Day trading can be very profitable but is very risky. For beginners, the chances of winning are far less than the chances of losing in day trading. However, despite the low success rate, you can increase your chances by considering some things. Before moving on, keep in mind that there is no 100% fail safe strategy in day trading and even in swing trading. Here are some of the most important things to consider before getting your feet wet in day trading.
1.) Learn technical analysis. Day traders rely on charts most or probably all the time. Generally, most short traders, such as day and swing traders, read charts and believe that everything is discounted on the charts. Reading and analyzing charts is a very important skill that you should develop in order to increase your chances in succeeding in day trading. Some things that you should learn and understand about technical analysis are supports and resistances, Fibonacci, indicators such as MACD, RSI, and STS, and developing a good gut feeling on price actions.
2.) Be content with 5% at most. Normally, if you earn 2%, that is already a winning trade after considering all commissions and fees. Some day traders aim too high and end up losing. Take note that 5% a day is already 50% in 10 days and 150% roughly in a month. Isn’t that good? Stocks that make it to the ceiling or go higher than 10% in a single day are rare. Hence, once you earn or gain by more than 2% in a single day, take your profits. Banks only give some 1% to 2% in a year, earning something as 2% in a single day isn’t that bad.
3.) Learn momentum trading. Momentum trading could further decrease the risk. In momentum trading, you buy stocks that have momentum and will most likely surge and sell when the buying spree is high. Momentum trading could be done in two ways. First, you can buy stocks that have strong price action near the closing and second, you can shop for stocks that will gap up in the opening. There are pros and cons to both. In buying at close (the previous day), you can position yourself for a possible gap up the next day. However, you also put yourself at risk if the stock won’t go up and will also leave you without cash if other stocks will gap up. In buying on stocks that are candidates for gap ups, some stocks that have closed strong the previous day are most likely going to gap up hence your potential gains have decreased. The advantage though is that if the index goes down, you are safe because you have cash and you can buy stocks at lower prices.
4.) Always have a cash on hand. Random stocks surge everyday, its just a matter of finding these stocks. Ideally, you should have at least 20% of your equity on cash just in case some stocks show strong bullishness. Having cash on hand can also make you buy stocks that have dipped and are bound to bounce back. Either way, you increase your chances of gaining and decreasing the risk of losing.