As is evident from the term, day trading refers to the practice of buying and selling securities in a single trading day. Day traders generally rely on short-term trading strategies and high leverage to take advantage of small price movements in the stock or foreign exchange markets. More than market fundamentals, day traders try to latch on to market movements caused by news on company earnings, statistics, economy, interest rates, etc. Day trading can be lucrative if you know the ropes and implement a sound trading strategy with risk minimization techniques. Some handy tips on achieving success consistently:
Devise a Trading Plan
Before investing any money, you need to put a robust day trading plan into place, which details the steps to attain the intended profits. For example, a good trading plan will contain specifics of what and when you will trade, the objective of making the trade, the exit policy, and more. Putting a trading plan in place will prevent you from losing direction under pressure or letting emotions influence your decisions. Test if your trading plan performs well by placing hypothetical trades without using money. This is crucial because most day traders suffer big losses in their first few months, says Peter DeCaprio.
Avoid Holding Positions during News Announcements with Potential High Impact
High impact news announcements like company earnings or economic data can result in prices moving in unpredictable ways. It is important not to have a trading position during those times. Instead, you should wait until after the announcement and then try to capitalize on the ensuing volatility. Even when you need to make your moves quickly, you should have a mental checklist you can run through to satisfy yourself that you are sticking to your trading plan.
Use Stop-Loss Orders to Live To another Day
A stop-loss order will enable you to limit your loss if the price does not move in the expected direction. It is simply a method of admitting you were wrong and getting out of the trade before making a loss you cannot afford. You can set a price at which the stop-loss order is automatically executed without your having to trigger it manually. It is important to have a proven strategy for placing stop-loss orders that also factors in the prevailing market volatility, says Peter DeCaprio. It may be worthwhile to reduce your position and give the stock a little more leeway. In addition to using stop-loss to limit the loss on each trade, you can limit the total loss you are willing to make in a single day to avoid getting wiped out.
It is easy to get caught up in the excitement of trading and lose direction. You must conduct reviews weekly and monthly to get the overall picture of what you are doing. Take daily screenshots of your chart showing the trades and compare them weekly to know if you have deviated from your trading plan. Also, note how you can improve your trading strategy. Every month, review your weekly plans and make corrections until you are aligned with your trading plan.