Day trading has become one of the fastest-growing activities globally. While the practice has been growing for years, it became more popular during the Covid-19 pandemic as more people stayed at home and as stocks and cryptocurrencies soared.
Day trading is the process of buying and selling financial assets in short time with the goal of making a profit. These assets include stocks, currencies, digital currencies like Bitcoin and Ethereum, bonds, exchange-traded funds (ETFs), and commodities.
Day trading differs from other forms of making money in the financial market like investing and swing trading. The main difference is in the duration of holding an asset.
DAY TRADING VS SWING VS INVEST
In day trading, the trader’s goal is to open a trade and ensure that it is closed by the end of the day. In other words, they don’t leave their trades open in a given day.
Swing trading, on the other hand, is the practice of opening trades and then holding them for a few days. These traders simply identify a short-term trend and then hold their trades for a while. On the other hand, investors or position traders are known for holding their trades for many months or even years.
DIFFERENT STYLES OF DAY TRADERS
There are different types of traders. First, there are scalpers, who are only interested in making small profits per trade. These traders open trades and then exit them within a few minutes provided that they have made a profit. Second, there are algorithmic traders who use algorithms and bots to execute their trades.
Third, there are copy traders, who rely on other experienced traders. They simply use tools offered by forex brokers to copy trades from traders who are better than them. This practice is done by both experienced traders who want to diversify their earnings and inexperienced ones.
HOW TO START TRADING?
After spending time in a demo account, you need to move to the next step. If you are a retail trader, you can simply move from a demo account to a live account. You simply do this by depositing funds to your account and then starting to trade. If you are using a prop-trading approach, you will need to be taken through an induction process.
Also, you should be aware of some of the top rules of day trading. These include:
You should not overtrade. Doing so will expose you to more losses.
Do not risk more than 3% of your account per trade.
Do not trade without a stop-loss.
Use limit orders and not market orders.
Limit your leverage.
Focus on small trades at first.
As you may have guessed by now, day trading is not a joke, and the trader's profession is a job in its own right. There are many things to consider both before you decide to start trading and once you have started your career.
Let's take a look at the most common ones and how you can create the strategy that best suits your needs.
Risk management refers to the process of reducing risks while at the same time maximizing your returns.
As a trader, you will need to have several risk management strategies to succeed. Some of these strategies are:
Stop loss and trailing stop-loss - These tools will stop your trades automatically when a certain loss threshold is reached.
Position sizing - You should always open relatively small trades that don’t put your trades at risk.
Trades overnight - You should always avoid leaving your trades open overnight as a day trader. This is simply because there are many risks that can happen when the markets are closed.
3% rule - embrace the 3% rule, meaning that you should avoid opening trades that expose your account to a loss of more than 3%.
Avoid moving the stop loss - A common mistake you should avoid is to move your stop loss as you wait for the trade to recover. In most cases, you will end up making a big loss.
Since trading can be done on a 24-hour basis, you should strive to manage your time well. Furthermore, you want to have a good work and life balance. Therefore, you should spend adequate time trading but you should avoid overtrading.
Also, ensure that you focus most of the trading at key times. If you are a stocks trader, the best time is when the market is opening or when its about to close.
DIVERSIFYING YOUR PORTFOLIO
As an investor, it is highly recommended that you hold several assets. By so doing, a major loss in one asset will be covered by a profit in another asset. This explains why exchange-traded funds (ETFs) are usually less volatile than individual assets.
However, as a day trader, the situation is relatively different. While you should have a diversified trading portfolio, you should only hold a small number of trades per time. This is important because you want to be able to track the performance of the trades easily. Also, opening more trades puts your account at risk if most of them make a loss.
DAY TRADING JOURNAL
The next key concept of day trading is a trading journal. This is a document where you write most details about your trades. The journal includes things like:
reasons for executing them
profit and loss
lessons you learn from them
A journal will play an important role in making your trading easy. It will also make you a more discplined trader.
Another concept in day trading is leverage. Leverage refers to the funds that your broker extends to you so that you can improve your profits. While leverage can make you a lot of money, when used badly, it can lead to substantial losses.
Therefore, use it wisely!