Day traders buy and sell high volumes of stock and indexes during daily trading sessions, locking in generated profits from small market movements. Successful day traders are well versed in short-term trading strategies and possess extensive marketplace knowledge. Generally, day traders are well situated financially to handle high volume trades; in addition, skilled day traders utilise leverage to increase trade volume capability. Though considered controversial to some, day trading creates market efficiency through arbitrage and market liquidity.
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Assess the volatility and liquidity of your potential stock selection. It's recommended that the security have high trade volume (liquidity) and a tight spread (difference between a securities bid and ask price). Use a stock's daily price range to help ascertain the security's potential trade risk and profitability.
Analyse the stock's movement to determine the best point of entry. News, price action and order placement are important areas to analyse. Tools such as intra-day candlestick charts, Level II Quotes & ECN and Real-Time News Service address these areas.
Determine a price target by taking into consideration your trading strategy. Some common strategies you may want to review are scalping, momentum, fading or daily pivots.
Reduce slippage (when market orders are executed by traders at worse than expected prices, which can be seen with highly volatile stock) vulnerability. Stop-loss orders protect your from sharp price movements, unlike market orders. You can view movement drops with the Level II/ECN tool. Furthermore, set a maximum loss you're willing to lose for the day and halt trading for the remainder of the trade session when you meet that point.
Evaluate your trading strategy often. Most day traders don't profit from day trading when transaction costs are factored in to the net proceeds. A well-defined strategy helps troubleshoot problems and refines a trader's short-term strategy until consistent profits are generated and risk is reduced.
Be aware of day trading risks. Expect profit losses; it takes time to hone your day-trading skills. Fifty per cent of all day traders are unsuccessful, but you might beat the odds if you're disciplined at sticking to and refining your strategy.
Consider taking a day-trading course. It will provide you with the stock market basics as well as advanced trading strategies. The course also might bolster your confidence.
Tips and warnings
- Day traders employed at financial institutions have an advantage over home-based day traders. Institutional day traders have access to the trade desk, copious amounts of risk capital and leverage capability and costly analytical software not available or economically feasible for home-based day traders. Thus, institutional day traders are in a better position to capitalise on trades with less risk than what an at home trader might face.
- Day trading isn't for those lacking short-term trading or marketplace knowledge. There is high risk associated with this kind of trading strategy. Trade with risk capital, not money needed for everyday living.
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