What is Day Trading? A Brief Guide to Get You Started

Gone are the days when people related to or working in brokerages, trading houses, and financial institutions were able to trade in the stock market. These days, trading is easier and more accessible to everyone – courtesy of online trading platforms and instant dissemination of news. The online trading platforms and trading apps are making it easier for laymen to trade like pros with several extra benefits.???

What is Day Trading?

Day Trading is the process of buying and selling securities within a specific period – typically not more than a day. This type of trading involves making profits through the ups and downs in the price movements that occur during a trading session. Day trading takes place in foreign exchange and stock markets.????

Those who engage in day trading are commonly referred to as day traders, and they are typically well-educated individuals with ample financial resources. To potentially increase their profits, many day traders opt for leveraging their investments, taking on additional risk.?

Leverage, as an investment strategy, refers to the practice of using borrowed money or capital through a range of financial instruments to enhance the potential return of an investment.?

How is Profit Generated in Day Trading??

When it comes to day trading, traders profit from short-term market fluctuations triggered by specific events. This trading strategy heavily relies on understanding market psychology and expectations, which guide traders in determining the right time to enter or exit positions.??

Day traders keep a close eye on events and news that may inspire the prices to move up or down. Based on the information and historical data analysis, they open or close the trading positions.

Strategies of Day Trading?

Here are some of the commonly used day trading strategies:???

• Range Trading – Through pre-decided support and resistance levels in prices, this strategy helps the traders to make buy or sell decisions.???
• Scalping – This is one of the most popular strategies where the focus is on small profits through ephemeral price changes occurring throughout the day.???
• High Frequency Trading – Also known as HFT, these strategies use sophisticated algorithms to impact small market inefficiencies.???
• News Based Trading – Under this strategy, traders make profits from the mushroomed volatility that occurs due to news events.???

To make profits in day trading, it is crucial to learn about the basic workings of the market to avoid losing money. You should have a good understanding of technical analysis and be able to read charts effectively. However, having a solid understanding of how the market operates is the most important factor.?

Market Terminology??

Understanding the specialized terminology is crucial in day trading. Familiarize yourself with phrases like "bid" and "ask" prices, "volume," "liquidity," "spread," and "stop-loss order." Mastering these terms allows you to engage in market discussions, analyze strategies, and comprehend reports effectively.?

The following is a list of commonly used trading terms for traders. Make sure to research and understand these terms and explore more on your own.?

1. Bid and Ask Prices: Bid price is the highest buying price, while ask price is the lowest selling price for a security.?
2. Volume: Total number of shares or contracts traded, indicating market activity and liquidity.?
3. Liquidity: Ease of buying or selling a security without significantly impacting its price.?
4. Spread: Difference between the bid and ask prices, representing the trading cost.?
5. Stop-Loss Order: Pre-set instruction to automatically sell a security if it reaches a specified price level, limiting potential losses.?

These terminologies form the foundation of day trading language, enabling effective communication and informed decision-making in the fast-paced trading environment.?

Marketing Hours and Trading Mechanics?

Day trading has specific market hours that are crucial to understand. Usually, day traders focus on regular trading hours, which vary by region and exchange. For instance, in the States, the New York Stock Exchange (NYSE) and NASDAQ operate from 9:30 AM to 4:00 PM Eastern Time. It's important to note that pre-market and after-hours trading also exist, allowing keen traders to react to news events and price movements outside regular hours. Make yourself familiar with the trading hours of your target market to align your activities.?

A firm grasp of trading mechanics is vital for smooth trade execution. Learn how orders are placed, executed, and managed. Explore order types like market orders, limit orders, and stop orders, and their role in day trading strategies. Try to develop an understanding of bid and ask prices to determine optimal entry and exit points for your trades.?

Risk management??

Implementing effective risk management practices is crucial in day trading. It is essential to define your risk tolerance and establish a clear risk management strategy. This includes determining the maximum amount you are willing to risk on any trade and implementing appropriate stop-loss orders to limit potential losses. Developing and maintaining discipline in adhering to your risk management plan is key to long-term success as a day trader.??

By following these key principles, you should be able to protect your trading resources and increase your chances of long term success:?

1. Define your risk tolerance — Determine the maximum amount of capital you’re willing to risk on each trade.?
2. Establish a Risk Management Strategy — This means setting specific guidelines on the maximum risk per trade as a percentage of your overall trading capital. A common rule of thumb is to risk no more than 1-2% of your capital on any single trade.?
3. Utilize Stop Loss Orders — A stop-loss order is a predetermined level at which you will exit a trade to limit potential losses. By setting a stop-loss order, you define the maximum loss you are willing to tolerate on a trade.?
4. Practice Proper Position Sizing — Position sizing refers to the process of determining the appropriate amount of capital to allocate to a specific trade or investment.? The goal is to find the optimal balance between risk and potential reward by allocating an appropriate portion of your trading capital to each trade.

Final Words?

By acquainting yourself with the fundamental aspects of day trading, such as terminology, market hours, and trading mechanics, you will establish a solid groundwork for your journey as a day trader. Developing a comprehensive understanding of these key elements will empower you to effectively communicate within the trading community, make informed trading decisions, and adeptly manage your risk.??

Always bear in mind that day trading is an ongoing learning process that demands dedication, practice, and adaptability. With unwavering commitment and a firm knowledge foundation, you are poised to embark on a gratifying and potentially prosperous day trading adventure.