TIPS FOR TRADERS
Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game—if it is played correctly. But it can be a dangerous game for newbies or anyone who doesn’t adhere to a well-thought-out strategy. Understanding the importance of each of these trading rules, and how they work together, can help a trader establish a viable trading business.
That’s why we’ll take a look at some general day trading principles.
RULE 1: ALWAYS USE A TRADING PLAN
A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria for every purchase.With today’s technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading
Don’t put real money on the line until you have a plan of action. That means know what you’re buying and selling, how much you’re going to trade and when you’re going to trade it. A trader without a plan is a pig heading for an expensive slaughter.
RULE 2: KNOWLEDGE IS POWER
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks—the Fed’s interest rate plans, the economic outlook, etc.So do your homework. Make a wish list of stocks you’d like to trade and keep yourself informed about the selected companies and general markets. Scan business news and visit reliable financial websites.
The successful trader never sits on his laurels, he’s always looking to trade smarter. Doing that means staying up to date with the news, utilising trading books, and staying tuned into emerging schools of thought. Markets evolve and you need to evolve right along with them.
RULE 3: HARNESS TECHNOLOGY
With thousands of other traders out there, you need to utilise all the resources around you to stay ahead. With that being said, charting platforms offer a huge number of ways to analyse the markets. You can also backtest your strategy against historical data to fill in any cracks. Mobile apps will also ensure you have instant access to the market, almost anywhere. Combine that with a lightning fast internet connection and you can make fast, informed and accurate decisions.
Trading is a competitive business. It’s safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.
Backtesting an idea using historical data prevents costly missteps.Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.
RULE 4:PICKING A DAY TRADING MARKET AND TIME THOSE TRADES
All markets offer profit potential. Therefore it often comes down to how much capital you need to get started. Don’t try to master all markets at once. This will divide your attention, and it may take longer to make money. Pick one market so that you can focus your learning. Once you learn to make money in one market, it is easier to adapt to learn other markets. So, be patient.Download several trading platforms and try them out. Since you are a beginner, you won’t have a well-developed trading style yet, so just try a few that your broker offers and see which you like best.
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But for newbies, it may be better just to read the market without making any moves for the first 15 to 20 minutes.The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
RULE 5: AVOID TRADING OVERACTIVITY
Checking in on your stocks once per quarter — such as when you receive quarterly reports — is plenty. But it’s hard not to keep a constant eye on the scoreboard. This can lead to overreacting to short-term events, focusing on share price instead of company value, and feeling like you need to do something when no action is warranted.
When one of your stocks experiences a sharp price movement, find out what triggered the event. Is your stock the victim of collateral damage from the market responding to an unrelated event? Has something changed in the underlying business of the company? Is it something that meaningfully affects your long-term outlook?
RULE 6: ALWAYS SET A STOP-LOSS LEVEL
It is quite possible that the share you chose falls on the day you trade instead of rising. Therefore, it is important that you decide how low the stock can be allowed to fall before you square-off the position. This acts as a safety net and helps minimize your losses. Most experts would suggest this is the most important tip for intraday trading you’ll ever get. So analyse which are buy and sell recommendations, and set a stop-loss level.
If you are beginner, it is ideal to adopt the basic 3:1 reward to risk ratio strategy. What this means is that the stop loss price — the price at which you are ready to exit if you are making losses — should be three times lower than the exit price — the price at which you are willing to book profit.
RULE 7: DEVELOP A METHODOLOGY BASED ON FACTS
Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the “so easy it’s like printing money” trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.
Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. Learning how to trade demands at least the same amount of time and fact-driven research and study.
RULE 8:MANAGE RISK
It is vital you sit down and develop a risk management strategy. This will ensure you only lose what you can afford. Without one of these, your time as a day trader could be extremely short-lived.Risk management is an art that comes with experience. It’s an integral part of successful trading. Sadly in the mix to find “best strategy” and make money quickly, many new traders miss this.
At large, stock trading is all about balancing risks- finding that sweet spot where risk is low and reward high. Every decision you take, every move you make is directed to avert the involved risks and maximize returns. And for this reason, having a separate risk management plan is no less than essential.
Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their odds of success in a very competitive arena.
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