When it comes to investing, people can choose different trading strategies and day trading is one of them. When learning how to start day trading, you’ll see that it’s the best strategy to follow if you choose to invest in the short term. However, before you dive in, you must first take market liquidity, volatility and volume into account, choose a good broker and decide on the actual strategy you’ll be using. You need to come up with a good plan that’ll serve as a roadmap to your success by constantly monitoring different indicators like MACD, RSI and ATR. “Never stop learning” is the name of the game and in this post, you’ll find everything you need to get you started on your way to financial freedom.
#1 What Is Day Trading
Day trading consists of the purchase and sale of financial assets during the same day. That is, at the end of each day you must close all positions. You can make this type of short-term investment in different markets: stocks, raw materials, crypto assets, currencies, indices and ETFs. In this article, we will cover definitions, the step by step process behind how to start day trading, and several pro-tips to help you evolve as a day trading investor.
#2 Relevant Factors To Take Into Account In Day Trading
There are a couple of elements that could influence asset prices during a trading day. The most important ones that you should take into account are:
- Market liquidity: it is important because it shows how easily and quickly you can enter and exit positions.
- Volatility: it is the speed with which the price moves. If high volatility is expected during the day, movements can create many short-term profit opportunities. You can take advantage of volatility when you encounter many price rises and falls during the day.
- Volume: is a measure of how many times assets are bought or sold in a given period. High trading volume shows a lot of interest and is useful for identifying entry and exit points.
#3 How To Start Day Trading: Step By Step.
For you to be successful in the stock market, it is essential to follow a series of steps that will allow you to achieve success. The objective is to have a clear idea of the steps to follow:
A. Select The Most Suitable Broker
Operating the financial markets can be a great challenge due to the multiple factors that can affect the price of financial instruments. Although the financial risk is part of trading as a profession, the experience and quality of a broker’s service can help you optimize your day trading strategy.
Factors To Consider When Choosing A Broker:
- Background, trust and reputation: a good record and experience in the market are necessary.
- World leader: an industry leader with high performance and innovation is key.
- Regulated: a trading provider must have authorization from the corresponding regulatory bodies.
- Ongoing support: a wide range of hours for customer service and various points of contact, such as direct chat, phone and support, are essential.
- Simplicity: a platform free of continuous downloads, adaptable to different devices and with an appropriate degree of customization and configuration will offer great advantages.
- Offer: The variety and quantity of assets and products available to operate the market is a determining factor to diversify the investment portfolio.
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B. Learn The Most Popular Day Trading Strategies
In the trading world, there is no single method of earning money. That means, there are strategies that adjust to each financial objective. In this section of How To Start Day Trading, you’ll learn how to choose the strategies that best suit your way of thinking.
How To Start Day Trading: Strategies
Investors try to make a profit by studying the direction of prices. If the trend is bullish (there is a maximum price), investors will take a long position and buy the asset. If the trend is bearish (there is a minimum), investors will take a short position by selling.
It consists of taking advantage of short-term price patterns. In this sense, swinging investors are more interested in small reversals in the price movement of a market. In other words, they try to detect small reversals in advance and operate to benefit from small movements.
The strategy is to carry out a large number of operations that remain open for a very short time. It is a short-term trading strategy that allows you to obtain small but frequent profits, since it focuses on achieving a high rate of profit. Scalping requires a very strict exit strategy since losses can quickly offset benefits.
Criteria To Consider When Selecting The Type Of Strategies In Day Trading
- Available Time: Different styles of trading require different periods of time. That is why you must be aware of how much time you really dedicate to Day Trading so that you can choose the strategy that best suits your lifestyle.
- Initial Capital: the shorter the operating time, the less money you will need to achieve a significant gross profit.
- Risk Aversion: day trading and the trading profession in general, is a risky activity in which you can earn or lose money. It is important that you define how much money you are willing to put at risk.
- Personality: it is important to determine which characteristics of your personality are adapted to each strategy to achieve better performance.
C. Learn The Most Common Types Of Indicators In Day Trading
It is not enough to see the evolution of prices for you to make buying or selling decisions. It is also necessary that you do a technical analysis that allows you to find the best opportunities. Day traders make their decisions based on technical indicators. Below you will see the most common:
MACD – Moving Average Convergence/Divergence
This indicator has the function of identifying changes in the trend and direction of prices. It consists of the evolution of two moving averages with different periodicity to determine patterns of changes.
RSI – Relative Strength Index
The RSI determines if the market is overbought or oversold. Analysis is very important to establish whether there will be a reversal in the price trend. The index works with exponential averages. If the RSI is above 70, the market is overbought, but if, on the contrary, the indicator is below 30, the market is oversold.
ATR – Average True Range
The indicator takes into account the closing price of the previous day with an exponential average, and depending on the market trend (bullish or bearish), it subtracts the high or low of the current day from the closing price of the previous day.
Simple Moving Average (SMA)
They are ideal for smoothing price data series and making identifying the direction of trends easier, which is especially useful in volatile markets.
It consists of two standard deviation lines, which indicate support and resistance levels. If the price touches any of these bands there is a possibility that the trend will suddenly change.
In the following graph, you can see the use of several of these indicators (MACD, SMA, Trends). You should consider that it is possible to use more than one indicator at the same time. In this way, you can make an analysis of the best times to buy or sell financial assets.
D. Have A Trading Plan
As with any investment, when conducting daily operations it is essential to carry out an overview and a procedure to develop the strategy. To be more efficient, it is important that you have clear parameters to follow and a list of tasks in an orderly manner. All of this will allow you to be in the right direction to generate profits.
What A Good Trading Plan Contains
- Objective: requires defining goals, capital, risk, schedules, and markets.
- Analysis Method: it is important to choose the analysis method, type of charts and indicators.
- Systematic Review Of The Plan: it allows detecting errors and improving the strategy.
Goals When Doing Day Trading
- Set Rules: This allows you to create a set of rules to adhere to in order to have a clear action plan.
- Better Analyze The Market: A day trading plan can avoid spontaneous and irreversible decision making, something that is especially useful when your emotions start to come into play.
- Avoid Mistakes: following parameters allows you to assess profits and losses. The goal is to think before acting.
- Finding The Best Entry And Exit Times In The Market: defining the financial objectives and instruments that you want to trade will help you to know what operation to carry out during the trading session, according to the scenarios.
- Managing Emotions: defining a framework of rules eliminates any subjectivity in decision-making and, therefore, allows you to better manage emotions.
- Avoid Over-Operating: Having clear rules prevents you from making hasty decisions. Without defined rules, a day trader is likely to want to buy more instruments to compensate for losses.
- Manage Risk: choosing the right level of risk is essential for you to determine the capital to invest and the expected profit.
#4 What Do The Most Successful Traders Have In Common?
- Discipline: the trader recognizes the loss and learns from it.
- Trading Risk Control: establishing a risk/benefit relationship.
- Courage: the ability to let go of emotions.
- Intuition: the ability to feel the market and identify trends.
#5 Tips To Evolve As A Day Trading Investor
Pro-Tip #1: Manage Your Emotions
As you have seen, emotions have a decisive influence on the development of daily trading strategies. It is important that you make technical decisions at decisive moments.
Pro-Tip #2: Never Stop Learning And Training
Day trading is a profession like any other, which requires knowledge and preparation before obtaining the desired results.
Pro-Tip #3: Manage Your Money
It is important that you have an investment plan to allocate capital in the most technical way.
Pro-Tip #4: Be Very Careful With The News
News, keynote speeches, and even geopolitical events can cause high price volatility. You must be aware of what is happening in the world. Take Elon Musk on Tweeter as an example: a simple tweet suggesting that Tesla’s stock price was too high and the very same day the price plummeted.
Pro-Tip #5: Always Set Stop Loss
This allows you to control in advance the amount of money that you are willing to risk in each position.
#6 Could I Make A Living From Day Trading?
The short answer is yes, you can. As in any commercial activity, it is not easy to generate high profitability: it takes a lot of discipline to carry out daily operations. You may have to risk capital, and there is a chance to win or lose money quickly. However, there are many day traders who have managed to be very profitable by following a daily trading plan. They constantly acquire technical knowledge and fully exploit their strategies. If you really want to live from day trading, you already know that it is possible.
#7 How To Start Day Trading: Advantages And Disadvantages
- It is possible to speculate in different markets.
- Closing positions before closing the market eliminates the risk of market disparity occurring overnight.
- Initially, it was the companies with large capital that used day trading. However, thanks to the growth of investment technologies and the greater relevance of operations with margin, trading has become popular, giving access to anyone.
- It is not necessary to have large volumes of capital to invest.
- There are endless brokers that allow access to more people.
- It is not necessary to have long positions in the market.
- It requires a lot of work time. It is not suitable for part-time investors.
- You have to give attention and dedication, as it involves making quick decisions and executing a large number of operations in a single day.
- Investors using the day trading technique do not need to be trading all day, but they need to be vigilant and anticipate the market.
- There may be limitations due to the costs associated with the commissions. The gains obtained from selling or buying financial assets must be greater than the commissions, otherwise, there will always be losses.
#8 Day Trading Vs. Long Trading
|Characteristics||Day Trading||Long Trading|
|Volatility||Key factor for decision making. It can be used to generate great benefits or losses.||It is a less decisive factor than in Day Trading because there is enough time to analyze market movements.|
|Trend||Short-term trends have more patterns of change. There are no clear trends.||Long-term trends are more marked. There are clear trends.|
|Number of operations||The number of operations in Day Trading is higher due to volatility and the short period of time.||In the long term, the number of operations is lower.|
|Stop loss||It is a fundamental tool to mitigate losses. It is possible to program the maximum loss.||The parameters can be moved in time because there is no rush to recover the positions.|
#9 How Much Money Do You Need To Start Day Trading
There is a direct relationship between the amount of capital and profits. The greater the capital, the greater the profit. However, there is also a profit-risk relationship. The amount of money you invest following a day trading strategy will depend on how much risk you are willing to take. It is also important that you have a clear knowledge of instruments (FOREX, stocks, futures and other derivatives), brokers and countries’ legislations. Remember that brokers generally request minimum opening amounts, and there’s also the issue of different state legislations.
If you want to take a closer look at how these markets are regulated in Canada, you can check Universal Market Integrity Rules & Policies
How To Start Day Trading With $500
With $500 as an initial investment, you may be able to carry out daily operations with Contract for Differences (CFD). CFDs will allow you to take advantage of long and short trades. In addition, CFDs will allow you to buy fractions of financial instruments and, since it is possible to resort to financing, you can operate as if you had more money.
It is important to note that to access the stock or currency market you will need more money. This is because, on the one hand, the price of stocks with a clearer trend is usually high. For this reason, it will be more accessible to buy fractions of those stocks through CFDs. On the other hand, Forex currencies are usually bought in batches. That is, there is a minimum standardized quantity. Once again CFDs will allow you to buy fractions of lots and thus you can do day trading. One aspect to keep in mind when investing low amounts is that to generate higher returns you may have to accept greater risk.
How To Start Day Trading: With $1,000
In general, the objective of trading is to obtain the highest possible return with the least amount of risk. In this sense, with $1,000 you may be able to take a lesser amount of risk. You can even buy other less risky financial instruments other than CFDs. For this, remember that you must know the investment options that the broker of your choice will provide you.
The Bottom Line On Day Trading
To round things up, the key takeaways on day trading are:
- The strategy consists of opening and closing positions of a large volume of assets on the same day.
- Many investors use this method to avoid overnight fees.
- Trading in commodities, crypto assets, currencies, indices and ETF markets is possible.
- It is important to take into account the liquidity, volatility and trading volume of a market before starting day trading.
- There are multiple investment strategies.
- There is market access due to a large number of trading platforms.
- To have better results, it is important to design and apply a trading plan to maximize profits and minimize losses.
- Continuous learning is necessary.
- It is an investment method that requires discipline, time and dedication.
If you are considering complementing your day trading strategy with long-term positions to obtain a higher level of diversification in your portfolio, we suggest our post “Capitalist Exploits: Investment Opportunities”. In it we cover the type of content and services they offer, how it works and in which markets they recommend investing.
If you take our advice and learn continuously, never stop practicing and stick to a well-thought-out plan, you can minimize the risks and become a profitable day trader. You can also take advantage of the many new tools at your disposal that make both learning and trading easier than ever before. In our opinion, your best choice as a beginner is eToro, so join now and get started.
If you are looking for a higher level of diversification, you may want to remotely operate part of your portfolio. If this is your case, you can complement your investment strategies with a Robo Advisors. In our post “Robo Advisors In Canada: How To Choose The Best One For You!” you will be able to discover a range of very interesting options to take into account.
We also recommend viewing our post “Wealthsimple Review: All About Canada’s Best Robo Advisor” This is the best-equipped Robo Advisor in Canada that manages your money using a team of world-class financial experts and the best technological talent. It works alongside software engineers, designers, and data scientists who have previously worked at esteemed companies like Amazon, Google, and Apple.