For those new to the concept of day trading, it’s helpful to understand the basic definitions and guidelines involved in the profession. Day trading is not a game, a hobby or a way to get rich overnight. It is a job that calls for specialized skills and a certain type of personality.
The following words of advice for new day traders will go a long way toward helping you decide if the profession is right for you:
Know What Day Trading Is
What is day trading, anyway? It’s the selling and buying of stocks within a market day, typically with an eye on profiting from short-term price changes. It takes nerves of steel and a solid understanding of the stock market to excel at day trading.
Stick to the “Three E’s”
This is one of the most fundamental day trading rules. The three Es are “enter, escape, exit.” When you decide to make a trade, have a set entry price and exit price, $2 as an entry and $2.20 as an exit, for example. The escape price might be $1.85. If the price declines to $1.85, you’d sell, or if it reaches $2.20, you’ll sell. Anything in between, you can let the trade continue to ride.
Study, Do Research and Stay Informed
The best day traders spend the off hours studying the market, knowing how the overall economy is performing and checking out upcoming announcements about government regulations and similar news.
Use the “20-Minute Rule”
Day trading experts typically stay out of the market during the first 20 minutes of the day because price changes during that period are nearly impossible to predict and can fluctuate a lot.
Place Limit Orders Only
Traders can protect their capital by using limit orders. This lets the trader set a defined dollar amount for getting in and out of a particular stock. Simply put, your buy order for stock XYZ won’t be executed until the price comes down to the price you’ve indicated. Likewise, a stock you are selling won’t be sold until a buyer offers a price high enough to meet your requirement.
Avoid Penny Stocks
Day traders avoid penny stocks for a host of reasons, including volatility, lack of data on the companies and the fact that many micro-cap shares are not very easy to sell.
Specialize in Two or Three Stocks
Especially in the beginning of a day trading career, it’s helpful to specialize in just a few stocks. That approach allows you to get used to the way those particular companies move in relation to market news. It’s also a smart way to get a handle on average price ranges for the stocks you specialize in.
Most professional day traders spend at least three months paper trading before “going live.” Paper trading is an effective way to learn the mechanics of buying and selling under pressure.
Understand that Day Trading is a Job
Too many day traders burn out because they failed to understand, at the outset, that day trading is a full-time job.
Before going into this highly demanding profession, it’s wise to read books on the subject, do some paper trading and, if possible, speak to to day traders who have been at it for a few years. Never jump into day trading without research and preparation.