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Thinking of Day Trading
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Day trading is still a hot topic in the investment sector. Some praise it as the fastest way to make big money, and others, unfortunately, fall prey to the risk of engaging in this type of speculative investment. If you are thinking of becoming a regular day trader, it is imperative, especially for beginners, to understand the basics of such trading to avoid losses.
Day trading can turn into a profitable career if done properly. But it can be challenging for beginners—especially those who don't have a well-planned strategy. And be aware that even the most experienced day trader can hit a rough patch and experience losses. When you start day trading, you must comprehend exactly what constitutes a day trade. Let's understand exactly what day trading is.
What is day trading?
As the name implies, day trading refers to buying and selling securities and stocks within the same trading day to make a profit. It is done using an online trading platform. Traders who trade in this capacity are generally classified as speculators and are known as day traders.
They are generally well educated about trading and are well funded. Many of them add an extra level of risk by using leverage, such as margin loans, to increase the size of their stakes.
How does day trading work?
● Stock prices keep fluctuating in the stock market, creating numerous trading opportunities throughout the day. These price fluctuations reflect investor ideas about the company's shares. During the day, stock prices keep on changing depending on the changes in demand and supply parameters.
● In simple words, when demand exceeds the quantity supplied of the stock, its price rises, and a sharper demand-supply gap results in a higher price.
● As mentioned, day trading involves buying and selling stocks within the same trading day.
● To earn a profit from trading the shares, the fluctuations in the price of the shares are monitored. Therefore, traders must have excellent risk management skills to maintain their profits.
● Here is a simple example to explain. Suppose you bought 1000 shares of company X for Rs 200 when the market opened. Within an hour, the price rises to Rs 250. You sell those shares at the current price to make a profit of Rs 50,000. But both buying and selling must happen within the same trading session. Stock delivery is not involved.
What are the day-trading strategies?
Day traders use a combination of strategies to achieve their goals are:
Breakout trading
A breakout strategy refers to a large fluctuation, or breakout, in a stock price that has remained stable for a relatively long period. For example, if a stock has been between Rs 300 and Rs 320 for three weeks and suddenly you see that it is either falling or rising sharply, it may be a good time to trade. That volatility should be appealing to a day trader.
Scalping
Scalping is when you sell your stock immediately after the trade is profitable. This strategy focuses on making several small profits on short-term price changes that occur throughout the day.
News-based trading
This strategy is based on trending news and information. Day traders follow breaking news and events to project rising and falling stocks. It requires competent research skills to do well, but it is still a better option for beginners.
Fade
Fade is acting against the current trend, which is evident in the market. It is a high-risk strategy that bets against traditional understanding.
Range trading
This strategy is very similar to breakout trading. Instead of waiting for the stock to move above or below the predicted range, day traders will buy and sell when the price approaches the range limit.
High-frequency trading
This strategy uses sophisticated algorithms to trade large amounts of securities as quickly as possible. This type of day trading requires specialized computer systems, which is why it is commonly done by institutional investors.
Is there a minimum amount of money required to start day trading?
Once you have decided that you want to earn money by day trading, you need money in the form of capital to start your business. But how much money do you need is the most popular question that beginner traders ask.
It's simple, there is no minimum amount to invest in the stock market. You just need to have enough capital to cover the cost of the stock. Therefore, you do not need a large amount of money to begin day trading. For example, a small trader can start trading with a capital of Rs 500 and a rich investor can start with a capital of Rs 5 lakh too.
Start with a small amount of capital if you are new to the stock market. Eventually, if you gain confidence and make some money in day trading, you can always increase your capital.
In short, a trader can start day trading with a small capital of Rs 1000 and trade in small quantities, and become a successful investor by withdrawing the profits made from day trading.
Should you start day trading?
If you intend to start day trading, be prepared for the following steps:
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Start small; focus on a few stocks rather than draining yourself.
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Be ready to put in the time to practice and perfect your strategies.
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Make sure you have some knowledge of the trading world and a clear idea of your risk tolerance, capital, and goals.
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Keep calm and try to keep emotions out of your business. Don't deviate from your plan.
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A brokerage account will allow you to make the number of trades needed to achieve your goals.
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Enough capital to make the kind of trades needed to turn a profit.
If you follow these simple guidelines, you could be on your way to a sustainable career in day trading.
Benefits of day trading
All investment opportunities carry a certain level of risk and have pros and cons, and day trading is no different. Many who venture into this field of investment fail.
Because you are relying on market volatility to drive up the value of a stock purchase with day trading, you always run the risk of losing money. The only thing you can do is to make an educated guess about what will happen in the market. This can always result in a loss rather than a profit. Here are some advantages of day trading:
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Personal freedom |
Being a day trader means that you set your own hours, control your actions and only do what you truly believe in. One of the main reasons why people are attracted to investing as a career is that they enjoy total personal freedom in their day-to-day life. |
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Greater flexibility |
Day trading offers a lot of strategies that you can use to find the right stock for you. This leaves room for greater flexibility, which is often difficult to find in other types of investments. |
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Comfort |
Day traders can work from the comfort of their homes. There is no need for a proper office for day trading. All you need is a computer and an excellent internet connection. |
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Overnight changes |
Day trading also has some advantages over positional trading (Long-term trade investments). Long-term trading investors worry about the stock market crashing and losing thousands of dollars in a matter of hours but day traders never have to worry about overnight changes as they close their positions by the end of the business day. |
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discipline |
It helps you to be disciplined in your trading life. |
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Substantial income |
Anyone can optimize their profits by adopting an adequate strategy. Day trading allows traders to earn a substantial income within a short period of time. |
Know the risk before trading in the stock market
Experienced day traders are usually very experienced and have a deep understanding of the markets, products, strategies, and risks. Make sure you understand the risks before you trade stocks
For the average investor, day trading can be a difficult proposition due to the number of risks involved. Some of the risks of day trading are summarized below.
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Serious financial losses |
The risks involved in day trading are much higher than those of long-term investment strategies. Day traders typically incur serious financial losses in their first months of trading, and many never make a profit. |
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Stressful job |
Day trading is an extremely stressful full-time job as it involves watching dozens of ticker quotes and price fluctuations to spot fleeting market trends and demands a lot of concentration. |
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Claims of easy profits |
Profit margins are often narrow because day trading involves a lot of risks, which is why it is not for everyone. Beware of false claims of easy profits. |
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Use of borrowed funds |
Day-trading strategies use borrowed funds to make profits. Many day traders not only lose all their money, but they get into debt. |
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Loss of money |
Day traders often lose money long before they make a profit. |
Conclusion
Day trading is all about taking advantage of the sharp fluctuations in the market and profiting from buying and selling securities and shares. It can take a lot of time and money to succeed in this endeavor, and anyone who is considering getting into day trading should do so with caution. This is an area of investment that is subject to high risk, excessive winnings, and heavy losses. While day trading will always be interesting to individual investors, anyone contemplating it needs to gain the knowledge, resources, and cash that give it a chance to be successful.
Frequently Asked Questions
Day trading requires a deep focus. Beginner-day traders first need to decide which market they want to trade in – Stocks, Commodities or Futures and how much capital they need and they generally need a thorough knowledge of the market. They also need proper equipment and access to trading platforms. Day traders must commit to spending enough time keeping a close eye on the market.
Day trading is not about getting rich overnight but making money every day for some time. How much money a trader can make in a day depends on the volatility of the market and their position. It is not easy for traders to make a profit from day trading and most of the day traders are in a net loss. They can make or lose a significant amount at any time. A day trader can literally choose from thousands of stocks to trade. Choosing the right stocks is the first step in making day trading profitable.
Day trading sounds like a good idea based on how the stock market is performing. But it is inherently risky and requires detailed planning, foresightedness, and solid entry and exit strategies. Those who are successful are often traders who have a deep knowledge of the market and trading strategies.
