Guide to Day Trading Stocks for Beginners
Published February 27, 2022.
When the global economy was shut down due to the COVID-19 pandemic, millions of people had nothing to do except watch CNBC, stare at their Robinhood trading accounts, and speculate on bankrupt companies. Dave Portnoy of Barstool Sports became the poster child for this activity, admitting that he would eventually stop day trading when the economy reopened.
Well, the time has come. Countries are reopening, but are individuals abandoning their day trading strategies to return to some semblance of normalcy?
Not quite. It is still a popular investment tool for many armchair traders who have developed a knack for finding patterns and enjoying a portfolio that is in profitability territory. For those who are entering this investment realm, there are many things you need to know before diving into volatile stocks or installing the latest day trading software on your computer.
Suffice it to say, day trading is not as simple as "buy low and sell high."
What Is Day Trading?
Day trading consists of buying and selling an asset repeatedly within a trading session and then closing your positions by the closing bell. Day traders can be institutional investors and retail traders looking to generate a positive return by speculating on the movement of exchange-traded funds (ETFs), futures, commodities, stocks under $5, forex, CFDs, and more.
Things to Do Before Trading With Real Money
When investing in the stock market, it is crucial to become acquainted with a wide range of factors before you begin trading. This is critical as it will ensure you are equipped with the knowledge to increase your day trading or swing trading acumen.
To help you out, ensure you do the following things:
Learn the Terminology
So, what terminology should you know? Let's list off a few that are imperative for day traders:
- Pattern Day Trader (PDT) This is an investor who executes at least four trades of a security in a five-day period and holds a minimum account balance of $25,000 (this is known as the over 25k day trading rule).
- Bid/Ask Price The bid is the price investors are presently bidding at, while the ask is the price traders are asking to sell the stock at.
- Float The number of outstanding shares available to trade in the open market.
- Scaling A day trader enters a position by partially scooping up shares at $4.75 and then adding more shares at $4.99.
- Scalping The investor will profit off small intraday price movements and turn a quick profit by trimming at the top.
Learn the Strategies
Every day trader should utilize a strategy rather than buying and selling on a whim. This could consist of monitoring charts, engaging in technical analysis, or using specific tactics.
Essentially, not using a strategy is like walking around blind without a cane.
So, what type of plan should you incorporate into your overall day trading strategies? There are quite a few, but only a few are popular, such as the following:
- Bullish flag pattern A bullish flag formation can be located in stocks that enjoy impressive uptrends and flash good continuation patterns. To help you spot this, read our beginner's guide to candlestick charts.
- Pullback trading First, find an investment that maintains an established upward trend. Second, spot a price decline from the trend. Third, pick your entry point and hit the buy button on your list of volatile stocks.
- Buy the rumor, sell the news Be it a war in Europe or disappointing corporate earnings, you can garner a position in a stock or commodity ahead of the news and then sell the asset when the developments come out.
- EMA indicator The exponential moving average (EMA) indicator is an average price calculation over a period that emphasizes the most current price data.
Practice With Demo Accounts
Indeed, day trading can be challenging. If knowing how to pick stocks for day trading was easy, everyone could do it and turn a quick profit. While most day traders lose money, many are successful by sticking to a routine: wake up early, study the markets, and remove emotion.
That said, you can perhaps maintain a pattern of profitability by practicing this investment strategy. The best way to hone your craft is by opening a demo account or participating in a trading simulator. This way, you are not using real money and can test out other charts, strategies, and indicators.
What You Will Need to Day Trade
Ultimately, there are three necessary things you will need to day trade properly and successfully:
1. A Brokerage Account
Before you begin day trading, you will need a brokerage account, which you can determine by best order execution, platform technology, or mobile app. To help you choose, read our Top 6 Forex Brokers for Day Trading.
And, of course, if you are a professional day trader, you will need to fund your account with a minimum of $25,000. Is day trading without 25k feasible? Yes, but you will need to make some adjustments.
Next, pick your day trading strategy. Remember, it will not be your eternal investment tactic. As time goes by—and you become more seasoned and easily identify patterns—you will start utilizing different strategies.
Should You Day Trade Stocks as a Beginner?
In the end, day trading can be a risky endeavor. You are investing with large sums of capital and, if this becomes your career, your earnings will depend on how well you do in the financial markets.
Put simply, you will need to understand your risk.
Is this a daunting task? Absolutely. At the same time, with enough practice and gathering as much information as you can, you can build a fierce trading arsenal that will produce tremendous results.
Every day trader is still striving to improve by learning as much as they can. The market is constantly evolving, and it is important you evolve with it to be successful.