In this article, we will discuss the day trading practice in detail. While the day trading principles can be simple, it does take time and effort to make your strategies better.
In case you are new to financial markets, we would recommend you to understand the basics of the financial markets first.
Let us find out the necessary aspects of trading as a day trader in this article which covers:
- What is day trading?
- Day trading as a beginner
- What all can be traded?
- Characteristics of the best day trading stocks
- Day trading strategies
What is Day Trading?
Day trading practice implies the speculation with regard to securities for buying and selling the financial instruments within the same trading day. In day trading, all the positions are required to be closed before the market closes for the day in order to avoid the risks of loss that can happen due to unforeseen events during the non-trading hours. For instance, the day traders get to avoid the price gap between that day’s close and the next day’s price at the open which may affect the decision making.
Let us now find about day trading practice for beginners.
Day Trading as a Beginner
Being a beginner in any field requires one to gather as much knowledge as one can about that domain. While much can be gained from the experience, we will discuss such information which may help you make your journey smooth as a beginner. This information is about the following points:
- Things to consider
- Reading candlestick chart
- Risk & money management
- Order types
There are certain prerequisites which every day trader must keep in check while beginning the practice since these are the essentials that help you carry out your operations efficiently. These are:
- Demat account
- Reliable internet connection
Technical specifications of PC should be favorable such as RAM and operating system. Moreover, since analysing the market is important, the screen should be comfortable to look at for each day’s analysis of the financial market.
You must choose the right broker for your day trading and we have a list of reliable brokers from India, U.S.A, U.K, EU and Canada for you in our blog article on the algorithmic trading guide. You can check out the brokers and the APIs mentioned here.
You can open your Demat account with your banking partner in case you are not trading via a broker. This is so because a broker will provide you with such facilities.
Reliable internet connection
A reliable internet connection is one of the most important prerequisites for day trading since you would not want your internet server going down when you are in the middle of your trading.
Having a skill set is quite an important thing not only for a day trader but also for any professional in any field.
Some of the skills may be required in general for carrying out trading, but for a successful day trading practice you need to be equipped with the following to experience smooth journey:
- Trading/Financial markets knowledge
- Quick with decision making so as to get hold of opportunities in the market
- Mathematical skills for carrying out trading strategies
- Knowledge of forecasting and analysing market trends
- Know-how of risk management as well as money management
- Asset management skills
- Planning skills for deciding about trading strategies
Things to consider
Day trading brings with itself a lot of things that are needed to be taken care of as a beginner. To begin with, let us discuss some simple yet extremely useful things that you can take care of while engaging in day trading practice:
- Trade only the optimal amount of money
- Be informed
- Keep your day job
- Have enough time to track the market
Trade only the optimal amount of money
You must trade with the money which does not make you lose your fortune or get you into debt which you won’t be able to repay in case of losses.
You must not be risking much of your capital on each trade. You need to know the position size of your trade.
The position size here implies the number of shares you take on a trade. Before deciding the number of shares, you must consider the account size and risk tolerance capacity as an investor. This way, you can set a stop-loss price during entry.
Usually, it is the Money at risk/Trade risk = Optimal position size
Money at risk is the amount you can afford to risk and Trade risk is the general risk of trading in the market.
Before you start day trading, you must be equipped with the amount of knowledge that you require for maximising the gains. You must have enough knowledge of the movement of stocks which you plan to trade and the latest news in the stock market about any unlikely events that may affect stock prices.
To remain informed, one should keep a check on result announcements since that way, the investor can invest in securities after analysing last quarterly or annual results. This way, the day trader can analyse the viability of stock returns after analysing financial supplements/disclosures made by companies. Return metrics such as RoE (Return on Equity), Dividend payout ratio, Operating efficiency, P/E ratio etc can be assessed in order to make an informed decision.
Another important way of being informed is with the help of sentiment analysis in trading. By analysing the sentiments portrayed by news and tweets, you can create such trading strategies which will help you gain. The sentiment analysis can be best done by various machine learning techniques, such as Natural language processing, Classification and Support vector machine. Then, the sentiment scores can be calculated using techniques such as VADER. This is all explained well in our courses in the learning track on sentiment analysis in trading.
Keep your day job
As a beginner, you may not get familiar with all the ups and downs of the stock market very soon. In the beginning, you may have a good time with luck and you get to sustain in the market. It is more of a possibility, especially in a favourable market. Although, in the case of an unfavourable situation market, your strategy will actually be tested. After seeing all the ups and downs in the market, if you feel that you can go on for full-time trading, you should take a plunge.
Have enough time to track the market
The most important thing that you will need to devote while day trading is your time. This time goes into tracking the markets and getting the right opportunities. Since these opportunities arise anytime in the market during the trading hours, you need to keep a check.
Reading candlestick chart
Reading the candlestick chart is another essential topic here. When you are day trading, you must know what different points on a candlestick mean. As you can see, in the image below, there are two candlesticks. One is bullish and the other is bearish candlestick. Let us find out how.
Source: Wikimedia Commons
Each point depicts:
- High price implies the highest price traded during the period.
- Low price implies the lowest price traded.
- Open price depicts the first traded price after the formation of the candle. If the price trends upwards as compared to the previous day’s close price, the candle will turn green/blue. On the other hand if price declines, the candle will turn red.
- Close price implies the last traded price over the period of formation of the candle. If the close price is below the open price, the candle will turn red. Whereas, if the close price is above the open price, the candle will turn blue/green.
The left image, which shows the bullish candlestick, is portraying that the open price is higher than the previous day’s close price. Whereas, the image on the right shows a bearish candlestick which portrays that the close price at the end of the day is lower than the open price.
Risk and money management
Risk and money management are the two most important things while trading and a day trader needs to be equipped with knowledge about the same.
Here, we will discuss some important things in the trading domain which may help with the gainful day trading practice:
Since paper trading is a trading practice which uses virtual money, it is safest to get involved in paper trading. By virtual money, we mean the money which cannot be transacted in the real world but can be used for placing paper trades. Paper Trading platforms are either technology companies or demo trading functionality provided by online brokers. They either provide paper-trading in the format of a virtual game or the general way of providing a paper trading account in complement to a real trading account.
Target Profit Analysis
You must also do a target profit analysis while day trading which implies finding out the estimated business activities to perform in order to earn a targeted amount of profit.
Formula to find out target profit analysis:
SpQ = VeQ + Fe +Tp
Sp = Sales price per unit
Q = Quantity to be manufactured or sold during the period
Ve = Variable expenses to manufacture and sell each unit of the product
Fe = Total fixed expenses
Tp = Target profit
Usually, day traders also can make use of margin leverage.
Margin is the collateral which the investor requires to deposit with the counterparty (broker or exchange) for covering the risk the counterparty may face in the financial markets.
Leverage, on the other hand, implies the shorting or purchasing of securities by the investors above the margin with the help of a broker or an exchange. Here, short-selling implies the strategy used by investors if they believe the price of the underlying asset will decrease in the future. In the U.S.A, the investors are allowed initial leverage in the ratio 2:1 (maximum), which is permitted by Regulation T. For detailed information, you can also check out our blog article on Algorithmic Trading Regulations - US.
But, there comes a risk of a margin call if you go with margin leverage, which we will discuss next.
In the case of margin leverage, the traders can have the risk of a margin call. The broker keeps on revising the value of collateral securities after estimating the risk in the market. Margin call implies the requirement to include additional funds from the investor’s side in the margin account whenever the market value of collateral securities falls below the revised margin.
For instance, if the investor’s portfolio holding devalues below the margin requirement of the broker then the margin call will be made. Accordingly, the investor has an option to either deposit the margin amount or liquidate the existing holding.
Hence, you must decide the amount of margin to leverage only after keeping in check the amount of losses you can afford at the end of the day.
Going forward, you must have the knowledge of order types and decide the order type to choose depending on your preference.
You must not risk beyond your decided cap for the day. Once you hit the cap, you need to stop trading.
For instance, in case your losing amount is going beyond your winning amount, it is a total loss for you. For instance, if you make $200 on a winning day, on your losing day, you must not make a loss of more than $200.
To make sure that you do not end up losing more than you can afford, let us take a look at several order types, which are:
- Market order
- Limit order
- Stop order
- Stop-limit order
- Bracket order
In a Market Order, the broker or the trading destination is instructed by the trader or investor to buy or sell a stock immediately at the best prevailing price in the market. Market orders are therefore used when the certainty of execution of the order is a priority over the price of execution.
For instance, An investor places a market order to buy 1000 shares of XYZ stock when the best offer price is $3.00 per share. If other orders are executed first, the investor’s market order may be executed at a higher price.
A limit order is an order to buy or sell a stock at a specific or better price. A buy limit order would only get executed at the limit price or lower, and a sell limit order would only get executed at the limit price or higher. A limit order is appropriate if getting a specific price is more important than getting filled.
For instance, An investor wants to buy a stock ABC for no more than $70, which is currently trading at $75. The investor places a buy limit order to purchase a stock of ABC at $70. If the price of stock ABC drops to $70 or below then the order will be executed. If the price never drops to $70 or below then the order will not execute. There are risks involved in placing a limit order; if the stock drops to $71 and after that the stock climbs up to $100. The investor may miss out on the opportunity given by the $29 rally seen in the stock from $71.
A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. The stop price is not the guaranteed execution price for a stop order. The stop price is a trigger that causes the stop order to become a market order.
For instance, Suppose you buy the stock XYZ at $50 per share that you feared might drop in price, you could use a stop order to sell if the price dropped below $45 a share to protect yourself against a larger loss. The risk is that if the price drops very quickly, and other orders have been placed before yours, the stock could actually end up getting sold for less than $45.
An investor can avoid the risk of an order executing at an unexpected price by placing a stop limit order. A stop limit order combines the features of both stop and limit order. Once the stop price is reached, a stop limit order becomes a limit order that will be executed at a specified price.
For instance, Suppose you buy the stock XYZ at $50 per share. You don’t want to lose more than $5 per share, so you set a stop limit order for $45. If the stock dips to $45, the stop price triggers a limit order to sell at $45. If the price drops quickly lower than $45, the limit will ensure that you don’t sell at the lower price. The limit order will only execute when the stock reaches $45 again.
Bracket order is designed where the investor can limit their loss and lock in a profit by “bracketing” an order with two opposite side orders.
Buy Bracket Order: A Buy order is bracketed by a sell limit order generally above the buy order price and sell stop order generally below the buy order price. This allows investors to lock profit by an upside movement and limit downside loss.
Sell Bracket Order: A sell order is bracketed by a buy stop order at a higher price and a buy limit order at a lower price.
For instance, If you place a buy order for a stock currently trading at $50, along with a sell limit order at $55 and a sell stop order at $45. If the price moves up to $55 or down to $45, the position will be sold. The trader will either meet a specified gain of $5 with the sell limit order or suffer a loss of $5 with the stop-loss order.
Moving forward, let us discuss what can be traded in the financial markets.
What All Can Be Traded?
We have covered what gets traded on an exchange in detail in one of our previous articles on Introduction to Financial Markets. Here, we have listed down some markets you can trade in and have explained them briefly.
As a day trader, you can explore the markets such as:
The foreign exchange currency market serves as the world’s most popular and liquid market. In this market, you can trade in the currencies such as INR, GBP, US Dollars and Euros.
Learn to create and backtest your trading strategies in the forex markets with our free forex trading course.
Also, here is a short video explaining how to do forex trading with Python:
The stock market provides you with the opportunity to invest in stocks of different companies either belonging to the same industry or a set of different industries. You can invest with regular and leveraged ETFs, futures, and stock options.
If you want to find out more about how to select stocks for day trading, you must watch this video below from Quantra:
The third market is the cryptocurrency market. Investing in this market brings you ample opportunities to trade in cryptocurrencies like Bitcoin and Ethereum.
You can opt from these three courses on Quantra, for a better understanding of crypto markets:
You can also gain some knowledge on the journey of the cryptocurrency market in India from this blog.
Investing in the futures contract is another option while day trading.
Last but not least is commodity trading. In day trading, you can invest in commodities such as oil and natural gas, agricultural produce, metals, minerals etc. Moreover, you can go from investing in anything from gold to cocoa in the commodities market. You can refer to our detailed blog which we have on the commodities market if you want to gain knowledge about the topic.
Bond is fixed income security, using which a company or a government, known as bond issuer, raises debt from the investors, known as bond holders.
There are different types of bonds such as bonds that do not pay interest (Zero Coupon bonds), bonds that can be redeemed prior to the specified maturity date (Callable bonds), bonds that can be exchanged for the shares of a company (Convertible Bonds) etc. Most of the corporate or government bonds are publicly traded on exchanges, while others are traded over-the-counter (OTC).
Going forward, let us see which characteristics do the best day trading stocks hold.
Characteristics of the Best Day Trading Stocks
While searching for the best day trading stocks, you must be aware of the characteristics which make them viable for day trading. Such characteristics are:
- A well-tracked stock
- Good volume
- Medium to high volatility
A well-tracked stock
A well-tracked stock by you will be a familiar one in the context of various factors such as volatility, price change triggering factors, etc.
Stocks which are high in volume lead to liquidity and liquidity is a factor which allows you, as a trader, to purchase and sell the stock without impacting the price much. The high volume of stocks in the market implies the number of shares being traded over a period. For instance, 10 transactions of 100 shares is the same as 100 transactions of 10 shares. This is so because, in total, 100 shares are traded. Since the number of shares being traded each day are available online, one can follow the volume with ease.
Medium to high volatility
Stocks, of which the price fluctuates a lot are considered highly volatile stocks and thus, are good for day trading.
Day traders must analyse stocks to track the movements of the same. Once you become familiar with the stock market’s process, your knowledge will help you to decide when to buy and sell on the basis of how a stock had performed in the past.
Now, we will discuss the day trading strategies next.
Day Trading Strategies
After choosing what to trade in day trading, you must also opt for the right strategy so as to derive maximum gains from the trading. You can specialise in a specific strategy or go for a combination of different strategies. Here, you will find the explanation of the trading strategies in a concise manner.
In one of our blog articles, we have covered all the trading strategy paradigms in much detail. Feel free to explore and learn about them in our algo trading strategies article.
Let us find out the popular trading strategies in brief here, which you will find in detail in the course. These strategies are:
- Momentum trading strategy
- Scalping strategy
- Ticking strategy
This series of videos are recordings of the discussion table conducted by QuantInsti exclusively for the students of the Executive Programme in Algorithmic Trading (EPAT).
Momentum trading strategy
The principle of momentum states that if the security is moving in an upward direction, then it will continue to move in the same direction.
Similarly, if it is moving in a downward direction, then it will move in the same direction. You can exploit the momentum in two ways, i.e. time-series momentum and cross-sectional momentum. Both the ways are explained in detail in this Momentum Trading Strategies course.
Scalping is a trading strategy in which traders hold a position for a very short period so as to be able to take small profits. Traders who implement this strategy are known as scalpers. They hope to reap a small profit on each trade and these small profits will add up to a big amount as the number of trades increases. Scalpers act like market makers looking to buy at the bid price and sell at the ask price, in order to gain the bid-ask spread.
Tick is a measure of minimum upward or downward movement in the price of a security. A tick can also refer to the change in the price of a security from trade to trade.
If a trade is at a higher price than its last traded price by its tick size or more, then it is called uptick.
Similarly, if a trade is at a lower price than its last traded price by its tick size or more, then it is called downtick.
For example; If the tick size is $0.01 and the stock goes from $10 to $10.01 then it would be considered as an uptick. Conversely, if it goes from $10 to $9.99, it would be a downtick.
Also, if a stock had a tick size of $0.1 and a current price of $10, the associated price can move to $10.1, $10.2 or $9.9, $9.8 but cannot move to $10.05 or $9.95 as it does not meet the tick size of $0.1.
Now, the ticking strategy is to benefit from the bid-ask spread. This implies that you buy at a price above the best bid and sell just below the best offer to maximise gains.
Also, check out this video for an introduction to day trading strategies:
To delve deeper, you can enrol in day trading strategies course on Quantra, which is specifically designed to provide you with the knowledge as a beginner.
In this article, we covered the basics of day trading and what the beginners need to know about the same. As a beginner, you can gain some knowledge of the day trading practice and how day traders function. Having a thorough knowledge of can help a beginner take the calculated risks in day trading.
Disclaimer: All investments and trading in the stock market involve risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.