Day Trading for Dummies – Essential Tips & Tricks

Larry Davidson - August 2, 2018

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 of seconds to several hours but it does close 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 such must have at least $25,000 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,

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 in less than an hour!

Although you can hire a broker to make trades at a good price, it’s very easy to get started with day trading. All you need to trade is risk capital, a computer, internet, and a stock brokerage account. Many individuals have trading times for a good hour or two. Successful day traders have financial freedom, create their hours and trading times, and have no boss.

However, day trading is one of the hardest ways to make money.

Day Trading – 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 a day trader opens a brokerage account with a small amount of money, there’s a good chance you’ll lose it all before you learn how to make money in the market. Pattern day traders must have at least $25,000 in their account.

Lack of a Proven Strategy: The day trading strategy is generally identifying market patterns that have a high probability of success. Once recognized, they must be willing to risk money before they have the chance to make.

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

You should also learn to cut losses in a day trade with market orders or limit orders. A market order is executed at the best price at the time, so no price guarantee. As for a limit order, it guarantees the price but not the execution. So set your price for buying and selling. This is one of the strategies you should have.

Poor Risk Management: If you are new to trading, how do you know which trade may be right and which one may be wrong. That said, new people may put too much confidence in their trade 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 on a trade may be an easy way to blow out your trading account. Set the risk and position you’re willing to take.

Repeating Mistakes: If you are someone who is not okay with being wrong then trading is not for you. Some may get away with being right just one-third of the time and still be profitable in a trade. It’s possible if their winners are significantly more massive than the losers.

After a while, they can recognize what their best trades are and focus on them. New traders often make the same mistakes in a trade. The way they can limit repeating the same mistakes is by at least reviewing trades and then recording them in a journal. This can be part of developing a trading strategy.

Day Trading – How To Succeed At Day Trading

day trading for dummies

Study: To trade successfully, you need to set yourself on being curious seeking knowledge first. Of course, make sure to read good books as part of the day trade process. You’ll find that the best books are the ones that focus on trading psychology.  Most books on day trading are outdated, and you don’t want those because they won’t offer you timely help or valuable strategy.

However, learning from a mentor is one of the best ways to get trading knowledge fast. An experienced mentor can help you avoid day trade mistakes, introduce you to technical analysis, and teach you what is working in the markets now. They’ll teach you everything you need when it comes to trades. If you don’t have access to a mentor than get to work on developing strategies through sim trading. Take some time to trade here so you can start learning without risking actual money in the market. You’ll learn that no two trades are the same. So even if you’re only trading for an hour or two, knowledge is extremely important.

Invest In Tools: If you want to start day trading, then you’ll need to decide on which services and tools you’ll need to get. There are a number of tools out there like charting packages, trade-alerts, news services, chat rooms, investment newsletters, and research are some that day traders subscribe to. Many offer advanced functions as well. Day trading often boils down to speed, having information at your fingertips is essential when you’re making split-second decisions.

Learn the basics. At least having a firm grasp of different trading terminology is important if you want to day trade. Like for example, price. Price has two structures: per-trade and per-share. It’s also good to know stuff like this so you would not be lost. As for trading platforms, you don’t really need the best ones right from the start if you’ve just started learning the ropes in the stock market. Take your time, try out a number of platforms, and develop your strategy well. Learning the technical analysis can come after the basics.

Join A Community: Believe it or not, most of the best day traders work in teams. Communicating ideas and developing plans in a team setting could lead to bigger profits than if you tried to do it alone. If you want to succeed, you do need to know and have a plan. Especially if you’re having a rough start, the least you can do is reach out for help from people who know trading well. Spending time with other people in the same community does wonders.

Be Disciplined: You also need discipline especially since there are so many ways and times that trading stocks can be profitable. Also, $25,000 is pretty much a big investment you would not want to go to waste. However, that doesn’t mean your personality fits all these trading styles.

For example, some stocks are riskier to trade than others. If your risk tolerance is low, then you want a strategy to avoid many volatile stocks or trade options to limit trading risk.

The best day traders know what their strengths and weaknesses, and use them for a strategy. However, they primarily focus on capitalizing on their strengths. Being a consistently profitable day trader requires discipline and patience, something that newbies often lack because they want money fast. When you just start day trading, knowing when to buy and sell can also be tricky.

Day Trading – Day Trading Strategies

Developing a strategy is crucial. Now, these aren’t the only day trading strategies in the markets, 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. A person typically put this position on when they believe a stock move is extended (overbought/oversold).

BABA day trading for dummies

On 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.

Sometimes this strategy gets a bad reputation because you are trying to pick tops and bottoms. However, stocks do overshoot, creating opportunities for both longs and shorts.

Trend: Trend traders want to go with the momentum — that’s their strategy. If a stock is going up, they are buying, and if it’s selling off, they are shorting. They live and die by the adage: The trend is your friend.

On June 26, 2018, Pacific Energy Development (NYSE: PED) announced the strategic investment’s close. 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 types of catalysts have a couple of different approaches in a strategy.

First, is speed, the faster you can interpret a breaking story the better the chances you’ll be able to act, position, and make profitable decisions when trading.

Second, if speed isn’t your game, then you’d want to focus on the merit of the story, whether its true or not and what the magnitude of the story means to the stock. Typically, news trading is something professionals have an advantage. It’s unlikely the average trader from home will be to react as quickly as the professional, especially when they are competing against news reading algos.

Day Trading – Final Word

Day trading is not easy. You need to have firm knowledge, great discipline, and an open mind to succeed in the markets. That said, trading may be the path for financial freedom for some. You will need much patience, time, hard work, a mentor, and a community to support you when trading. But with the day trading tips above, you can start day trading and take one step at a time.

Larry D. is one of the most experienced writers at the Dork. His expert insights into the individual stocks have made small fortunes for some of his readers and profitable trades for many more. Best known for his work with under-the-radar growth stocks, Larry has been picking winners for over 30 years.

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