Trading for Beginners

An Unforgettable Event Elevating Trading Education 

The stock market is among the popular markets for traders, with the New York Stock Exchange (NYSE) being the largest stock exchange in America by market capitalisation.

Aside from stocks, markets that you can trade in are foreign exchange (forex), commodities and cryptocurrencies. Trading in these markets can help you earn a profit from market movements.

However, trading can be challenging, especially when market prices change anytime, and news can affect whether an asset increases or decreases in value. Therefore, you must learn the factors influencing market prices and what strategies you can use to trade.

What are the basics of day trading that beginners must know? What are the different types of trading? Are there any strategies that you can use to help you trade?

This beginner’s guide provides an introduction to trading and covers various topics, such as the different trading methods, strategies, and platforms.

This article aims to make beginners understand the basics of trading and make informed decisions as they begin their trading journey.

Everything Trading is an online platform where you can learn various topics about trading to help jumpstart your trading career. 

Sign up with us today and gain free access to trading strategy courses, webinars, live trading sessions, and weekly market analysis to help you become a more informed trader.

What Is Trading?

Trading is the selling and buying of financial instruments, such as shares, goods and currencies, to make a profit. You predict whether a financial asset’s price will rise or fall and take a position by buying or selling that asset to profit from its price movements.

Trading in the financial markets is different from traditional investing, which involves buying and owning assets for the long term.

Why Use a Derivative?

Derivatives are contracts whose value comes from an underlying asset or group of assets. These contracts allow you to go long (buy) or short (sell) to make a profit or a loss if that asset’s price rises or falls.

You can also use derivatives to help mitigate risk (hedging) or assume risk with an expectation of a commensurate reward (speculation).

Key Takeaways

  • Day trading can be profitable in the long run if you do your research and take this activity seriously.
  • As a day trader, you must have focus and diligence. You must also be objective and patient.
  • Deciding what securities to buy usually involves looking at an asset’s liquidity, volatility, and volume.

Five Key Trading Terms

Technical terms you must understand so that you can trade with confidence are as follows:

  • Spread betting: This trading method lets you trade on an underlying asset’s price movements by betting an amount of capital per point of movement in that asset’s price.
  • CFD trading: Contracts for difference (CFDs) allow you to trade on an underlying asset’s price movements by exchanging the difference in that asset’s price from when you open your position to when you close it. 

This price difference determines how much you can gain or lose.

  • Going long and going short: Going long means buying an asset after predicting that the market’s price will rise. Going short means selling a security you don’t own with an expectation that its price will fall.
  • Trading on margin: This method involves opening a position for less than your trade’s total value. Suppose you buy CFDs on shares with a total value of $1,000. If your broker offers a 20% margin deposit, you can open a trade with $200.
  • Risk: Risk is the possibility of monetary loss. Understanding trading risks is essential to managing and minimising or preventing losses.

Financial Markets New Traders Need to Know

The financial market consists of several securities you can trade. If you’re a beginner, consider trading CFDs across assets like stocks, forex, indices and commodities.

What Is Stock Trading and Investing?

Trading in shares means buying and selling a public company’s share price based on whether it’ll rise or fall. By trading stocks, you can go long or short. However, you won’t receive investment-related benefits like dividend payments because you don’t own those shares.

You must purchase a stake in the company to receive dividends and other benefits associated with long-term investing. Unlike trading, you must pay the share’s full price and own those shares. Doing so entitles you to shareholder benefits like dividends and company voting rights.

What Is Forex Trading?

Foreign exchange or forex trading is selling and buying one currency for another. 

Forex trades in pairs of two currencies. You predict whether one currency’s price will rise or fall against another. 

For example, you can speculate whether the U.S. dollar (USD) will strengthen or weaken against the British pound (GBP).

You can go long or short with forex. If you predict correctly, you can profit from the trade. But if the price moves in the other direction, that’s a loss for you.

Forex markets are among the world’s largest and most liquid markets due to the global reach of finance, trade and commerce. Furthermore, forex trades 24 hours daily, five and a half days weekly.

What Is Index Trading?

Indices are collections of publicly traded stocks grouped into one entity. When you trade indices, you’re trading on all its stocks simultaneously.

Indices usually group stocks that have something in common. For example, the Standard and Poor’s 500 (S&P 500) groups the 500 largest U.S.-listed companies by market capitalisation. 

Meanwhile, the Financial Times Stock Exchange 100 (FTSE 100) groups the 100 biggest stocks in the United Kingdom (U.K.).

What Is Commodities Trading?

Trading commodities involves speculating on the prices of tangible and usually natural resources. For example, you can take a position on the price of gold, copper, sugar, coffee, or Brent crude oil.

Commodities have two categories:

  • Hard commodities consist of mined materials like precious metals, oils, diamonds, and gases.
  • Soft commodities consist of animal and plant resources like grains, coffee beans, sugarcane, and cattle.

Trading for Beginners: Where to Learn More

Getting started with trading can be intimidating, but it provides plenty of learning and earning opportunities.

Fortunately, Everything Trading provides all the tools you need to improve your skills in navigating the financial markets.

With an Everything Trading membership, you’ll have a comprehensive library of trading tools and educational materials to enhance your trading knowledge.

“Where Can I Know More About the Markets to Trade?”

Whether you’re a beginner or a professional trader, Everything Trading provides comprehensive educational resources to give you the know-how and confidence to become a successful trader.

Sign up for an Everything Trading membership and gain access to educational materials like trading tools, webinars, courses, and information that professional traders also use.

Your First Trade: How to Do It

After learning about trading, your next step is to make your first trade. The following steps will give you an idea of how this process works:

  • Open a trading account and make your initial deposit.
  • After carefully analysing the markets, select an opportunity to trade a financial instrument. You can buy if you think the asset’s price will rise or sell if you believe the price will fall.
  • Select your deal size. If you choose CFDs, you’ll trade contracts.
  • After entering a position, monitor it to see how the market moves.
  • Take the necessary steps to manage your risk.

Risks and Benefits Beginner Traders Should Know

Trading has several benefits as well as risks. Some advantages can sometimes be a disadvantage depending on the market situation.

Benefits:

  • Leverage: Leveraged trades allow you to enter positions using a fraction of the trade’s total value to help maximise your profits.
  • Short selling: Going short involves borrowing and selling a security on the market. Your aim is to buy that same asset later, hopefully at a lower price than you sold it for and profit from the difference.
  • Volatility: Volatility is the rate at which an asset’s price increases or decreases within a specific period. A trader with the right strategy and risk management measures can find profit opportunities to trade on volatility.
  • Negative balance protection: Some brokers provide protections that help prevent you from losing more than the capital in your account.

Risks:

  • Leverage: Spread betting and CFD trades use leverage, meaning profits and losses from these trades can significantly outweigh your initial margin.
  • Short selling: Suppose the asset’s price increases, and you don’t have a stop-loss order (an automated command to sell an asset after reaching a specific price) to exit your position. 

Because short selling needs the price to go down to make a profit, you can suffer significant losses if the price goes up.

  • Volatility: Volatility influences how much an asset’s price can decrease. Too much volatility can also put you at risk of losing money.
  • Margin call: When your loss from a leveraged trade exceeds your account balance, you’ll be prompted with a margin call requiring you to add more funds to cover the loss and continue trading.

Trading Terminology: Trading Notes for Beginners

The world of trading uses terms that a nontrader may need help understanding. If you’re new to trading, you must familiarise yourself with these terms to help you avoid confusion and trade confidently.

Spot Forex

Spot forex trading is buying and selling real currencies based on their current price.

Suppose you buy a specific amount of U.S. dollars and exchange it for euros. You can exchange your euros for dollars again if the dollar’s value increases. In this case, you’ll receive more money than you spent on the initial purchase.

CFDs

CFDs represent an asset’s price movement instead of the asset itself. When buying and selling securities in large amounts, CFDs let you take advantage of price movements without owning the physical asset.

Depending on your broker, you can trade CFDs across different instruments like stocks, bonds, indices, commodities, and cryptocurrencies.

Pip

A pip is the base unit of a currency pair and equals 0.0001 of the quoted price. If a forex pair’s price goes from 1.1556 to 1.1557, the difference is one pip (1.1557 – 1.1556 = 0.0001 = 1 pip).

Spread

The spread, also called the bid-ask spread, is the difference between an asset’s buy and sell prices. If a currency pair’s bid (buy) price is 1.9985 and the ask (sell) price is 1.9987, the spread is two pips (1.9987 – 1.9985 = 0.0002 = 2 pips).

Many popular currency pairs have low spreads, but pairs that don’t trade as often can have wider spreads.

Margin

Margin is the money kept in your trading account when opening a trade. Sometimes, you may need more cash to trade in high volumes to make a good profit.

If you’re trading currencies, your forex broker can allow margin trading using leverage to help boost your buying power.

Leverage

Leverage is the capital you can borrow from a broker to help increase the volume of trades you can make. Leverage can help if you don’t have enough money to fund the trade’s total value.

Bear Market

 This term describes a market moving in a downward trend. In the stock market, a bearish movement is when stock prices continue to fall. 

Bull Market

A bull market is a period of increasing prices in the market. An individual asset or sector can be called bullish if it keeps trending upwards.

Beta

This metric measures an asset’s price movement relative to the whole market’s movement. For example, a stock beta of 1.3 means that it’s 30% more volatile than the market. Whenever the market moves by 1 point, this asset moves by 1.3 points, and vice versa. 

Broker

A broker is an individual or company that facilitates your buying and selling of a financial instrument. If you’re trading online, an online broker provides these services through their platform.

Bid

In the stock market, the bid price is the price buyers are willing to pay per share at any given time. This price is set against the ask price, which is what sellers are willing to sell their shares for.

Exchange

An exchange is where you place your trades. Some popular stock exchanges are the NASDAQ (National Association of Securities Dealers Automated Quotations), NYSE (New York Stock Exchange), and LSE (London Stock Exchange).

Close

The close is the time when an exchange closes and stops trading. For example, NASDAQ and NYSE trading hours open at 9:00 AM and end at 4:30 PM Eastern Time (E.T.).

Day Trading

Day trading is one of the common trading strategies in which you buy and sell assets within a day. If you’re interested in making day trades, consider placing long-term investments.

Dividend

Dividends are a part of a company’s earnings paid to its shareholders (people who own the company’s stock). The company pays out dividends quarterly (four times a year) or annually (once a year).

Not all companies pay dividends. For example, companies offering penny stocks don’t likely pay dividends to shareholders.

Penny stocks are those trading for less than $5 per share.

Blue Chip Stocks

These stocks come from large, industry-leading firms. Many traders prefer blue chip stocks because of these stocks’ reputation for paying stable dividend payments and sound long-term fiscal management.

Regarding the term “blue chip,” popular belief is that it comes from the blue chips casinos use to denominate the highest-valued chips.

Which Trading Strategy Is the Most Popular for Beginners?

Following the trend is among the popular trading strategies for beginners. You follow an asset’s trend or price direction and buy or sell based on that movement.

For example, you can buy a stock if you believe the trend will rise and sell if you think the movement will go down.

How to Trade Forex for Beginners: Introduction

After learning the kinds of assets you can trade and the various terms you’ll encounter while trading, your next step is to learn how to trade, read charts, use trading platforms, and implement strategies. The sections below discuss these concepts.

How to Trade Forex for Beginners

Before placing a trade, you must decide whether to go long or short and how much to spend to enter a position. Knowing when to take such positions can help you determine which trades to enter.

Price and Quote

Currency pairs have a bid price at which you can buy the currency and an ask price at which you can sell it.

Additionally, each pair has a base currency and a quote currency. The quote is the currency whose value equals one unit of the base currency. 

For example, a EUR/USD (euro and U.S. dollar pair) trading at 1.0712 means you’re buying €1 for $1.0712. 

In the example above, the euro, the first listed currency of this currency pair, is the base currency. The second currency, the dollar, is the quote currency.

Long Trade

Upon analysing the market, suppose you find a currency pair you believe will increase in value. In that case, you can hold a long position until the currency’s value rises. Afterwards, you can sell that currency and profit from the price difference.

Short Trade

Suppose you expect a currency’s value to drop. You can sell the asset and repurchase it for a lower cost to profit from the difference.

How to Read Forex Charts for Beginners

Whether you’re a beginner to forex trading, you can further enhance your learning by discussing charts.

When analysing forex price movements, you have three options to display their performance: line charts, bar charts, and candlestick charts.

Line Charts

A line chart shows a line that connects the closing prices of a given time frame. When you view a daily chart, this line connects the closing prices per trading day.

You can use the line chart to help you identify big-picture trends. However, unlike the other chart types, this chart’s basic design doesn’t offer much else.

OHLC Bar Charts

A bar chart shows a vertical bar for each period you’re viewing. If you use a daily chart, each bar represents one day’s worth of trade.

The bar chart shows the asset’s OHLC (open, high, low, and close) values per period, offering more data than the line chart.

The dash on the bar’s left side represents the opening price, while the dash on the right is the closing.

The top of the bar is the highest price traded during the selected period, while the bottom is the lowest traded price.

Green bars, also called buyer bars, are those whose prices close above the open. Meanwhile, red bars, also called seller bars, have closing prices below the opening price.

The OHLC bar charts help you identify whether buyers or sellers are in control of the market. These bars also form the basis of the candlestick charts.

Candlestick Charts

These charts are similar to OHLC bars because they show an asset’s open, high, low, and close values within a particular period.

The main difference is that the bars in a candlestick chart appear as the candle’s “body”, representing the closing and opening prices. The “wicks” are the highest and lowest prices traded within a specific period.

Forex Trading Systems

Trading has been an everyday activity among banks, investors, corporations, and speculators for decades. A wide range of forex trading strategies have been developed over time.

These systems include the following:

  • Currency scalping: This type of trading consists of selling and buying currency pairs in short periods, typically within a few seconds or hours, with the trader’s intention to accumulate numerous small profits.
  • Intraday trades: Intraday forex trading focuses on one- to four-hour price trends, which may be a more conservative approach for beginners.
  • Swing trading: Swing trading focuses on larger price movements than intraday trading or scalping. This medium-term trading approach lets you keep trades open for days or weeks.

Best Forex Trading Platforms for Beginners

When evaluating a trading platform as a beginner, ensure that it provides the following elements:

Trust

Your chosen platform must provide accurate quoted prices, fast execution of orders, and sufficient data transfer speed to help you trade forex successfully.

The information must be available in real-time, and the platform must always be available when the forex market opens to ensure you can take advantage of any opportunity presented.

Security

A reputable forex broker must ensure that its platform can provide adequate security for your data and the ability to back up all essential account information.

Independent Account Management

A reliable forex trading platform should allow you to manage your account and trades independently without having your broker act on your behalf. Doing so helps ensure you can trade as soon as the market moves, control any open positions, and capitalise on opportunities that arise.

Analysis

Market analysis can help you determine what assets are likely to be profitable and give you an idea of when to enter and exit a position.

Technical indicators can assist you in analysing markets more effectively if you can access them through the trading platform instead of having to exit the platform to use those tools.

These indicators are mathematical calculations produced by a security or contract’s volume, price, or open interest.

Automated Trading Functionality

Many advanced trading platforms can automatically implement trading strategies on your behalf once you have configured the parameters for these strategies.

For example, you can use the MetaTrader 4 and MetaTrader 5 platforms, which are among the latest and most popular trading platforms worldwide.

You can set up these platforms to use automated strategies. You can also access both platforms on your desktop and mobile devices.

Is Forex Trading Safe for Beginners?

When considering trading forex, beware of the following risks to help you prepare your risk management strategy:

  • Interest rate risk: High interest rates help attract foreign investment and increase a country’s currency’s value, boosting demand for that currency.

However, lower interest rates can discourage foreign investment and decrease the currency’s strength.

  • Transaction risk: Time differences between countries can lead to transaction or exchange rate risk. During the 24 hours that a forex market is open, there’s a chance that exchange rates will change before a trade settles.

Transaction risk can increase as the time difference between entering and settling a contract increases.

Forex Trading Strategies for Beginners

The following sections explain three strategies to use when trading currencies as a beginner:

Breakout

This strategy uses breaks (sharp upward or downward price movement) as trading signals. A breakout occurs when an asset’s price moves beyond a trading range and achieves new highs or lows. This breakout can potentially lead to a new trend and more trading opportunities.

One caveat of breakouts is that not all result in new trends. Consider using a stop-loss order to prevent or minimise the chance of a loss.

Moving Average Cross

Moving averages are lagging indicators that use historical price data and move slower than the current market price.

Moving average indicators typically use two lines: a fast-moving, short-term moving average line and a slow-moving, long-term line.

Common moving average settings include 50-day, 100-day and 200-day periods. You can adjust the length of these periods depending on your preferences.

A short-term moving average line crossing above the long-term line indicates that recent prices are higher than the oldest ones. This indication suggests an upward trend and potential buy signal.

Conversely, a short-term line moving below the long-term line suggests a downward trend and may be a sell signal.

Donchian Channels

Donchian channels are technical indicators that help identify bullish and bearish conditions that favour reversals, emerging trends, and higher and lower breakouts.

You can modify the number of periods appearing in the Donchian channels as you see fit.

The indicator forms by showing the highest highs and lowest lows of a user-defined period.

Suppose you set the period to 20 days. A breakout in the Donchian channel can suggest one of two things:

  • Buy if the asset’s price exceeds the highest high within the last 20 days.
  • Sell if the asset’s price drops below the lowest low within the last 20 days.

Forex Trading Tips for Beginners

Forex can be an extremely volatile market for trading, depending on the circumstances surrounding a currency’s performance. Thus, it may help if you prepare before you trade forex with real money.

The following sections provide tips that may improve your chances of success and profitability in forex trading.

Educate Yourself

Learning about the forex market as much as possible can help you make informed trading decisions instead of guessing what currencies to buy and sell.

Before risking real money while trading, study the different currency pairs and understand the factors that make their prices move up and down.

Know Your Markets

Take the time to learn what moves the forex market and influences the price movement of currency pairs. Doing so can help lower your chances of making mistakes that cost you more money than you can afford to lose.

Create a Plan and Stick to the Plan

A trading plan is an essential forex trading component that may help improve profitability and minimise losses. You can set up your trading plan to include your profit goals, evaluation criteria and risk tolerance level.

After creating a plan, ensure that each of your trades doesn’t fall outside the criteria you set.

Practice

Before trading with real money, test your plans and strategies using a demo account. Doing so lets you see how your trading plan performs without risking your capital.

Some brokers provide a free demo account where you can practise your trades to help you become a more confident and experienced trader.

Forecast the Market Conditions

If you prefer predicting markets based on news and financial or political data, you may be a fundamental trader.

Suppose you choose to predict market movements based on technical analysis tools like moving averages and other indicators. In this case, you may be a technical trader.

You can use both analysis methods to forecast market movements.

Know Your Limits

Whether your trade is going in your favour or not, knowing when to exit can help you stick to your plan and prevent unexpected losses later. Consider setting stop-loss orders accordingly and never risking more money than you can spare.

Know When to Stop

Even if you treat trading as a full-time job, you don’t need to sit and watch the markets every minute of every day. Consider using stop-loss and limit orders to help you manage risks, exit the market at the price you set, and protect potential profits.

Leave Your Emotions Outside the Door

Suppose you purchase forex, but the market isn’t going your way. Don’t let your emotions influence your trade by trying to get your losses back in one go. If the market keeps going the other way, you may lose more money.

When you have a losing trade, continue sticking with your plan as you try to slowly recover what you have lost.

Stay Slow and Steady

Most, if not all, traders have lost money, but if you keep a positive edge and are consistent with your plan, you may have a better chance of earning a profit.

Educating yourself and developing a successful trading plan is good, but sticking to your plan through discipline and patience may help you achieve long-term success.

Stay Open-Minded

Open-mindedness is a valuable trait for a trader. You must be mentally prepared for the uncertainties of trading while constantly exploring different strategies and options until you find what works for you.

If you have a rigid way of thinking, you may find it challenging to adapt to what happens in the market.

Don’t Fear Growth

Although consistency is essential, reevaluate your trading plan occasionally, especially if things aren’t working as planned. Your needs can change as your experience and knowledge grow. If your financial situation or goals change, consider adjusting your plan also.

Choose the Right Broker for You

Select a trading broker to serve your needs as you engage the market. The execution, pricing, and customer service quality a broker provides can spell the difference between a satisfying trading experience and a poor one.

What Is Day Trading?

After familiarising yourself with trading basics, the next step is to learn about day trading.

If you buy an asset in the morning and sell it within the same day before the trading hours end, you have performed a day trade. However, if you close that position the next day, your transaction is no longer a day trade.

Considering this scenario, read the following sections to learn what day trading is and how it works.

How Does Day Trading Work?

Day trading works by capitalising on short-term price movements by actively buying and selling shares. 

Day traders seek volatility in the market. Without short-term price movement (volatility), there is no opportunity. The more movement a stock has, the more profit a trader can gain or lose in a single trade.

What You Need Before You Start Day Trading

Day trading isn’t for the faint of heart. Before you begin day trading, you must possess the following:

  • Strong knowledge of day trading terminologies and technical analysis
  • A tested and proven profitable strategy
  • Proven profitability in a day trading simulator

The following sections expound on these three elements.

Strong Knowledge of Technical Analysis and Day Trading Terminology

The first steps to learning day trading include reading trading books and watching educational videos to understand the terminology and technical analysis methods.

However, one challenge with learning day trading is the overwhelming and often contradictory information out there.

The reason is that the technical analysis or entry and exit requirements working for one strategy may not work for another.

Adopting a Proven Day Trading Strategy or Developing a Profitable Day Trading Strategy

You can choose to adopt a strategy used actively by other traders or create your own.

If you decide to create a strategy, prepare to spend months or years testing and improving it before you can use it for trading real money.

However, you can also use a proven profitable strategy to help save time and effort. You can decide later if you want to customise that strategy by making a few changes to suit your needs and preferences.

Converting Knowledge to Skill by Practising in a Day Trading Simulator

Trading simulators can help you practise your strategies in real time without using real cash until you’re comfortable with trade management and order entries.

Some beginner traders may overestimate their abilities and start trading with real money, only to lose. If you want to lower the chance of this situation happening, consider practising your trades with a simulator first.

Day Trading Tools: Everything You Need

As you trade, you’ll use several tools to help execute your trades, identify potentially profitable assets, and chart price movements. The following sections discuss these tools to help your day trading activities.

Best Broker for Day Trading

Choosing the right broker is one of the significant decisions you’ll make because you’ll entrust the money you’ll use for trading to that individual or company. You also need to look for a broker that can provide fast trade executions at a reasonable price.

Trade Execution

Another essential element you should look for in a broker is the speed at which your orders execute. A few seconds can sometimes distinguish between catching and missing a breakout.

One way to achieve fast execution is by looking for a broker that provides direct market access (DMA).

DMA gives the trader direct access to the financial market exchanges’ electronic facilities to achieve fast order execution at lower costs.

Commissions

Day trading brokers can charge commissions through two pricing structures: per share and per trade. The charges vary among brokers and on your position sizing.

  • Per share: This structure charges a fee for each share of the asset you trade.
  • Per trade: This structure requires you to pay a fee for each trade you make, such as a buy or sell transaction.

Stock Scanner

Stock scanners are tools that constantly scan the market and stream real-time results.

If you’re a day trader who relies on short time frames, consider using scanners that can identify price movements as small as ticks and as far as weeks.

A tick is a short-term indicator that measures a security’s minimum upward or downward price movement. 

Charting Platform

A robust and reliable charting platform can help you visualise price action and make trade decisions.

Still, not all brokers’ charting platforms meet the active traders’ demands. If you’re one of these traders, consider using third-party charting software to augment your analysis.

Day Trading Tips for Beginners

After learning what trading is and the various tools you can use to analyse your trades, your next step is knowing how to profit from day trading. The following sections discuss day trading tips for new traders.

Knowledge Is Power

Aside from knowing day trading procedures, you must stay up-to-date with the latest stock market news and events affecting stocks. Such information can include interest rate plans, leading indicator announcements, and other business, economic, and financial news.

Set Aside Funds

Assess and commit an amount of capital you can afford to risk per trade. Many successful day traders can risk less than 1% or 2% of their accounts per trade.

Suppose you have a $20,000 trading account and are willing to risk 2% of your balance per trade. Your maximum loss per trade is $400 ($20,000 x 2% = $400).

Set Aside Time

Day trading requires time and attention, and you may need to utilise most of your day. Thus, consider other trading methods if you have limited spare time.

Day trading requires you to track the markets and spot opportunities that can arise during trading hours. Because these opportunities can occur anytime, you must be alert and quickly move when they happen.

Start Small

As a beginner, you should focus on one to two assets during a session. Tracking and finding opportunities may be more manageable with just a few securities. As you gain experience, you can add more assets to trade.

Avoid Penny Stocks

Even if you’re looking for low-priced stocks, consider avoiding penny stocks, especially when you’re a new trader.

These stocks are often illiquid, and your chances of hitting the jackpot with them are usually slim. Unless you have done your research and see a real opportunity, steer clear of these securities.

Time Those Trades

Many orders placed right before the market opens usually execute as soon as the morning trading hours start, contributing to price volatility.

As a seasoned trader, you may recognise those patterns and time your orders to make profits. If you’re a beginner, consider observing the market for 15 to 20 minutes before making any moves.

Cut Losses With Limit Orders

Limit orders can guarantee the price (but not the execution) and help you trade more confidently because you can set the price at which your order should automatically execute. Such a feature enables you to cut losses on reversals.

Be Realistic About Profits

You don’t have to succeed in all your trades to become profitable. Many successful traders earn from only 50% to 60% of their trades. What makes these traders different is that they plan and ensure to make more on their winning trades than they lose.

Stay Cool

Sometimes, the stock market can become too unpredictable and test your nerves. As a day trader, you must learn to keep greed, fear, and hope at bay. Make decisions based on logic, not emotion.

Stick to the Plan

Successful traders can usually make fast decisions because they have a trading strategy and the discipline to stick to it.

If you want to succeed in trading, follow your formula closely instead of trying to chase profits. Also, don’t let your emotions get the best of you and make you abandon your strategy.

What Can Make Day Trading Difficult?

Day trading takes plenty of practice and know-how, and several factors can make this trading style challenging.

First, remember that you’re trading against other professionals who may have access to the best technologies and industry connections.

Second, you must pay taxes on short-term gains, such as for assets you hold for one year or less.

You can be prone to psychological and emotional biases affecting your trading. For instance, you may experience stress when losing money on a trade.

Deciding What and When to Buy

Trading takes practice and observation to determine the right time and price to buy and sell assets. The sections below discuss what to look for in securities and when to buy.

What to Buy

When deciding what assets to buy, you must look for three things:

  • Liquidity: A highly liquid security lets you sell and buy it easily and at a reasonable price.
  • Volatility: Higher volatility means greater potential for profit or loss. Volatility is the rate at which prices increase or decrease over time.
  • Trading volume: Trading volume measures the number of times traders buy and sell an asset in a given period.

When to Buy

After identifying the assets you want to trade, you must determine when to buy. Tools that can help you identify your entry points include:

  • Electronic communication networks (ECNs) that display the best available bid and ask quotes and automatically match and execute your orders
  • Real-time news services
  • Intraday candlestick charts that provide price action analysis

Deciding When to Sell

Some common profit target strategies that can help you decide when to sell are:

  • Scalping: Immediately selling after the trade becomes profitable
  • Fading: Shorting stocks after rapid upward movement
  • Momentum: Finding strong trends supported by high volume
  • Daily pivots: Buying at the day’s low and selling at the day’s high

Day Trading With Cash vs. Margin

Day trading with a cash account means you only use the cash in your account for trading. With a margin account, you can use leverage to increase buying power by borrowing funds from your broker.

The following sections provide examples of these account types.

Cash Account

If you have $1,000 in your cash account, you can only enter positions worth up to $1,000. You must deposit more funds into your account or make more profitable trades to increase your position.

Margin Account

Suppose you have a 20% initial margin requirement and want to purchase $5,000 worth of assets. The amount you must provide should be $1,000 ($5,000 x 20% = $1,000), and you can borrow the remaining $4,000 from your broker ($5,000 – $1,000 = $4,000).

In other words, margin trading can boost your buying power beyond what your cash allows.

Day Trading Rules for Margin Accounts

The main rule specifically pertaining to day traders is the pattern day trader (PDT) rule.

The PDT rule has the following characteristics:

  • The rule applies to margin accounts only.
  • The rule requires you to make at least four day trades within five days.
  • The rule requires you to maintain at least $25,000 in your account.
  • The rule gives you four times the buying power for day trading.

Ways Around the PDT Rule

One way to trade without the PDT rule is by opening an account with an offshore broker or one not covered by U.S. regulations.

Another way is by day trading futures. These derivatives don’t fall under the PDT rule like stocks do, so you can day trade futures as many times as you want.

Day Trading Patterns and Charts

Three common tools you can use to help determine opportune buying points are:

  • Volume
  • Candlestick chart patterns
  • Other technical analysis, including trendlines and triangles 

Trendlines help predict an asset’s direction. Triangles consist of converging trendlines that signal a pause in the trend.

How to Limit Losses When Day Trading

Some strategies help minimise or prevent losses through automatic or manual means. These methods include the following:

Set Stop-Loss Orders

A stop-loss order can help reduce your losses in your position. 

For long positions, consider placing a stop-loss below a recent low. For short positions, you can place a stop-loss above a recent high.

Suppose a stock price moves about $0.05 a minute. You can place a stop-loss order of $0.15 away from your entry point to allow for fluctuation before the price moves in your anticipated direction.

Set a Financial Loss Limit

Consider setting a daily loss maximum that you can afford. Exit your trade and take the rest of the day off whenever you hit this limit. You can resume trading the next day if you’re a day trader.

Test Your Strategy

After planning how you will enter trades and where to place stop-loss orders, test your chosen strategy to see whether it suits your risk limit. You can use a demo account for testing to avoid using real money.

If your preferred method puts your trades at high risk, you can modify or use a different strategy to help reduce the risk.

Basic Day Trading Techniques and Strategies

Some of the key techniques you can use for day trading are as follows:

  • Following the trend: This technique involves buying when prices rise or selling when prices drop, with the assumption that such movements will continue doing so.
  • Contrarian investing: This strategy assumes a potential reversal in price movements, so you can buy during a fall or sell during a rise.
  • Scalping: This style involves exploiting the price gaps in the bid-ask spread by entering and exiting a position within minutes or seconds.
  • Trading the news: This strategy involves buying when there is good news or selling when the report is unfavourable.

Bull Flag Strategy

You can find bull flag formations in stocks with solid uptrends and good continuation patterns. These patterns are called bull flags because the pattern appears like a flag on a pole.

The pole forms due to a vertical rise in a stock’s price, and the flag results from a consolidation period. The flag can be a horizontal rectangle but can also angle away from the prevailing trend.

All Day Trading Strategies Require Risk Management

Regardless of your strategy, trading activities have varying risk levels. You must know proper risk management to help lower and keep your risk within tolerable levels, as discussed in the section below.

Learn to Play Defense

As a new trader, one of your primary focuses should be mitigating losses. After learning how to lose less, you can focus on making bigger profits.

As a defence tip, set a stop-loss immediately after entering a trade, and leave that order as is. Stick to your strategy and try not to move stop-loss orders around constantly.

How Much Do Day Traders Make

How much you can make day trading depends on numerous factors, such as capital, leverage, and risk management strategies.

To give you an idea, in March 2023, a day trader’s average annual salary was between $34,000 and $96,500.

Turning $500 Into Over $53,000 With Day Trading in 17 Days

There is no guaranteed method to earn $53,000 with only $500 in a few weeks. Although such a result is achievable, your outcome can vary.

One trader claimed to have achieved this result by trading with a broker offering leverage of up to six times with a $5,000 cash balance. This offer would give you up to $30,000 in buying power ($5,000 x 6 = $30,000).

Other elements of that trader’s strategy were risking up to $50 only per trade and maintaining a three-to-one profit-loss ratio. On certain days, the trader doubled their account in one day. Such outcomes are possible if you focus on volatile stocks.

As you trade, remember that you have various fees like commissions, software fees, exchange fees, and taxes that get deducted from your gross profit.   

How to Start Day Trading

After learning a strategy and testing its profitability in a simulator, you can start day trading using a live account. The steps you will need to trade are as follows:

  • Open a brokerage account and deposit money in it.
  • Review your trading plan every morning and make a watchlist of assets to trade.
  • Start trading and stick to your plan.
  • Review your trades at the day’s end.

Is Day Trading Good for Beginners?

Many day traders will likely lose money, but if you gain enough experience, your chances of becoming profitable can increase.

If you’re a beginner trader, consider testing your trades through a demo account before investing your capital to help improve your profitability.

Is Fundamental Analysis or Technical Analysis More Suitable for Day Trading?

Technical analysis can work well for day trading because this method can help you identify short-term trading patterns and trends.

On the other hand, fundamental analysis works better for long-term investing due to this method’s focus on valuation that can often last for months or years.

Why Is Making Money Consistently From Day Trading Difficult?

Making money consistently from day trading requires combining attributes like knowledge, discipline, experience, mental fortitude, and trading awareness. Possessing a high level of these qualities can be demanding for many people.

Also, implementing essential strategies like cutting losses or letting profits run can take extra work for beginners. If you face significant losses and market volatility, having the ability to maintain discipline in trading can be challenging.

Furthermore, you’re trading against thousands or millions of market experts with access to advanced trading tools, years of experience, and deep financial pockets.

Should a Day Trading Position Be Held Overnight?

You can hold a trading position overnight to reduce losses on losing trades or increase profits on winning ones. However, doing so may not be a good idea, especially if you want to avoid overnight risk (adverse price movements after markets close).

Other risks of holding an overnight day trading position include meeting margin requirements, incurring additional borrowing costs, and receiving negative news.

How Much Money Do You Need for Day Trading?

The capital you need for day trading depends on whether you want to make this activity a full-time job or a side hustle to make a few extra dollars.

Why Trade With a Trading Platform

Many brokers provide trading platforms where you can trade in financial markets like forex, metals, indices, commodities, and cryptocurrencies. If you want to practise trading, consider looking for a broker that has a demo account so you don’t risk real money.

For instance, some brokers can offer a standard account, allowing you to start trading for as low as $100. You also gain free access to Everything Trading and save $99 monthly by opening an account with a partner broker.

FAQs

  • Is online trading safe?

Online trading can be safe if you open an account with a regulated and licensed stockbroker. You should also not trade more money than you’re willing to lose.

  • How do I get into trading?

To get into trading, read as much as possible and open an account with a broker. Consider practising your strategies before trading with real money and develop a plan to achieve your trading goals.

  • How much do online brokers cost?

The costs for online brokers can vary, but on average, their trading fees are between $4.95 and $20, although most fees range from $7 to $10 per transaction.

These rates can still change because online brokers can lower their fees further to attract more customers and boost market share.

  • Can I practise trading?

If your trading broker offers a demo account, you can use it to practise trading without risking real money.

  • Can I make money day trading?

Trading doesn’t guarantee that you’ll make money or predict your rate of return over any period, but you can use several strategies to help improve your chances of locking in gains while minimising losses.

  • What is a trading platform?

A trading platform offers you a means of buying and selling shares, exchange-traded products, investment trusts and other assets directly instead of indirectly through a financial adviser.

  • What type of trading account should I choose?

Two main categories of trading accounts are cash and margin accounts.

Choose a cash account if you prefer using only cash to buy and sell assets, but if you want to increase your buying power beyond your capital, consider using a margin account.

  • How do I open a trading account?

You can usually open an account online, and major platforms say the process can take around 10 minutes. You must provide some essential information like bank account and debit card details.

  • How much money do I need to open a trading account?

The money required to open an account depends on the trading broker.

However, all Everything Trading tools and resources are free and available to everyone.

Opening an account with a partner broker also gives you free access to Everything Trading’s trading courses, tools, and communities.

If you have a Taurex account, you can get a one-month free trial to use. Afterwards, you must fund your account for unlimited access.

  • How does monthly investing work?

Some platforms offer monthly investing by letting you set up a direct debit to transfer money into your trading account each month, usually to buy the maximum number of shares monthly.

  • What fees will I pay?

Depending on your broker, you’ll be paying the following fees:

  • Trading platform fees
  • Annual fees
  • Research and data subscriptions
  • Inactivity fees
  • Paper statement fees
  • Account closing fees
  • What tax will I pay for selling and buying shares?

You pay capital gains tax for profits realised after trading shares and other taxable investment assets. Earnings from assets held for less than a year are taxed between 10% and 37%.

  • What should I need to know about buying U.S. shares?

If you’re trading U.S. shares from overseas, you must complete a W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting) form, valid for three years. 

The W-8BEN is an IRS (Internal Revenue Service) form to collect NRA (nonresident alien) taxpayer information to document an individual’s status and for tax reporting purposes.

This form allows you to benefit from a withholding tax reduction from 30% to 15% for qualifying U.S. dividends and interest.

  • What regulatory protection should I look for?

Regulatory bodies like the Securities and Exchange Commission (SEC) in the U.S. or the Financial Conduct Authority (FCA) in the U.K. can give you the necessary protection when trading.

  • What should I consider before share trading?

Consider diversifying your portfolio of shares through a fund, exchange-traded fund (ETF) or investment trust to help reduce your risk exposure to underperforming companies.

  • Is $100 enough for trading?

Some brokers let you start trading with only $100, but to boost your profit potential, you may need to increase your capital or use a margin account to trade with leverage.

  • Which online broker is best for beginners?

If you’re a beginner, the best online broker for you will depend on your trading needs and goals. Consider choosing an online broker offering trading guides, tools, and other educational material to help improve your trades and minimise losses.

  • Which trading platform is best for beginners?

There is yet to be a conclusive consensus on the best trading platform for beginners. However, some elements you can look for in a platform are the speed at which the platform executes orders and the technical analysis tools available.

  • What stock trading app is the best for beginners?

If you’re a beginner, your preferences can differ from other traders, so what may be the best trading app for you may not work for others.

However, when determining what trading app to choose, consider one that meets your trading needs, such as minimum deposit requirements, technical analysis tools, leverage ratios, and trading fees.

  • Which type of trading is best for beginners?

Beginners can start with swing trading because it involves holding an investment for more than a day and less than a few months. Swing trading can be less time-consuming and stressful than day trading.

  • Can I teach myself how to trade?

Yes, you can do self-study on trading by reading books and watching videos. However, if you have questions or topics you don’t understand, having a mentor or instructor can help address and clarify those questions.

  • How do I start trading for beginners?

To start trading, you must first have a brokerage account and at least some basic knowledge about trading. Next, fund your account with enough capital that you can risk losing.

Afterwards, check the various financial markets and choose a preferred asset to trade. Enter a position with that asset and wait for the price movement to give you a favourable position to exit and make a profit.

  • How does the pattern day trading rule affect day traders?

Suppose you have a margin account and place four or more trades in five business days. You’ll be labelled a pattern day trader and required to maintain $25,000 in your account.

  • How do beginners trade stocks?

Beginner traders can start trading stocks through a preferred broker by doing the following:

  • Open a brokerage account and deposit money you can risk.
  • Learn to place an order and view stocks at your chosen trading platform.
  • Practise trading using a virtual portfolio (no money involved) or small amounts in a live account.
  • Keep a trading journal for documentation.
  • Follow market news and make decisions based on your analysis.
  • Monitor your results closely and modify your strategy when it does not work.
  • How do you buy stocks online?

If you want to buy stocks, your broker of choice can provide several account options to open and fund an online trading account and research the stock you wish to purchase.

Afterwards, you can open an order ticket, enter the stock symbol and number of shares to buy, and place your trade.

  • What is paper trading?

Virtual or paper trading is a feature in trading platforms that lets you trade stocks and other assets using virtual or fake currency.

If you’re a beginner, this tool can help you practise stock trading without risking real money.

  • What are fractional shares?

A fractional share is a portion (fraction) of a full, publicly traded share. If you have a small budget and want to buy a stake in companies with high stock share prices, consider purchasing fractional shares if your broker offers this option.

Suppose you want to buy a stock priced at $100 per share. Instead of spending $100 to buy one share, you can buy a $10 fractional share. Doing so lets you own 10% of one share ($100 ÷ $10 = 10%).

  • What is a market order?

A market order lets you buy and sell securities at the best available market price. A market order is the most common type for traders as it is the easiest and fastest way to trade shares.

  • What is a limit order?

Limit orders let you buy and sell assets at a predetermined price. Once your chosen security’s price reaches a specific level, the limit order executes automatically.

References

  1. Stock exchanges – statistics & facts

https://www.statista.com/topics/1009/global-stock-exchanges/#topicOverview 

  1. What Is Forex Trading? A Beginner’s Guide

https://www.investopedia.com/articles/forex/11/why-trade-forex.asp 

  1. Beta: Definition, Calculation, and Explanation for Investors

https://www.investopedia.com/terms/b/beta.asp 

  1. What Are Penny Stocks?

https://www.investopedia.com/terms/p/pennystock.asp 

  1. 10 Day Trading Tips for Beginners

https://www.investopedia.com/articles/trading/06/daytradingretail.asp 

  1. What Is a Currency Pair? Major, Minor, and Exotic Examples

https://www.investopedia.com/terms/c/currencypair.asp

  1. Technical Indicator: Definition, Analyst Uses, Types and Examples

https://www.investopedia.com/terms/t/technicalindicator.asp 

  1. How National Interest Rates Affect Currency Values and Exchange Rates

https://www.investopedia.com/ask/answers/040315/how-do-changes-national-interest-rates-affect-currencys-value-and-exchange-rate.asp 

  1. Most Commonly-Used Periods in Creating Moving Average (MA) Lines

https://www.investopedia.com/ask/answers/122414/what-are-most-common-periods-used-creating-moving-average-ma-lines.asp 

  1. Direct Market Access (DMA): Definition, Uses, and Benefits

https://www.investopedia.com/terms/d/directmarketaccess.asp 

  1. Margin and Margin Trading Explained Plus Advantages and Disadvantages

https://www.investopedia.com/terms/m/margin.asp

  1. Day Trading

https://www.finra.org/investors/investing/investment-products/stocks/day-trading 

  1. Is Day Trading Profitable? How to Get Started

https://www.investopedia.com/articles/active-trading/053115/average-rate-return-day-traders.asp 

  1. How Brokerage Fees Work

https://www.investopedia.com/articles/active-trading/022315/how-brokerage-fees-work.asp 

  1. Short-Term Capital Gains: Definition, Calculation, and Rates

https://www.investopedia.com/terms/s/short-term-gain.asp 

  1. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

https://www.irs.gov/forms-pubs/about-form-w-8-ben

  1. W-8BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

https://businessservices.wisc.edu/documents/w-8ben-certificate-of-foreign-status-of-beneficial-owner-for-united-states-tax-withholding-and-reporting-individuals/