Day Trading for Dummies – Essential Tips & Tricks

What is day trading for dummies, a better question, what is day trading?

Day trading is the art of buying or selling stocks in hopes of turning a short term profit. A day trader enters each day in cash and ends the day the same way.  A typical day trade can last a couple seconds to several hours, but must be closed out by or before the close of the trading day.

FINRA rules define a “pattern day trader” as an individual who executes four or more day trades within five business days, provided that the number of day trades adheres to more than 6% of that individual’s total trades in a margin account for those same five business days.

Individuals  deemed as “pattern day traders” must have at least $25K in their accounts and can only trade in margin accounts. 

On December 15, 2017, a little known stock by the name of Longfin Corp. (LFIN) gapped up in the pre-market after it announced that it acquired blockchain provider, Ziddu.com.

Before the opening bell, the stock was up nearly 100%.  That said, it opened up at $9.76 and hit a high of $26.80 that day.

Imagine if you bought 1,000 shares at $10 that day and sold it at $21 later on, you would have doubled your money. But what’s even crazier is that the  next day it went from $22.01 to as high as $142.81.

long fin day trading for dummies

Source: TradingView

Imagine holding 500 shares and making 100 points on that in less than an hour!

It’s very easy to get started with day trading. All you need is risk capital, a computer, internet, and a stock brokerage account. Successful day traders have financial freedom, create their own hours, and are their own boss.

However, day trading is one of the hardest ways to make easy money. In fact, nearly everyone who tries day trading fails.

Day Trading For Dummies – Why Most Day Traders Fail

There are several reasons why day traders fail, here are some of the most common reasons:

Lack of Capital: It takes time to learn how to day trade stocks. If you open a brokerage account with a small amount of money, chances are that you will lose it all before you learn how to make money in the market.

Lack of a Proven Strategy: Day traders make money by identifying  market patterns that have a high probability of success. Once identified, they must be willing to risk money before they are given the chance to make .

However, it takes time to find a proven strategy.  Trial and error can be a costly approach. It’s best to risk small amounts of capital on trades when you’re first learning how to day trade.

Poor Risk Management: If you are new to trading, how do you know which trade is good and which one is bad. That said, new traders put too much confidence in their trades by betting a large portion of their account on the outcome of one trade. Not fully knowing what you’re doing while making large bets is an easy way to blow out your trading account.

Repeating Mistakes: If you are someone who is not okay with being wrong than trading is not for you. Some traders are able to get away with being right just one third of the time and still be profitable. This is possible by letting your winners run and maintaining your losses. After a while, they are able to recognize what their best trades are and focus on them. New traders often make the same mistakes. The way they can limit repeating the same mistakes is by reviewing trades and then recording them in a journal.

Day Trading For Dummies- How To Succeed At Day Trading

day trading for dummies

Study: As a new trader you should be curious and seeking knowledge. Of course, you should read books as part of this process. The best books are the ones that focus on trading psychology.  Most books that try to teach people how to day trade are outdated. However, learning from a mentor is one of the best ways to gain trading knowledge fast. An experienced mentor can help you avoid the same mistakes they made and teach you what is working in the markets now. If you don’t have access to a mentor than work on developing strategies through sim account, this is an easy way to learn without risking actual capital in the market.

Invest In Tools: Once you’ve figured you want to give day trading a serious go, you’ll need to invest in some services and tools. These services will vary depending on your needs. Some services and tools that day traders subscribe to include: charting packages, trade-alert services, news services, trader chat rooms, investment newsletters, and research. Day trading often boils down to speed, having information at your finger tips is important when you’re making split-second decisions.

Join A Community: Believe it or not, most of the best day traders work together as teams. Talking to each other about ideas and plans throughout the trading day. As a retail trader, you can achieve this by joining a trading community. This will allow you  an opportunity to learn and grow as a trader.

Be Disciplined: There are so many ways money can be made in the stock market. However, that doesn’t mean it can work for you. For example, types of stocks are riskier to trade than others. If you have small risk tolerance than those types of stocks are not for you. The best day traders know what their strengths and weaknesses are and primarily focus on capitalizing on their strengths. This requires discipline and patience, something that new traders often lack because they want the fast money right away.

Day Trading For Dummies- Day Trading Strategies

Now, these aren’t the only ways to make money from day trading but they are among the most common.

Reversals: This is a counter-trend strategy, the trader takes the opposite side of the trend in hopes that it reverses. Traders typically put this position on when they believe a stock move is extended (overbought/oversold).

BABA day trading for dummies

One June 29, 2018, Alibaba (NYSE: BABA) declined sharply on the open by four points, reversal traders found that as a buying opportunity and bought the stock, it rallied back by more than four points in less than 15 minutes.

Trend: A trend trader goes with the momentum. If a stock is going up in price they are buying and if it’s selling they are shorting. The trend trader lives and dies by the adage: The trend is your friend.

On June 26, 2018, Pacific Energy Development (NYSE: PED) announced the closing of a strategic investment. The following day the stock rose sharply in the pre-market.

PED day trading for dummies

 

The stock price opened at $0.40 and got up as high as $2.37 that day. Trend traders who were able to spot the trade early were able to ride the wave higher for handsome profits.

News: Traders who trade the news or other type of catalysts have a couple of different approaches. One, is speed, the faster you are able to interpret a breaking story the better the chances you’ll be able to act on that information. Second, if speed isn’t your game, than focus on the merit of the story, whether its true or not and what the magnitude of the story means to the stock. Typically, trading news is something professionals do because they are armed with so many tools. It’s unlikely the average trader from home will be to react as quickly as the professional day trader.

Day Trading For Dummies- Final Word

Day trading for dummies is not easy. In fact, nearly everyone who tries it fails. That said, it can be the path for financial freedom for some. There are several reasons why people fail at day trading. That said, it is still possible to beat the odds. It will require discipline and patience, along with some hard work.

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