Day Trading for Beginners

Day Trading Basics - Definition

Day or intraday trading refers to buying or selling stocks on the same day. Day traders may either buy first to sell later or sell first to buy later. They buy when the market is bullish and sell when it is bearish. Day trading is usually very popular in stock, foreign exchange, and F&O (Futures and Options) markets. Day traders identify liquid, highly volatile momentum stocks in the stock market and take entry or exit at the best time.

Day traders generally trade with high leverage. While leverage may increase their profit margin substantially, it can also cause a huge financial burden if the trade goes against their predictions. Day traders need to be sharp-eyed since they must analyse news on the go and charts like a pro.

You can find three types of traders in the stock market - fundamental, technical, and news-based. Fundamental day traders rely on fundamental analysis, such as price-earnings, Beta, book value, balance sheet, etc., to identify opportunities. Technical day traders rely on technical indicators like MACD, Bollinger Band, RSI, etc., to analyse a stock’s momentum and place pinpoint trades. And, news-based day traders listen to or read the top news of the day and trade the stocks that are most likely to be in the news. News-based traders also watch the macroeconomic data, corporate events and earnings, sectoral news, interest rates, and broad market sentiment. 

Because of the traders’ and investors’ collective sentiments, the stock market moves. For instance, some traders may find an opportunity and pour money, while others may sense danger and pull out the money. Day traders try fetching a profit due to the wild movement of stock prices.

How Does Day Trading Work

Day trading involves buying and selling on the same trading day. The idea is to profit from modest price swings by entering and closing positions swiftly. In contrast to long-term investment, day trading concentrates on short-term market changes, with traders often holding positions for a few minutes to a few hours, but never overnight.

Day traders depend extensively on technical analysis, which includes charts, patterns, and indicators, to find prospective trading opportunities. They frequently use tactics like scalping, momentum trading, or range trading to profit from market volatility. Furthermore, many day traders employ leverage supplied by brokers to maximize their potential gains, but this raises the risk of loss.

Day trading relies heavily on risk management. Successful day traders use stringent stop-loss orders to limit possible losses and stick to disciplined trading strategies to prevent emotional decision-making. Because of the high frequency of transactions, transaction costs can accumulate, thus traders must account for them in their strategy.

In short, day trading is a fast-paced, high-risk approach that necessitates quick decisions, frequent market monitoring, and a thorough grasp of technical analysis and risk management.

Top Strategies Employed by Day Trading Beginners

Beginners and experienced traders apply several day trading strategies to make a profit. Here are the top strategies day traders prefer to trade efficiently in the stock market:

1. Momentum Trading - Momentum trading is identifying the market trend and riding the waves. The market trend can be bullish, bearish, or sideways. 

2. Scalping - Scalping means making numerous ultra-short-term trades and pocketing the gains from winning trades.

3. Range Trading - Range trading is identifying support and resistance levels to enter and exit at the correct time. The Fibonacci Retracement level indicator is often used to draw support and resistance lines.

4. High-Frequency Trading (HFT) - HFT uses an automated computer-based trading system to track price movements and place automatic trades.

How Can Beginners Engage in Day Trading?

Beginners need a demat and trading account to work as a day trader. Fortunately, 5paisa provides free Demat and trading accounts to eligible investors. You need to submit your PAN card, Aadhar card, and a selfie photograph to create the account and start trading. Besides stock trading, you can also use the account to trade commodities, currencies, futures, and options. 5paisa also offers a margin facility to maximise your profits.

What Qualities Do Beginners Need to Be Successful Day Traders?

It is important to know the day trading basics as a day trader. But, what is even more important is having a balanced view of the market for taking calculated risks. Here are the top traits of successful intraday traders:

Knowledge of Market Fundamentals

Knowing the ins and outs of the market is crucial before placing your first trade. While stock recommendations are freely available on the internet, you must not trust them blindly. Try reading some books and tips to master the basic concepts involving stocks. Also, keep an eye for the latest news because sometimes, negative news may trigger a widespread sell-off or frantic buying. 

Invest a Decent Capital

It is wise to invest an amount you can lose in the market. However, proper knowledge can help you achieve the opposite. Novice traders often enter the market with less capital. But, low capital might also prompt you to take higher risks. With high capital, you can diversify your risks and book small profits. Since your capital is high, multiple small profits can lead to a high profit margin.  

Backtest Your Strategy

Although you can employ countless strategies as a day trader, not every strategy will work efficiently. Hence, it is wise to figure out a strategy that works in all market conditions and stick to it - being consistent is the key here. A persistent and disciplined trader can traverse friendly and hostile market conditions to make consistent profits. Also, keep the stop loss ready at all times to protect your capital from eroding.

Risks of Day Trading

Day trading entails high risks owing to its fast-paced nature and the possibility of huge, sudden losses. The use of leverage may magnify both earnings and losses, sometimes resulting in losses greater than the initial investment. Market volatility can cause unexpected price changes, making it harder to execute deals at the right price. 

The urge to make rapid decisions under pressure can often result in emotional trading and costly mistakes. Furthermore, the high frequency of trades raises transaction costs, which might reduce earnings over time. Overall, day trading necessitates a good risk management approach and discipline to avoid big financial losses.

The Endnote

Day trading is no less an art. But, with proper knowledge and experience, you can ace the task like an expert. We hope this day trading guide has made you confident enough to take on the task and test your skills.