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Day trading takes immense focus, discipline, and strategy to execute correctly and can take years to master. It can be an extremely lucrative career if done correctly with the right amount of research and practice. If you want to start day trading, read on to understand how to break into this industry. 

What is day trading?

Day trading is the practice of buying securities for a short term. In other words, purchasing stocks or cryptocurrency and then selling them at the end of the day to profit. The ultimate goal of day trading is to earn small (or large) profits at the end of the market day with all positions closed, in which those same profits will compound over time. 

This may sound like a quick way to make money, but experienced day traders treat day-trading activities like a full-time job and give it great focus and attention to strategize the best opportunities to make profits. 

Since it is the opposite of traditional investing, where you buy and hold securities in hopes that your stocks appreciate in value over many years, day trading thrives on the financial market’s volatility and the ups and downs of stock price movements throughout a one-day period. 

This practice requires keen real-time observation, high-risk tolerance, and technical analysis of market trends, and past performance.

How does day trading work?

Volatility is where day trading thrives. Day traders make their profits on the fluctuations of the stock prices of the market that day. They love stocks that jump around on the charts no matter the reason.

To execute day trading effectively, traders will buy the dips and sell the highs. This means that while tracking the market trends for the day when a specific stock or security drops in price, the trader will buy at this time to maximize the number of stocks per trade. 

With more tracking and strategizing of potential profits, a trader will sell their position once the stock goes up in price, meaning that a profit was gained.

A day trader can make multiple trades of the same stock in one day if they find enough volatility.

Understanding key terms and strategies is one of the first ways to educate yourself on day trading. We have outlined some words for you:

Key trading terms

  • Forex market: This stands for the foreign exchange market. This market and the stock market are the most common marketplaces where day traders make trades.
  • Professional Day Trader: A professional day trader buys for the short term and then sells securities daily to earn money. You can either work alone or work for a brokerage.
  • Pattern Day Trader (PDT): Is a “day trader” who trades four or more times in five business days using the same account. There are certain restrictions on PDTs and limitations to their account holdings.
  • Margin Trading: Margin trading is also referred to as “buying investments on margin,” in which traders use borrowed funds to increase their purchasing power. This can be risky as there is never a guarantee of a market trend, so when you borrow money, you must pay it back whether or not a trade was executed for profit or a loss.

What are the most commonly used day trading strategies?

  • Scalping: Scalping is a trade management strategy in which a day trader chooses to take small profits frequently throughout the day when available in the market. This involves identifying fluctuations in stock prices in the short term. Scalpers can trade up to hundreds of times per day. Scalping can be a very profitable trading strategy when executed the right way.
  • CFD Trading: CFD trading (Contract for Difference) is popular in the Forex market, where day traders trade the price movements of currency, stocks, and other commodities such as gold and oil. With CFD, traders gain access to leverage on multi-asset platforms like Forex and can take advantage of both the rising and falling markets.
  • Range Trading: This strategy known as trading range refers to security trades between consistent high and low prices for some time. This range means that the top of the security range will provide price resistance, and the bottom of the trading range will offer support. In other words, traders will use various technical indicators to determine when to enter or exit a trading range.
  • News-Based Trading: News-based trading or news trading strategy refers to trading based on volatility around the market and news events. Success trading on news announcements means constantly listening and reading about the current circumstances to get into the market before the volatility becomes too wild. This means that you need to get in at the perfect time, which requires a certain skill level and knowledge of market expectations.
  • High-Frequency Trading (HFT): High-frequency trading is a platform employed by big banks, hedge funds, and other major financial institutions and performed with a high-functioning computer that can execute millions of orders per day. High-frequency trading platforms allow traders to sift through multiple markets and exchanges in seconds. This is possible because these systems use high-tech algorithms to analyze market inefficiencies and pinpoint hot spots for day traders.

How do I get started as a day trader?

Professional day traders do not just wake up one day and know how to day trade. They are professionals for a reason. They have had many ups and downs in this business and have had plenty of years of practice and experience to become established in the field.

There are a few things you need to do before getting started as a day trader:

  1. Have a personal talk with yourself and ask, is day trading truly for me? Day trading takes a lot of individual skills, including attention to detail, constant research, reading comprehension, intense amounts of focus, chart reading, financial analysis, and more. These skills do not come overnight, and money does not come overnight, either. People who try to day trade without enough expendable capital lose money before gaining.
  2. Educate yourself with extensive research on the market, growth stocks, strategies, and different platforms. Knowing how to read a chart is a great start. Still, it is imperative that you learn day trading technical analysis skills and understand key terms, strategies, market trends and how to use different platforms before diving into day trading. It is essential to combine knowledge and skill to be a successful day trader.
  3. Decide where you will get the capital to day trade. One of the hardest things about breaking into the day trading field is having the means to spend. If you decide to use your own money to day trade, you must acknowledge that you can potentially lose a lot of money and risk financial ruin. You should only trade with money that you can afford to lose. As there are strategies like margin trading that can provide capital for you to make more profit while day trading, it is crucial to consider the risks of losing money while trading, especially if it isn’t yours.
  4. Know the basic rules of day trading:
    • Pick your trading choices wisely
    • Plan your entry and exit points and stick to that
    • Observe the market patterns and trading activity 
    • Be disciplined with your strategy and plan
  5. Understand the risk of day trading. This was mentioned many times and could not be said enough. There is a high risk in day trading. Always remember that you can lose it all if you are not careful.
  6. Start small. Once you have researched and become familiar with different platforms and marketplaces, you can begin to break into the day trading world. It is highly advised that you start with dummy trading games and platforms and once you get the hang of that, start trading with tiny amounts of cash. 

The bottom line

Day trading is not a shortcut to making millions of dollars. It requires many skills and a lot of experience before you can make a lot of money from it. If you want to become a day trader part-time or make it a career goal, there are many things to remember when getting started.

Education is critical, and we have the resources you need to start day trading today.

Information provided on Entrepreneur Guide is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. We do not offer financial advice, advisory or brokerage services, we do not recommend or advise individuals to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results

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