Day trading involves investing in the share market during the market hours and closing out all of your trades before the market closes at end of each day. The main idea behind day trading is that day traders tend to take advantage of small price movements or sudden movements by investing large amount of money.
Day trading is a risky business. But, like any business plan, the greater the risk and more you are exposed, the greater your chances of reward. For you to successfully day trade, a few essential and subtle details must be understood first, from the difference between investing and day trading to how much you can risk losing in day trading.
Depending on the strategy, day trading can me sub divided into following subcategories,
1. Scalpers: In this strategy of day trading large volumes of stocks are rapidly and repeatedly bought and sold within few minutes or hours. The main objective is to make small profit per share on each transaction and at the same time minimizing the risk.
2. Momentum Traders: This style of day trading involves we primarily focus on identifying and investing in the stocks which follow a fixed pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.
3. Fading: This technique involves selling the stocks just after there is rapid or sudden positive movements.
Before we start day trading following points must be considered very carefully-
1. Setting stop-loss
Small margin trading is extremely vulnerable and susceptible to rapid or sudden adjustment than regular traders. Thus, it becomes crucial to set stop-loss to prevent our self from huge loss.
Day traders generally have a maximum loss for a particular day that they can withstand financially. Whenever that point is reached, trading for that particular day should be stopped. This specifically signifies that every single transaction must be properly analyzed initially.
2. Know your sectors
Every stock that we you choose in for your position, is part of some sector.
It’s of vital importance to have knowledge of this when day-trading since the comparative strength in particular sectors can be used to our advantage to give you added momentum for the day-trade. A list of few active sectors can be maintained which appeal to you so that any momentum in those sectors proves to be a good opportunity for you to earn.
Day traders must learn to control their emotions and make sure that they never act impulsively. Because a small decision or step made in agitation or frustration might lead to huge losses.
4. Relative Strength is the Key
Relative strength is just a measure to show how strong or weak particular stock is against some other thing. It can be measured against the base market itself, or some other stock of the same sector, or just any stock in general. Lot of traders make fortunes just by this style of trading. To measure the extent of relative strength or weakness just observe issues outperforming the market by good margin and ones that are underperforming because of certain conditions.
5. Knowledge and experience matters–
For success in day trading one of the major factors is Day traders must have thorough understanding of market fundamentals. It takes years of experience to be successful at day trading. No matter how busy you are, some amount time must be spent on researching and working on fundamentals.
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The Bottom Line
Stock market trading requires great mastery and dexterity. As a result, most of the beginners with weak fundamentals fail at it. But if we have enough experience and understanding of fundamentals, it can result to be highly successful in terms of money and, with further performance evaluation and consistent learning, we can further benefit by improve our chances of success.