Day Trading Basics For Beginners: A Complete Guide
What Is Day Trading?
Day trading is the act of buying and selling securities(stocks, crypto, futures contracts, options, etc.) within the same day. No matter what instrument you are trading, if you are opening and closing the position within the same day, it is considered day trading.
Day trading can be done in many different ways which leaves plenty of options for any interested trader to get involved in the markets. Some of the most popular securities that people day trade are stock shares, options contracts, futures contracts, spot trading and margin trading.
Types Of Securities You Can Trade
You can day trade almost any type of security you would like to as long as there is someone on the receiving end of your transaction, which is called liquidity. Here is a list of the different types of securities you can day trade:
- Stock Shares – You can trade shares of any publicly traded company depending on what is available from your broker. Some examples of popular day trading stocks are S&P 500, Apple, Amazon, Tesla, Nvidia, Microsoft, Meta and AMD. You can participate in this via spot trading or margin trading, depending on what your broker gives you access to. Stocks can be traded during market open hours which can vary based on the country you are in and the time zone for that part of the world’s stock market. Some brokerage firms(but not very many) will offer after hours stock trading that allows you to buy and sell stocks 24/5 as long as it’s a business day and not a holiday.
- Stock Option Contracts – Options contracts are very popular for day traders because they allow you to get exposure to the upside or downside of a stock, while not needing the capital to purchase large amounts of shares. One option contract gives you the right to buy or sell 100 shares of that stock at a certain price, but the contracts have an expiration date, so they can be quite volatile. You can buy options on most stocks, as long as there is someone selling options contracts for that stock. The most popular options contracts are the same as the popular stocks to trade that was listed above. Options can be traded during normal stock market hours and some can be traded for up to an hour before/after the regular market opens/closes.
- Cryptocurrency Pairs – Crypto markets are open 24/7(depending on your broker) and are typically more volatile than stocks, which can be attractive for day traders to take advantage of. You can participate in these markets via spot trading and margin trading, with some pairs allowing up to 100x leverage. Since cryptocurrency is still in its youth stages, it is considered a speculative asset and many major investors do not heavily participate in trading these due to the wild swings in price that can be devastating to a portfolio if you are on the wrong side of the swing. Crypto is traded as a pair, so Bitcoin vs US dollar or Ethereum vs Euro, etc. Some of the most popular pairs are BTCUSD, ETHUSD, SOLUSD, MATICUSD, LINKUSD, LTCUSD and XRPUSD.
- Forex Pairs – Foreign exchange trading pairs two countries’ currencies against each other and allows traders to profit off of upside or downside via futures contracts. Since currencies are not very volatile(sometimes), forex trading is typically performed with high leverage such as 1:100. Forex markets are only open from Sunday evening through Friday evening and some pairs on some exchanges may also close for a few hours between each day’s trading session. Some of the most popular forex markets that day traders participate in are: EURUSD, GBPUSD, AUDUSD, NZDUSD, USDJPY, EURGBP, EURJPY, GBPJPY and more.
- Futures Contracts – Futures contracts are an extremely popular method of day trading. These contracts can be traded on a vast array of different securities such as CFDs, Indexes, Currencies, Forex Pairs, Commodities, Cryptocurrencies, Stocks and more. Futures contracts are typically traded using margin, with many allowing leverage from 1:5 all the way up to 1:500.
Spot Trading Vs Margin Trading Vs Option Trading
The three main methods of trading any type of security is via spot trading, margin trading or option trading. Let’s clarify the differences for each one so you can understand the entire concept better.
Spot trading means you are buying and selling a security for its actual value. The party buying and the party selling are virtually exchanging whatever stock, currency or whatever else they are trading. When making this virtual exchange, each transaction has a specific cost for each party and that cost is transferred to the other party at the current exchange rate. So if you are buying one share of Apple stock for 100 US Dollars, you would give $100 to the person who has the share of Apple stock. They would in turn give you one share of Apple stock. All of this happens virtually, on an exchange and can be done over and over again with the intention of profiting from the trades.
Margin trading is similar to spot trading, but you are actually trading contracts that are tied to the value of the underlying asset. Margin allows you to multiply how much money you are trading by a certain value and only pay a fraction of the normal cost. So for example, if you buy a contract for 1 share of Apple stock and use 10x margin, then you would be paying 1/10th of what that share would normally cost and any price move that the stock makes would be multiplied by 10, whether it is a profit or loss.
So if the stock goes up by 1% you would make 10% if your trade was placed for the direction that the stock went. These contracts allow you to speculate whether the stock will go up or down and you profit if the stock goes in the same direction of your bet. A long position would be betting the stock goes up, a short position would be betting that the asset will go down. So a 10x short position would profit 10% from a 1% move to the downside and vice versa for long positions. Make sure you look up Pattern Day Trader rules and familiarize yourself with them if you are going to start margin trading.
Options contracts are a unique method of trading that have become very popular due to their limited risk and unlimited reward. There are two types of options contracts: call options and put options. Call options give you the right to buy 100 shares of the underlying stock at a specific price called a strike price. A put option gives you the right to sell 100 shares of the underlying stock at a specific price called a strike price. So, call options profit when the price of the stock goes above the strike price and put options profit when price of the stock goes below the strike price.
For example if you have a call option for Apple stock with a strike price of $150 and the price of the stock goes to $160, the call option would increase in value because the contract gives us the right to buy 100 shares at $150 even though the price is now $160. That is what makes the contract valuable, because you can profit from the move that 100 shares would have given you, without the cost of buying 100 shares. Most options contracts can be purchased for very cheap if the price is close to the strike price.
These contracts also lose value increasingly as the expiration date of the contract gets closer. By purchasing an option contract, you have a limited risk of only losing the money that you spent on the contract; however, your profits are not limited when purchasing call options because the stock price could in theory go up forever. Options can also be very volatile though which is why many traders opt for just spot trading stocks instead.
How To Choose What Securities And Style Of Trading To Do
An important part of starting day trading is choosing what securities you want to trade and what type of trading you want to do. First and foremost, it is extremely important to let you know that 95% of day traders lose money, so it is strongly recommended that you take full advantage of a Tradingview demo account and practice trading until you are consistently profitable.
What Should I Trade?
The biggest thing to consider, no matter what market you are trading, is that there is plenty of liquidity in that market. Liquidity means lots of other participants with active orders in the market so that you can always enter or exit a position without your order moving the price significantly. When you trade securities with low liquidity, the gap between people willing to buy at a certain price and people willing to sell at a specific price(called a spread) will be very wide, meaning if you decided to exit your position shortly after you entered and price didn’t move, you would still lose money because of how big the spread is. This can eat your account, so make sure whatever you decide to trade that there is plenty of liquidity and tight spreads so that you have good trading conditions and give yourself the best chance at success.
Some markets that have tight spreads are as follows:
- Stock Symbols – APPL, AMZN, SPY, QQQ, TSLA, NVDA, AMD, META, MSFT
- Crypto Symbols – BTCUSD, ETHUSD, SOLUSD, LINKUSD, MATICUSD, XRPUSD
- Forex Symbols – EURUSD, GBPUSD, AUDUSD, NZDUSD, USDJPY, EURJPY, EURGBP
What Method Of Trading Should I Do?
First, start with spot trading to familiarize yourself with the markets and limit your risk. Once you are consistently profitable with spot trading, then you can dabble in margin trading or options contracts. Make sure you fully understand the ins and outs of your margin requirements or the options contracts details because you can lose your money very quickly when margin or options comes into play.
Again, at Trend Friend, we do not want to see you blow your accounts, so please make sure to practice trading extensively with a demo account until you are comfortable before getting into the real markets.
Trading For Yourself vs A Prop Firm
Getting started with trading can be very expensive depending on what and how you want to trade. If you are low on capital to get started in trading, it really limits what options you have, so one option is to stick with cheap stocks, low cost margin trading contracts or options contracts that are close to their expiration date.
These all give you low cost options to get into the markets, but if you have a small balance and are worried about losing any of it, then you are likely going to cut your trades short as soon as they go against you, instead of giving the market room to breathe and this can eat away at your portfolio really fast. That’s why it is important to have as much available capital as possible and keep your position sizes small enough to allow normal market movements to happen without hitting your stop loss.
The second option to get started with low capital is trading with a prop firm. Prop firms are companies that will stake you with trading accounts up to $400,000 as long as you pay a small fee and can pass their trading tests. Many prop firms offer $100,000 accounts for around $500-$600 which makes attaining a large account that you can trade a few contracts with much more attainable. It is important to note that they are able to offer these low rates because they will take a percentage of your profits(usually around 20%) in exchange for staking you the capital.
The other reason they can do this as a profitable business model is because most traders hit the maximum drawdown limits that these firms place on traders accounts and then the prop firm gets to keep your fee and pay you nothing. These accounts are only for experienced traders that are consistently profitable, otherwise, you will likely just keep paying them for accounts that you will blow over and over again. So be aware of that and don’t become that person that blows accounts constantly because you take trades without solid reasoning behind it.
Types Of Day Trading Strategies
Day traders use a wide variety of strategies in their attempt to turn a profit, but one of the biggest things every successful trader does is find a strategy, learn it inside and out and then stick to the strategy. Jumping from one strategy to the next constantly is just going to make you blow your account and you’ll never make any progress.
Pick a strategy, execute it exactly how it is supposed to be done and apply proper risk management with every trade to give yourself the best chance at success. Let’s take a look at some popular types of day trading strategies.
You may have heard that the trend is your friend right? 😉 Well that’s because trading with the trend is much safer than trading against it. Most of the time, when a market is trending strongly in one direction, you will take a lot of losses trying to short the tops or buy the bottoms because you are trading against the trend. If you make a point to look carefully at the chart and determine its overall trend direction, then you will know which direction you should be trading. From there, look for pullbacks and enter on those pullbacks, in the same direction as the trend to lower your risk and increase your win rate.
Gap fill strategies are very common in the stock market, but can also be used in futures, forex and other markets as well. The theory is that most of the time, when a market moves up or down in between sessions and leaves a gap behind, that gap is likely to fill and many times, once the gap is filled, you get a nice bounce. So, when a market creates a gap, make sure the market isn’t trending really hard and if not, look for peaks or valleys that can be your entry point to catch the move back to fill the gap. Make sure to keep an eye on the price action when you reach the start of the gap as it may bounce from there. But if not, wait for it to fill the gap and then you can also look to trade the bounce when the gap fills completely.
Buy The Dip
Buying the dip is a strategy as old as time, but it works if you can get your timing right. You want to find markets that are trending strongly and then buy the dips or short the peaks, depending on which way the market is trending. Remember, always trade with the trend when you can as it is much safer than constantly trying to find the tops and bottoms. Buying the dip is also an excellent strategy for any long term investor that wants to accumulate a certain stock. Purchase more shares any time there is a big decline in price to help average into your position at discounted prices. This helps lower your risk and increase your returns.
Learning how to read price action is one of the best things you can do as a trader. You can do this by looking at the highs, lows, important levels and comparing the most recent candles to the previous candles. Price action can take a long time to learn and takes a lot of training your eye to see things but it is a very important thing to learn if you want to master the art of day trading.
Many traders like to trade based off of company earnings reports that are released throughout the year. Each week, there are different companies reporting their earnings for the year or quarter, so you can anticipate whether they will beat or miss earnings expectations and place trades based off of your anticipation. Many traders also wait for the earnings to be released and then try to ride the price trend that forms after earnings are released to the public.
When major economic news comes out such as interest rate hikes, unemployment rates, inflation rates and similar metrics, it can create wild price swings in the markets that are affected by that news. These moves are usually quick and very big which can mean major profits in a small amount of time if you are on the right side of the trade, but if you aren’t your losses can be pretty devastating. Many times the spreads will widen by quite a bit as well making trading conditions not very ideal for being able to get out at a reasonable price if the market goes against you. News trading is a very risky strategy, so always make sure you use very strict risk management when using this type of strategy.
When the market is moving sideways, it usually defines a range with its longer term highs and lows. If you can recognize this sideways price movement and then identify the levels of importance, you can make quick trades back and forth within that range to pull some profits out. Your safest entries will be right near the tops or bottoms of these ranges, with a stop loss just beyond that just in case the market decides to break out of that range. When the market is ranging, it is very important to make sure you take your profits quickly though, or you will watch your nice gains get wiped out when price returns to the other side of that range.
Scalping is my personal favorite trading strategy, as you don’t need to be right about where price will go over a long period. You just need to identify where the price is going in the next few minutes and then ride that move for a quick profit. You will need to use price action and important levels to make sure you are making good entries, but once you get comfortable doing this, you can make quick scalps all day long. This type of strategy works on any type of market and is typically done by looking at the 1-5 minute time frame charts. Many successful day traders like to scalp options contracts, futures contracts or leveraged margin trading with larger than usual position sizing so that each short term price movement is still a nice profit but has limited risk because you use a tight stop loss and get out right away if the market turns on you. These trades happen over a short period of time, usually a minute to an hour and should be watched closely with a trailing stop loss.
Swing trading can bring in major profits if you are good at it, but you also need to have a bigger risk tolerance and use a wide stop loss so that the market has room to breathe. You need to be able to identify very low risk entry points where you can set a reasonable stop loss and then also figure out where price is likely to extend to in the near future. Swing trading can vary from trades that take hours to days or weeks. It’s all personal preference. Many traders use the most important levels as entry points as these help limit risk and then you can trail your stop loss as the market moves towards your target so that way you lock in partial profits along the way. For an even less hands on approach to trading, try long term investing by just buying stocks you like over long periods of time.
No matter what style of trading you choose to do, remember these things: always trade in the same direction as the trend, only take trades that have low risk and medium to high reward, stick to your strategy like your life depends on it and always utilize proper risk management. If you can follow these rules and be consistent with your trading, then you have a much better chance than most at becoming profitable in the wild world of trading.
Using Indicators & Software To Your Advantage
Most experienced day traders use indicators and software to help them make better and faster trading decisions. The trading indicators can do things like give buy and sell signals, show price levels where the market may reverse, show an oscillator for trends, or any other useful purpose. There are an endless amount of day trading indicators, so take a look at some of the best day trading indicators and put these tools to good use. The day trading software that we provide at Trend Friend is built specifically for day traders and scalpers. That’s the type of trading that we engage in, so our tools are all based around those styles.
We recommend using an indicator for buy and sell signals and an indicator for reversal levels at a minimum. Anything beyond that should be used to help you filter out times to not trade. The more indicators you put on your trading platform, the more clogged your charts will get and the harder it will be to make informed decisions because each indicator may not line up at the same times. So make sure to not go too crazy with indicators or it can actually hurt your decision making process.
Using Confluence To Your Advantage
Once you have figured out which indicators you want to use, try only taking trades where all of your indicators line up together. If you are using our buy sell indicator with the supply and demand, you can increase your odds of a successful trade by waiting for price to reach the daily and weekly highs, lows or midlines and then waiting for a reversal signal from the buy sell indicator near those levels. By using multiple indicators to filter out times that you shouldn’t trade, then you are only taking high probability trades, which is a huge part of trading profitably. Patience is key and waiting for confluence between multiple indicators will help you remain patient.
Confluence can also mean using other markets to predict when you should enter a trade. For example, when trading forex, you have two currencies paired against each other. Let’s take EURUSD which is the Euro vs the US Dollar. If the US Dollar Index is trending up strongly, then the EURUSD pair is likely going to trend downwards unless the Euro is moving up at a stronger rate. For many forex traders, they look at the dollar index and wait for reversals to happen on that chart before entering a trade on the pair they are trading against the dollar. This can be very useful for times when your pair may be moving sideways waiting for the dollar to reverse. You can use this as a reason to wait out the sideways movement and then when the dollar makes a reversal, enter your position on EURUSD.
Day Trading Tips
Here are some quick tips to help you read the charts better when you’re day trading.
- The market is constantly searching for liquidity. Market makers have much larger orders than us retail traders do, so market makers push prices to where retail traders have their stop losses set so they can fill their pockets and stop us out. These stops are gathered at swing highs and swing lows, also known as pivot points. That is why you will see the market move just past these pivots and then reverse all the time. Watch for this and trade accordingly.
- You need to learn to watch for choppy price action and sit on the sidelines until the market has decided on a direction. If the market is indecisive, then you are not going to be able to place high probability trades. Choppy price action will make you second guess yourself constantly and will take all of your profits very quickly, so learn to not trade during these times. Remember, it’s much cheaper to not trade than to trade and take even a small loss.
- The market doesn’t care about your position, your feelings, your profits, or your losses. The market is going to do whatever it wants to do whether you like it or not. If you are letting your emotions run your trading decisions instead of being level headed and unbiased, then you are going to lose. Placing an order twice the size of the last order to make up for your previous loss is just going to make you lose twice as big on this trade. If the market movements are making you emotional, your position size is too big. Size down until you can accept your stop loss placement without it feeling like a big hit to your account. Emotions have no place in trading, so use proper risk management to help remove your emotions from the trading process and rely on your technical analysis instead.
Your Mindset Can Make Or Break You
There is a reason 95% of day traders fail. Mindset plays a huge role in being able to push through all of the downfall to be able to reach the point of consistently profitable trading. If you are constantly switching strategies, not back testing your ideas before trading them, using too big of position sizes, revenge trading or anything else that you know isn’t a good idea, then you need to work on your mindset and your self discipline. If you can’t be disciplined, you will not make it in trading. To become a successful trader, you are going to need to constantly self reflect and see what you did wrong and why. If you can’t be honest with yourself during these times, then you won’t make any progress. Practice trading as much as you can, only reading books about day trading isn’t going to give you the experience you need to get better.
Risk Management Overview
Risk management is a key component of day trading. Using proper risk management principles, you leave yourself a lot more room for error with your trading, which in turn allows you to trade for a much longer time and learn more from that time. You should be aiming for a 1:2 or higher risk to reward rate when entering a trade and optimally a higher reward rate if it’s reasonable. Use a stop loss on every trade and set your take profit at a reasonable target price that is at least 2x as far from your entry as the stop loss.
Make sure you are only using a maximum of 10% of your trading capital on any given trade and if you can, use more like 1-2% per trade. This way you won’t be so emotional when a trade starts to go against you and you will be able to more easily let the trade play out as planned according to your technical analysis. Remember, the market needs room to breathe, so if you are constantly getting stopped out with really tight stop losses, then you need to lower your position size until you can set your stop loss at a reasonable distance away from your entry.
You need to regularly review your trading activity and check to make sure you are having bigger wins than losses, because if your losses are exceeding your wins, you aren’t going to be profitable. Go for high probability trades only, use a reasonable stop loss and reasonable take profit and only take position sizes that you can watch go against you without it making you emotional. If you can do all of this, you are ahead of 90% of the other traders.
You Need A LOT Of Practice
Don’t expect to be able to learn how to day trade profitably overnight, in a month or even in a year. Becoming a consistently profitable day trader is very hard and will take an extensive amount of time to get comfortable with. It is a high stakes and fast paced market that will tear you to pieces if you don’t have self discipline and a lot of time staring at the charts and participating in the live trading.
This is why we strongly recommend only trading with a demo account when starting out. Trade without risking your hard earned money and only when you can trade consistently profitable on a demo account should you move forward. But once you have real money on the line, everything changes. Your emotions will kick in much harder and it will be an entirely different experience, so expect for it to be harder than it was with simulated trading.
Day Trading Vs Swing Trading
If day trading is a little too risky or fast paced for you, you may want to try swing trading instead. This can be done with much less time staring at the charts throughout the trading day and can even be done while working a day job. You will need to look at higher time frame charts and find your key levels and wait for price to retrace to these levels before entering. You can set price alerts on Tradingview for when price reaches your ideal levels so you get a notification to look at the chart and possibly take a position. This can be a great way to trade, but requires a much wider stop loss and takes much more time for a trade to play out.
How Does a Day Trader Get Started?
Well first, read through this guide! Then choose a broker, choose a trading style, set up a demo trading account and start trading with fake money. This way when you take losses during your learning process, it won’t actually cost you anything. Practice your strategies, your self discipline, your patience, your entries, your exits, modifying orders, doing technical analysis and everything else you can practice to become the best trader you can be.
What Are The Risks Of Day Trading?
The risks of day trading are financial losses exclusively. In many types of trading, you can only lose what you risk or what you have in your account, but there are some situations like margin calls that can end up costing you more money than you put into your brokerage account. To lower these risks, use a demo trading account to practice until you are successful at that. Then if you put real money into the market, only use funds you are willing to lose because most day traders do lose. Use proper risk management at all times and constantly self reflect on your trading to progress and become a better trader and prevent substantial losses.
How Much Money Can You Make Day Trading?
Technically, there is no limit to how much money you can make day trading. But the amount you make is determined by many different factors. The biggest one being how big your account size is. If you can only afford to trade with $100, then you won’t be able to make nearly as much as someone who has $100,000 to trade with. However, the more you trade with, the more your risk is. One way to get access to more trading capital for a much lower entry fee is to use a trusted prop firm like FTMO which will give you access to large amounts of trading capital if you pay a small fee and can pass their trading tests. No matter what size your account is though, if you can increase your account by 1% to 5% per week on a regular basis, you are doing great!