and the flow of orders coming in and out.
Therefore, what does it take to become a day trader? And is this a viable means of income on a permanent basis? Let’s take a closer look at this popular investment strategy.
Definition of Day Trading for Beginners
Before you can decide if day trading is right for you, it’s important to understand the concept to the best of your ability.
So, what is day trading for beginners who are looking to buy and sell stocks? Day trading is the process of buying and selling stock in a single trading day. The overall goal is to earn short-term profits on each trade while using compounding to maximize those gains over time.
For most day traders, this includes multiple stock trades throughout the course of each day. And, as such, it can become a full-time job that requires the utmost dedication and research.
Day trading as a hobby will set you up for failure. And most investors would suggest you shy away from this strategy if you have a busy schedule or other work obligations. But, if you are ready to commit to day trading as a beginner, there are a few guidelines to live by.
Day Trading Tips for Beginners
It’s hard to find a profession these days that doesn’t come with its own set of ground rules or standards. And, to a point, day trading is no different. There’re specific tips that all day traders do their best to stick to.
For starters, most day traders are working with a large amount of capital. Upwards of at least $25,000 is the standard in day trading for beginners. And it’s common to risk no more than 1% of that capital on a single trade. This is the best way to control your risk, along with a stop loss.
A stop loss will get you out of a trade if the share price drops to a certain level that you can determine yourself. Let’s say you go by the 3% rule. This means that you are not willing to lose more than 3% of your entire day trading portfolio in a day. And let’s face it, you aren’t always going to win big.
Once the investor reaches his or her maximum loss for the day, they will shut it down and begin again the next morning. As you can see, this is different than a stop loss order, which controls the risk of an individual trade. Day trading for beginners isn’t recommended without a stop loss in place.
So, what type of stocks do day traders look for? For example, the primary focus is highly liquid stocks. These are stocks that trade enough shares for you to sell whenever you choose.
You just have to analyze the orders coming in and out while waiting for the share price to change in the right direction. At this point, you can offload the stock and turn a profit.
When to Day Trade
In fact, most day traders execute trades between two separate time frames that cover the first one or two hours after the stock market opens and the last hour before it closes. This includes:
- 9:30 a.m. EST to 11:30 a.m. EST
- 3:00 p.m. EST to 4:00 p.m. EST.
During those two separate time frames, the stock market is at its most volatile moments. Therefore, it gives you the most profit potential due to share prices moving rapidly.
There’s only a small percentage of day traders who trade during an entire session. And as a general rule, it’s best to create your own process that fits your goals and stick to it.
Creating investing goals will help you determine the best way to enhance your portfolio. Not every investment opportunity will be right for you. But, you don’t want to miss out on the potential for huge returns because you don’t have a plan.
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