Why is day trading so hard? If there was a Hollywood movie about Day Trading, it would probably star Robert Downey Jr, Leonardo DiCaprio, or Jennifer Lawrence and they would make billions of dollars effortlessly. Unfortunately, Hollywood rarely represents reality. Studies have shown that successful day traders are much less common than we think. In fact, the majority of day traders lose money. Why is day trading so hard? For all current or aspiring day traders, our article will provide you with a few tips to become a more successful trader and why others fail.
What Is Day Trading?
First, what is considered day trading? Day traders are investors who open and close their position within the same trading day. They do not carry their investment to the following day. The investment is not limited to stocks.
Options, currencies, futures, and even crypto can be part of the fun. In the US, day trading should take place in a margin account with a minimum equity of $25,000.
Furthermore, to be considered a day trader by the SEC, one must complete four or more day trades within five business days AND those trades must represent more than 6% of all trades made in the account.
I bet that some of our readers who consider themselves day traders do not necessarily fit the definition above. When you first start trading, it can be pretty scary.
However, the more you practice, the more comfortable you’ll be with your strategy. As a result, we have some tips and tricks for you to look at so you can become a successful day trader.
Tips for Successful Day Trading
As the title of the article suggests, day trading is difficult and it is not for everyone. It requires a lot of discipline, money, research, and most importantly, time. Yes, there is the occasional lucky trade that boosts our ego. Full of confidence, we think we figured it out and we place another trade. That one does not go as well and we’re either back on Step 1 or we’ve lost our initial gain and more. So how about some useful tips for anyone day trading!
Having a strategy is essential
Look for favorable market conditions for your investment. A favorable chart is not the only research that should be done. A successful strategy is most often actioned before the opportunity arises, not after. Uncovering favorable opportunities before they happen is a big part of day trading.
Don’t treat it as gambling
Anyone who has ever been to a casino was certainly down on their initial buy-in and had to work their way back up. The stock market should not be treated in the same fashion. If you are down on an investment, take the loss and put the money elsewhere. I often come across investors who keep averaging down on their investment claiming prices are cheap. A few weeks after, I come across the same investors repeating the same steps and not learning from their mistakes. Move on!
It’s better to lose money in a simulation and learn from our mistakes than to go in the wild unprepared. This is called paper trading. We published an article with the best platforms and it is worth a read.
Treat It Like Your Work
Would you do something your boss wouldn’t agree with at work? Treat each trade with utmost seriousness. Day trading is a full-time job, not a hobby, and deserves to be treated as such.
Are you ready to quit your steady career for the uncertainty of day trading? From experience, I understand how each new trade comes with a ton of adrenaline and it just makes us want to do another.
I get the same adrenaline for every new tattoo I get and I want another one immediately. However, those two actions can’t be compared.
Set your limits
Setting limits orders for a loss or a gain are essential. Don’t be greedy after you’ve achieved your expected profit. It’s better to take the gain and not regret it when profits turn to losses. The same advice goes for losses. Set a stop loss and pursue a different investment. Don’t get attached to the investment.
Be smart with your finances
When I was a financial advisor, I always advised investors to only play with the funds they don’t plan on using in the next 5 years. You don’t want to see your hard-earned money going down the drain within a few days when your family was planning to purchase a property shortly.
Study and use indicators
Indicators and trend analysis are your friends, use them! We offer courses for both beginners and experts in day trading if you are interested! In the next section, we will expand on some patterns to follow.
Remember that there are hundreds of companies with advanced tools and professionals out there. Day traders are up against them and it is not an easy fight without the essential tools.
Day Trading Strategies and Indicators
Below, we will expand on some popular strategies to find an advantageous deal. Don’t forget to cover any trading fees.
This is the easiest strategy. Basically, exit your position as soon as it becomes profitable. Small wins add up over time. No ifs, no buts, OUT.
As soon as a stock is moving up with high volume, jump on the opportunity. This is usually caused by a major catalyst. When volume begins to decrease and there is a sign of reversal, sell.
This happens often with pharmaceutical companies with new FDA approvals or when a drug is released and with mining companies who found a new source of material to mine. Another cause can be stronger than expected earnings.
This strategy involves shorting a stock with an unexplained move up. They are often overbought and buyers will want to take out their profits. Exit the position when other buyers re-enter the position.
Buying at the lowest price point of the day and selling at a higher one. Seems simple, but not always easy to pinpoint.
Indicators are tools created at our disposal to make an educated purchase of a financial asset on the stock market. There is a wide range of indicators, some more useful than others. We have a video available that summarizes the most popular indicators.
To conclude, there are many reasons why day traders may have some difficulties turning their purchases into profits. It is important to stay focused on the task at hand and to use the available material online for traders. The markets over the last few months have been very volatile. This can be beneficial or detrimental to any day traders out there trying to make a quick buck.
If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.