Day trading began as far back as 1867. This may come as a surprise because, at that time, computers and the internet had not been created. However, stock markets leveraged the telegraph communication technology to create ticker tapes.
Day Trading (Source: InvestmentU)
Technology was not yet advanced so brokers had to live close to exchanges like the New York Stock Exchange to get regular ticker tapes with up-to-date information on the stock market. With the information on the tapes, they could monitor price movements and make decisions on which stock to purchase or sell within a trading day.
Then, also, individual traders could only place trades physically through the brokers. As a result, day trading was an unpopular term. However, as technology advanced, it evolved and became a popular term among virtually every trader in the stock market.
How Does Day Trading Work?
Day trading is a risky trading strategy for those who are not experienced. Even experienced day traders are not immune from incurring financial losses. This is why the United States Securities and Exchange Commission warned day traders to be wary of this strategy as there is a huge possibility of suffering severe financial losses. However, with huge risk also comes the possibility of huge profit.
A day trader leverages a substantial capital size to exploit small, daily price changes in securities that are highly liquid. Before they trade, day traders develop solid trading plans that usually revolve around the four main strategies:
Selection of Securities: Day trading works best when the trader confirms the liquidity or volatility of a financial instrument before purchasing it. While liquidity allows the day trader to enter and exit a cryptocurrency or stock at the desired price easily, volatility shows the kind of potential the cryptocurrency or stock has that would guarantee a drastic change in its price within a short period.
Entry Points: This is where the day trader determines the best time and price to buy or invest in a cryptocurrency or stock. Day traders usually capitalize on news that could potentially cause a sudden movement in the market.
Price Target: A day trader should have a strict exit strategy. This can be done by setting a price target at which he will decide to sell the cryptocurrency or stock. The common price strategies that day traders use include taking profit, fading, momentum trading, and daily pivots.
Stop/loss Order: This order helps to limit the day trader’s loss by exiting a trade when he has lost the maximum amount he is willing to lose on it.
10 Questions to Ask Yourself Before Adopting Day Trading
What Is Your Trading Plan?
Before he begins trading, a day trader needs to develop an efficient trading plan that is completely based on proven market strategies and free of emotions.
Can You Stick to the Plan?
Day trading requires strict adherence to the plan. As a day trader, never abandon that plan because you foresee a potential further rise in the price of the cryptocurrency or stock. It might backfire unexpectedly and cause huge losses.
Are You a Good Researcher?
Before you purchase a cryptocurrency or stock, you need to research its market potential and its recent price movements. You should be abreast of all the recent news that can potentially move the market before you trade.
Do You Have the Time?
Day trading is time-consuming as you need to monitor your cryptocurrencies or stocks and also make several trades within a day. Do you have the time?
Are You Willing to Start Small?
The legally required minimum balance for a day stock trader in the US is $25,000. However, because day trading poses a huge risk, as a beginner, it is recommended you start small then increase your investments as soon as you get the hang of it.
Can You Keep Your Emotions in Check?
Day trading requires the trader to make a trading plan that is completely devoid of emotions. Otherwise, he would make significant losses on trades.
Do You Watch Stock Market News?
A day trader makes sure that he monitors news that can cause drastic changes in market prices. Day traders decide to buy or sell cryptocurrencies or stocks depending on whether the news is positive or negative.
How Much Are You Willing to Risk on Each Trade?
This should help you determine where to place your stop-loss order. The rule of thumb is: do not risk more than the amount you’re prepared to lose on a trade.
What Online Broker Should You Choose?
Choose the broker that offers the widest access to markets, analysis tools, and also charges low commissions. Most day traders use either Interactive Brokers or Fidelity Brokers.
Do You Have a Good Exit Plan?
Having a good exit plan ensures that the day trader can limit his financial losses on a bad trade. This will be a function of your risk-reward ratio.
The information on this website and all associated literature are for educational and informational purposes. It does not constitute a fiduciary duty or obligation between Uncut Lab and you. Please consult your financial and investment professional for your specific situation.