How to Day Trade as a Beginner

Day trading involves buying and selling financial instruments within the same day. The aim is to try and make returns from small price fluctuations. However, market volatility due to rapid economic changes, fluctuating interest rates, and geopolitical developments, can lead to sudden price swings, making day trading risky. In this article, we’ll cover the key steps to getting started.

What is day trading?

Day trading involves buying and selling financial instruments such as stocks, forex, or commodities within a single day. Traders aim to profit from small price movements on highly liquid assets, opening and closing positions in hours, minutes, or even seconds. The goal is to profit from short-term price fluctuations. Unlike traditional “buy and hold” investment strategies, day traders close all of them before the market closes. They do not hold positions open overnight.

How to start day trading

Professional day traders have an in-depth understanding of the market, a lot of experience, and can earn a living from day trading. Here are some steps to get started:

1. Understand trading strategies and principles

Before you begin, you need to understand the principles and trading strategies used for day trading. Read up on it, take online courses, and study financial markets.  Study technical analysis, learn about trading psychology and, most importantly, risk management.

2. Develop your trading plan

Your plan should clearly outline your investment goals, risk tolerance, and the strategies you’ve learned. Specify your entry and exit criteria, how much capital you’re willing to risk on each trade and establish a risk management strategy. Before committing real money, practice with a demo account to familiarise yourself with the platform, without risking your own funds.

3. Choose a broker and fund your account

Select a reputable broker that suits day traders by offering low transaction fees, fast order execution, and a reliable platform. After choosing a broker, fund your account, but start with a small amount. Only invest what you can afford to lose.

4. Begin trading with small positions

As a beginner, start by trading small positions to limit your risk while you’re still learning. Carefully review each trade, check them against your research, and adjust your strategy as required. Day trading requires you to constantly adapt to changing market conditions.

5. Stay disciplined

Discipline is essential. A lot of day traders lose money because they fail to follow their own criteria. As the saying goes, “Plan the trade and trade the plan.” Without discipline, success is impossible.

Day trading tips for beginners

1. Knowledge is key

Day trading requires a solid understanding of the financial markets and staying up to date with market news and events that affect financial instruments such as stocks and currencies. Keep an eye on announcements from the Federal Reserve, economic indicators, and financial news. Regularly check reliable business news resources to stay informed. 

2. Set aside funds

Decide how much capital you’re comfortable risking on each trade. Many successful day traders stick to a risk limit of 1% to 2% of their account per trade. Always do it with money you can afford to lose.

3. Dedicate time

Also requires a significant time commitment, making it unsuitable if you have a tight schedule.

You’ll need to monitor the markets constantly and identify opportunities that can arise at any time during trading hours. Since markets can shift quickly, being aware and moving quickly are key.

4. Start small

When you’re ready to start with real money, begin with a small amount of capital and focus on learning from each trade. As you gain confidence and experience, you can slowly increase your position size.

5. Time your trades

The market’s open and closing hours tend to be the most volatile periods. While experienced traders may be able to spot patterns and capitalise on them during these times, beginners should be more cautious. A smarter approach is to observe market movements for the first 15 to 20 minutes before making any action. Midday trading hours tend to be less volatile and are a safer option for traders who are still learning to trade.

6. Use limit orders to manage risk

Decide on the type of order you’ll use to enter and exit trades. Market orders are executed instantly at the best available price, but don’t guarantee a specific price. Limit orders, on the other hand, can help you do it more precisely as they allow you to set a specific price at which your order should be executed. They can reduce losses during market reversals. However, if the market doesn’t reach your set price, the order won’t be executed and your position will remain open.

7. Set realistic goals

You don’t need to win every trade to be successful. A success rate of 50% to 60% can still be profitable if your winning trades outweigh your losses. The key is to manage risk effectively. Limit the financial risk on each trade to a specific percentage of your account and have clear entry and exit strategies in place.

8. Reflect on your trades

Regularly reviewing your actions allows you to spot patterns, refine your strategies, and learn from past mistakes. This reflection process is essential for continuous improvement, adapting to changing market conditions, and building both discipline and emotional control – key factors for trading success.

9. Stick to your plan

Success in day trading comes from preparation and discipline. Develop a clear strategy and stick to it. Don’t allow emotions to influence your decisions and focus on executing your plan. Always remember the rule: plan your trade and trade your plan.

Day trading strategies

Let’s review some of the various strategies day traders can use.

Following the trend

Traders who follow the trend buy when prices are rising or short sell when they are falling. This strategy assumes that prices that have been rising or falling steadily will continue to do so.

Contrarian investing

This strategy assumes that a rise in prices will eventually reverse and drop. The contrarian buys when prices fall or short sells when prices rise, anticipating that the current trend will change direction.

Scalping

This strategy focuses on making numerous small profits from brief price movements throughout the day. Arbitrage, a type of scalping, profits from correcting market mispricing. This is a style by which a speculator exploits small price gaps created by the bid-ask spread. Traders using this method typically enter and exit a position quickly, often within minutes or even seconds.

Range/swing trading

This strategy uses predefined support and resistance levels to guide buying and selling decisions.

Trading the news

This strategy involves buying when positive news is announced or short selling when there’s negative news. The idea is that news events can cause greater volatility, leading to higher profits or losses.

Pros and Cons of Day Trading

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No overnight risk

Since positions are closed before markets close, day traders avoid the risk of negative overnight news impacting their trades overnight, such as economic reports, earnings reports, or corporate announcements.

Tighter stop-loss orders

Day traders can set tight stop-loss levels to minimise losses on long positions. Additionally, access to margin provides leverage and the potential for bigger profits.

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Higher costs

Frequent trading can lead to increased commission fees, which can reduce profit margins over time.

Higher risks

Using margin or short selling can magnify losses, leading to margin calls and greater financial risk.

In summary

Day trading is challenging and requires time, discipline, and patience. Start by learning the basics, creating a solid plan, and starting with small moves to gain experience.

Prioritise risk management, stay in control of your emotions, and stick to your plan. Learn from every trade, adapt as the market changes, and stay committed to continuous improvement. With time, practice, and dedication, you can increase your chances of becoming a successful day trader.

Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.