This is purchase and selling of a financial instrument during a day or even several times per day. The correct use of small price changes can be profitable, if to do it correctly. At the same time, it can be dangerous and risky for beginners and those who do not follow the developed strategy for day trading.

However, far from all brokers are suitable for many trades made by day traders, although some brokers focus on day traders only. Check out the list of the best brokers for day trading to learn about the ones that are the most suitable for those who prefer day trading.

Fidelity and Interactive Brokers are online brokers included in the list. They have advanced or even professional versions of their platforms that have a real-time stream, extended instruments for charts and patters, and the option to quickly enter and change comprehensive orders.

Below you can find some general principles of day trading. After that you will see the solutions of how to sell and buy, as well as widespread day trading patterns, basic charts and models, as well as the ways to decrease losses.

BASIC POINTS

Day trading is profitable only when traders treat it seriously and do their own research. Day trading is a job, not a hobby. It should be treated as a job and as any job it requires focus, devotion, objectivity, and no emotions.

Read these basic recommendations and know how to become a successful day trader.

1. Make use of knowledge. It is your real power.

It is essential to be aware about the main trade procedures. At the same time, it is as important to be informed about the latest news of the stock exchange and the events that have an impact on the stock, e.g., the economic outlook, the Fed’s interest rate plans, etc.

Thus, don’t limit yourself to day trading only. Do homework! Make a list of the stock you want to trade and learn about the selected companies and general markets. Read business news and reliable financial websites.

2. Save funds

Make a decision about the capital you are ready to risk on each trade. Most successful day traders risk less than 1-2% of their account per day. If you own a trade account for $40,000, and you are ready to risk 0.5% of the whole capital on every trade, the maximum loss per trade is $200 (0.5% * $40,000).

Define the amount of the surplus funds you can trade and are ready to lose. At the same time, don’t forget that it may happen, and may not.

3. Take the time

It is not a secret that day trading requires your time. That is why it is called day trading. In fact, you will have to refuse from most of your day. Give up trading if you have little free time.

Trading requires the trader to monitor the markets and identify the opportunities that may arise at any time during trading hours. Fast movement is a key to success.

4. Start small

Being a beginner, you are recommended to focus as much as one or two stocks a session. It is much easier to monitor and find opportunities focusing on a small amount of stock. Nowadays it is more and more popular to trade fractional shares. That is why you can specify smaller amounts you intend to invest.

It means that if Facebook shares are traded at $250, and you want to buy only $50 worth, you are able to purchase one fifth of the share.

5. Don’t focus on penny stocks

Are you searching for deals and low prices? Don’t focus on penny stocks. As a rule, they are illiquid and there are almost no chances to hit a jackpot.

Many stocks traded under $5 a share are excluded from the list of major stock exchanges and are traded only on OTC (over-the-counter). If you do not see real opportunities, don’t even think about them.

6. Choose Time for Trades

A lot of orders investors and traders place start being executed as soon as markets open in the morning. This contributes to the prices volatility. An experienced trader can determine regularities and choose the most suitable variant for earning a profit. As for beginners, they would rather read the market and not make any steps during the first 10-20 minutes.

As a rule, the middle hours are not so much volatile. Changes re-occur by the closing bell. No doubt, the rush hours are full of opportunities. In spite of this, beginners are recommended to avoid them not to suffer losses.

7. Decrease Losses with Limit Orders

It is important to decide on the type of orders to use for entering and exiting trades. Are these market or limit orders? When you place a market order, it is executed at the best price possible at that moment. That is why there is no price guarantee.

At the same time, the limit order guarantees the price rather than its execution. Limit orders help to trade with higher accuracy, and you establish your price (it should be real) both for selling and purchasing. More experienced traders can also use option strategies for hedging their positions.

8. Evaluate Your Profits Realistically

For the strategy to be profitable, you should not win all the time. Most traders win only 50-60% of all their trades. They earn more on their winners than lose on losers. It is important to make sure that the risk on each trade is limited to a certain percentage, and the entry and exit methods are accurately defined and recorded.

9. Keep calm

Sometimes stock markets test how calm you are and rattle your nerves. As a day trader, you should learn how to restrain your greediness, hope and fears. Your decisions must be based on the logic rather than emotions.

10. Follow Your Plan

Successful traders must act quickly, but this does not mean that they should think quickly, too. Why? Because they have developed their basic day trading strategies before, and now they are disciplined to follow it. It is important to follow the developed formula rather than to chase the profit. Don’t let your emotions lose your head and stay governed by your emotions, as well as to refuse from your basic strategy. Day traders have a rule: “Plan trading and trade by plan”.

Before defining the details of day trading, let’s consider some reasons why day trading can be so difficult.

Why is Day Trading Difficult?

Day trading requires much practice and know-how. Besides, there some factors that complicate this process.

First of all, don’t forget that you will have to deal with professionals whose career is related to trading. They have access to the best technologies and connections in the area. That is why if they lose, they are eventually focused on success. If you join a winner, it means they will earn more profit.

Uncle Same will wish to decrease your profit regardless of its amount. Keep in mind that you will have to pay taxes from any short-term profit and from any investments you have during a year or less at the marginal rate. And one more caution: your losses will compensate any profit.

As an individual investor you can have emotional and psychological biases. Professional traders, as a rule, can exclude them form their day trading strategies. However, when it turns to your own capital, it is a different story.

Taking a Decision on What and When to Purchase

Day traders attempt to earn money by using minute price movements in certain assets (stock, futures, options, currencies). They tend to use large capital for this. When a typical day trader decides what to focus on (e.g., stock), he pays attention to three points:

1. Volume of trades is the measure of how many times the stock is sold and bought for a certain period of time. It is called the average daily trading volume. High volume shows the high interest in the stock. The increase in the volume of stock often predicts the increase or decrease in the price.
2. Volatility is a measure of the expected day range of prices, the range where the day trader works. More volatility is higher profit or loss.
3. Liquidity allows entering the market and exiting it at a good price. For example, the difference between the bid and ask price of a stock and low slippage, tight spreads, or the difference between the expected and the actual price of a trade.

As soon as you decide what stock (other assets) you search for, you should learn how to define the entry points, i.e., the moment you are going to invest at. You can use the following instruments for this:

• Online or real-time news services. Remember that news moves stocks. That is why it is extremely important to subscribe to the services and they will tell you potential important news for the market.
• ECN/Level 2 quotes: electronic communication networks (also known as ECNs) are computer-based systems. They show the best available bid. Besides, they ask quotes from multiple market members and after that automatically match and execute orders.

Level 2 is a service based on subscriptions. It provides real-time access to the Nasdaq order book composed of price quotes from market makers registering every Nasdaq-listed and OTC Bulletin Board security. Using them together, you can get a sense of orders to be executed in real-time.

• Intraday candlestick charts that provide you with a raw analysis of price action.

Identify and put down the conditions under which you are going to enter the position. It is not enough to purchase during the uptrend. It is recommended to buy when the price is above the upper trendline of the triangle pattern, where the triangle was preceded by an uptrend on the two-minute chart in the first two hours of the trading day.

When you have a number of entry rules, monitor more charts to see whether these conditions are created every day (if you want to purchase every day of course) and more often and move in the relevant direction. If it is so, you have a potential entry point for your strategy. After that you will have to assess how to exit from these trades or sell them.

When to Sell

There are several ways to exit a winning position. They include profit targets and trailing stops. The most widespread method is profit targets. It implies taking a profit at a pre-determined level. These are examples of price target strategies:

Scalping

This is one of the most popular strategies. It includes the sale as soon as the trade becomes profitable. The target price is any number that means “you have earned on this trade”.

Fading

This implies the decrease in the stock after the quick movement upwards. It is based on the assumption that 1) they have been bought before, 2) early buyers are ready to dix the profit, and 3) the existing buyers can be frightened. Although this strategy is highly risky, it can be very much useful. The target price here is when the buyers start stepping in again.

Daily pivots

This strategy means the profit from the day stock volatility. It is done by the attempt to buy at the minimum of the day and to sell at the maximum. The target price here is the next reversal sign.

Momentum

This strategy implies the trade on the release of news or search for strong trends supported by high volume. One trader will purchase at the news release and move by the trend until it displays the reversal. Another one will fade the price surge. The target price is the decrease in the volume.

In most cases you will want to exit from the stock when the interest in the stock fades, as shown by the Level2/ECN and volume. The target profit must also let earn more on wins than lose in case of lost trades. If you stop-loss is $0.5 from the entry price, your target must be $0.5 higher.

Like in case of your entry point, think of how you are going to exit trades before you do it. The exit criteria must be rather correct to be repeated and checked.

Day Trading Charts and Patterns

In order to define the appropriate moment for purchasing the stock (or any other asset you choose), many traders choose the following:

•  Volume—increasing or decreasing,
•  Candlestick patterns, including engulfing candles and dojis, and
•  Technical analysis, including trend lines and triangles

There are many types of candlestick setups to be used by the trader to search for the entry point. If correctly used, the doji reversal pattern is the most reliable.

As a rule, search for the pattern that has the following confirmations:

Firstly, look for the volume spike. It will show you whether the traders support the price on this level.

Note: this can be both the doji candlestick and other.

Secondly, search for the preceding support on this price level. For example, the previous day minimum (LOD) or the day maximum (HOD).

Finally, look at the situation from Level 2 that will display all open orders and their sizes.

Following these three steps will help you to define whether the doji will be able to make the real turnaround and whether it will be able to occupy the position under favorable conditions.

The traditional analysis of graphic patters also provides profit targets for exists. For example, the triangle height at the widest part is supplemented to the triangle breakout point and provides the price the profit is fixed at.

Limiting Losses at Day Trading

The stop-loss order aims at limiting losses on the stock position. A stop-loss for long positions can be placed below the recent minimum, and for short positions – above the recent maximum. This can also be related to the volatility.

For example, if the stock price is moving approximately $0.05 per minute, you can place the stop-loss at $0.15 at the entry for the price to have some space for fluctuations before it starts moving at the desired direction.

Make the decision how you are going to control the trades risk. In case of the triangle pattern, the stop-loss can be placed at $0.02 below the recent minimum of the fluctuation when buying the breakthrough, or $0.02 below the pattern.

One of the strategies is to set two stop-losses:

1. A physical stop-loss order is placed at a certain level of price that suits your tolerance to risk. Actually, this is the largest amount of money you can lose.
2. A mental stop-loss is set at the point where your entry criteria are violated. If the trade makes an unexpected turn, you'll immediately exit your position.

Regardless of how you decide to exit the trades, the exit criteria must be rather correct to be repeated and checked out. Besides, it is important to set the maximum losses per day you can withstand both financially and psychologically.

As soon as you achieve this point, spend the rest of the day resting. Follow your plan and your pattern. Remember that tomorrow is another trading day. As soon as you decide how to enter trades and where to place stop-loss, you can estimate whether the potential strategy complies with your risk limit. If your strategy makes you risk much, you need to change it to decrease the risk.

If the strategy is within your risk limit, start testing. Look through historical charts to find your records and define whether your stop-loss has been achieved. Make at least 50-100 trades on paper and note whether the strategy used to be profitable, and whether it complies with your expectations.

If this is so, go on trade by using your strategy on the demo-account in the real time mode. If it is profitable during two or more months in the modeled environment, continue your day trading by applying your strategy to the real capital. If the strategy is not efficient, start again.

Finally, take into account that if you trade on margin, it means that you borrow your investment funds from the brokerage (remember that the margin requirements for day trading are high), you are more vulnerable to sharp price fluctuations. The margin helps to improve the trading results not only in relation to the profit but also loss if the trade is against you. That is why the use of stop-losses is essential for day margin trade.

Now when you know all details of day trading, let’s consider some key strategies to be used by new say traders.

Basic Day Trading Strategies

If you learn about some methods, develop your own investment styles, ad define your target, you can use a number of strategies that will help you to search for a profit. These are several popular techniques to be successfully used:

• Follow the trend. Anyone who follows the trend will purchase when the prices are up and sell when the prices are down. This is done if the prices that were constantly growing or decreasing will continue increasing.
• Contrarian investments. This strategy means that the prices increase will reverse and drop. Contrarian buyers purchase during the decrease or sell during the rise expecting changes in the trend.
• Scalping. This is the style used by the speculator when he makes use of small price gaps created by the bid-ask spread. This method includes the entry and exit from the position during several minutes or even seconds.
• Trading the news. The investors using this strategy buy when the news is good and short sell when the news is bad. This may cause higher volatility, which can result in higher profits and losses.

It is difficult to master day trading. You need skills, time, and discipline. Many of those who try to do it fail. However, the above recommendations and methods will help you to create a profitable strategy. If you have practice and consistently evaluate your performance, you can succeed.