Day trading tips for beginners: Embrace volatility & market mechanics

Author: Forex Live | Category: Education

Day trading online during the global crisis

Day trading is no longer the express domain of Wall Street brokers and their high-powered affiliates. The democratization of trading through online brokers and online trading platforms has facilitated tremendous growth in day trading activity. Nowadays, growing numbers of day traders are filling the market. Their determination, enthusiasm, and insatiable appetite for knowledge are driving equities markets in a big way. Day trading takes place during market hours, with the majority of trades closing out before the end of the day. The ultimate objective of day trading is simple: short-term profits. But this fiercely competitive market is not for the faint of heart. It can be grueling, risk-laden, and punishing at times.

It is against this backdrop that a thorough discussion of day trading activity takes place. Contrary to popular opinion, day trading is really about incremental gains. The world's most successful day traders understand that this is not a get-rich-quick-scheme; it is hard work. There is a definite art to buying and selling financial instruments, like stocks, commodities, indices, or currency pairs. The price action of stocks is affected by myriad factors. These include geopolitics, economics, news, technology, et al. With so many variables to consider, it's important to have a trading plan in place. Successful traders understand the importance of budgeting, strategy, stock selection, and maintaining laser-sharp focus on pricing.

How to Counter the Pitfalls of Day Trading

Think of a career in, or side hustle of day trading like building a house. The most important component of this process is a solid foundation. In trading parlance, that foundation is education of the financial markets. Anyone who is not prepared to learn will invariably fail as a day trader. Even the most seasoned professionals understand that learning is an ongoing activity. Any time you feel that you know it all, the market will throw you a curve ball to remind you that it is in charge. This brings us to an important point: Respect the markets. No matter how much you learn about the interrelatedness of market components, the price mechanics of markets are exceptionally difficult to forecast. In fact, it wouldn't be a stretch of the imagination to say that nobody has the ability to correctly predict market pricing.

Education. The focus of day trading is really about education, not profits. This seems disingenuous to everyone intent on making smart financial decisions with securities. Think of it this way: Profits are a byproduct of a solid education, and understanding of the financial markets. The goal therefore is not to generate profits, but to understand the intricacies of the markets to be able to anticipate price action with a greater degree of accuracy. Top-tier traders never win 100% of their trades; on the contrary, a win/loss percentage of 60%, 70%, or 75% is deemed phenomenal by expert standards. Without an education, it's a crap shoot when buying and selling stocks. You're either going to call it right, or you're going to get it wrong. Education is like a little extra juice in your decision-making process - it tilts the needle slightly more in your favor.

What Types of Things Do You Need to Learn about Day Trading?

For one thing, you have to risk in order to get rewarded. Nothing ventured, nothing gained. Your adventures should be predicated on research, logic, and extrapolation. Use all available resources such as economic indicators, company announcements, media reports, financial statements, market dynamics, charts and trends, and other factors to develop your trading strategy. There is little benefit to day trading without one of the most integral components of all - volatility. Nobody wants volatility to be a daily reality in their personal relationships, since it can be disruptive to your emotional state. However, with day trading you absolutely, unequivocally need volatility. Without rising and falling prices, there is no way to buy on the upswing, sell before the market tanks, or use financial analysis to predict when bearish trends or bullish trends will kick in. This is part of the extrapolation process.

In many forms of trading, clients are exposed to margin and leverage. While this may be helpful if the market is moving in your favor, it does nothing to help you when markets move against you. By leveraging trades, you are increasing the buying power of every $1 in your trading account by a multiple. This can magnify your losses, and your indebtedness to the broker. Avoid buying on margin, irrespective of how enticing it may be. As a casual trader, you are better served by picking penny stocks over blue-chip stocks since there is greater volatility with stocks under $5 apiece. These SMEs listing their stocks for sale typically don't have a proven track record of performance, nor do they have substantial seed capital invested in new companies. As a trader, it behooves you to acquaint yourself with what each company does, and how far along in the process they are.

You may decide to hold certain positions for more than a day. In that case, you would be called a swing trader. By buying and holding stocks for a longer period of time, you are choosing to ride out any short-term volatility in expectations of longer-term gains. This mimics investing, but it is trading since the timeframe is much shorter. Buy and hold approaches are best suited to investing, not trading. When you purchase an asset in expectation of future gains, you must be prepared to ride out the short-term volatility of the markets. The majority of 401(k) (retirement accounts) are based upon the buy and hold approach to investing. As a result, investing is often seen as a passive activity, and trading is perceived as an active activity.

3 Quick Tips to Help Your Trading Profile


  • Carefully vet your trading platform and brokerage to ensure that they meet all your expectations [or as many as possible] before you register and start trading. Issues to consider include your country of origin, regulatory constraints, licensing, trading account minimum/maximum amounts, and so forth. Be advised that trading is stressful, and not suited to everyone.
  • Use a stocks screener to automatically scan the financial markets for the best performing stocks on the day, or the most volatile stocks, or the highest trading volume stocks. It is near impossible to perform these functions on your own, without a stocks screener. Top-tier trading platforms like Stocks to Trade feature a function known as Oracle which automatically performs these tasks for you.
  • Always have an exit plan. Warren Buffett says a lot of interesting things, including this: 'Be fearful when other people are greedy, and greedy when other people are fearful.' Sure, you will kick yourself when you sell stock too early and the price continues to appreciate. But trading is not a once-off activity - it's an ongoing activity where incremental profits build a portfolio over the long-term. Set your price and take profit, or set your price and stop loss. Act decisively at all times.

This article was submitted by Brett Chatz, Market Analyst at LegacyFX.

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