DAY TRADING FOR BEGINNERS

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Day Trading is a form of Share dealing where shares are bought and sold in a single day. The intention of a Day Trader is to make use of the small price fluctuations to earn profits. Though the mere definition portrays it as an easy method of profit earning, there is high amount of risk involved in Day Trading. A typical day trader is knowledgeable and financially equipped. He uses high amounts of leverage and short term trading strategies to capitalize on small price movements in stocks. To understand the basics of day trading the key terms, benefits and risks involved are first to be known.

Key Terms Related to Day Trading

Trade:             The act of Buying or Selling Financial assets

Trader:            The Individual who Buys or Sells the assets. While Investors hold assets for  longer period, Traders hold assets for shorter time.

Stock:              The element representing ownership of a Corporation. When an individual owns Stocks of a Company then He / She is a Shareholder.

Broker:            Mediator who enables the Trading between a Buyer and Seller.

Liquidity:        The factor denoting the ability of Buying or Selling an asset without much fluctuation in the prices.

Volatility:       Term denoting the Price range of a stock on a particular day.

Securities:       Assets that can be Valued and used as Currencies for Trading. Stocks & Bonds are prime securities.

Entry Point:    The Optimum time to start Trading on a Stock.

Closing Out: The closure of all transactions (buying/ selling) for that particular day.

Common Entry Strategy Used for Day Trading

Trader identifies and continuously monitors few stocks, and trades them based on their liquidity and volatility. In general, higher the volatility, higher is the profit or risk of loss involved. Once the stocks to be traded are confirmed, the trader has to identify the right entry point, for which below tools can be used;

  • Intraday Candlestick Charts
  • Level II Quotes / ECN
  • Real Time News Service

Common Trading Strategies

  1. Scalping: In this method the stocks are sold immediately after it becomes profitable and is the most common method used.
  2. Daily Pivots: This method is dependent on the volatility of the stock. Here the trader attempts to buy the stock at its lowest and sell it at its highest.
  3. Fading: In this method shorting of stocks is done as the stock prices begin to surge. Though this method yields more profit, it requires good amount of study of the stocks.
  4. Momentum: News releases and high volume trends are monitored for this type of strategy. The trader will use the trend until it reverses.
  5. Stop Loss: Stop Loss is set at a desired price range to save the trader from rapid price fluctuations. It is the most that a Trader would want to lose in the day trade.

 

Considering the above strategies, it can be deduced that day trading is not an easy trade to master. It requires proper tools, techniques, market study and performance analysis to get a good understanding and eventually make profits out of day trading.

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