The stock market is full of a variety of trades, all lending themselves to different markets and share interaction. The term day trading refers to the type of trading whereby you start and end the trading day with your account 100% in cash, i.e. not holding a position, whether long or short, until the next day.
While some view day trading as a basic way to trade, it really is the safest way to play the market as you’re not exposed to crashes and plummets that can happen when the market is closed due to news that could affect your stock or share prices. The key to successful day trading is having the time and knowledge.
Unlike the long term investment of real estate investing, day trading can make money in one single day.
In terms of currencies, day trading is slightly different as currencies are open to be traded 24/7, meaning there is no such thing as overnight or end of day trading. This means you can have open positions for longer than a typical market day, with active stop losses that can be activated at any time.
5 Steps to Successful Day Trading
So you want to start successful day trading? Here are 5 important steps to follow to ensure you’re giving yourself the best chance at stock market success.
Get yourself a great computer
It may seem basic, but you’d be surprised at how many people try to play the stock market seriously on an inferior machine. The computer you use for your day trading has to support the best operating platforms, have the latest software as well as fast, directly connected internet connection.
Read lots of reviews on the best software to use for your day trading. It will be given to you by your direct-access broker when you start a brokerage account. It is the most comprehensive software system that allows you to best trade your day stocks.
The internet connection you have is also vitally important. If you’re operating on a wireless connection, chances of signal dropping in and out are high which can be catastrophic to your trading, opt for a robust broadband or cable connection with plenty of data allowance.
Also, ensuring you have a strong, trusted firewall and antivirus on your computer will provide protection and well as security from hackers.
Open a direct access broker account
When trading online it is important to open your own account through software such as RealTick, or alternatively, trade with proven and trustworthy online brokers with direct access to the market.
This will eliminate any drag time, or slow executions resulting from going through an overcrowded online trading interface.
Unlike tax deductions with life insurance, you don’t get any tax minimisation from day trading, so you’ve got to stay switched on, and react fast.
Always trade top down
The term top down in the world of trading basically refers to having as many or as much of the general market behind you as possible. Before taking a position in the market at the beginning of a day, analyse the previous night’s closing figures and trends and position yourself with a majority of key factors in your favour.
When successful day trading, approximately 80% of stocks follow the trend of the broad market from the previous day, so try to have it moving in the same direction as you!
Know your market internals
When partaking in any kind of day trading you need to be able to ascertain the strength and direction of the market you’re playing. The best and most accurate way to do this is by utilising market internals. Three of the most noteworthy and successful market internal strategies for determining broad market bias are:
– Market Breadth i.e. The volume (by amount) that is flowing into the increasing stocks, minus the volume flowing into decreasing stocks.
– Advance Decline Line i.e. The number of increasing (up) stocks minus the number of decreasing (down) stocks.
– TRIN or Arms Index i.e. Essentially creating a fraction out of the breadth and advance decline lines and computing them into one figure.
Know what sector you’re trading in
Again, this seems basic but some of the most common trading mistakes come from people who trade the wrong sector or are not aware of the sector they’re trading within.
Every stock you own, and every stock everyone else owns is part of a sector and a sub sector. Once you are educated as to the type of stocks you have and their relative sectors, you will be able to use the strength of the sector to add momentum to your own day trade stock.
Summary: Successful Day Trading
While there are many other guidelines and helpful hints to get you started at successful day trading, the above should give you enough of a base to begin from. Remember, day trading is part of a diverse investment strategy, and should not be the only investment you have.
When successful day trading, remember to always analyse trends, and get the strength of the broad market behind you prior to trading, and close off each day!