Day trading strategies for beginners
What is day trading?
Day trading is the opening and closing of a trade within the same day. A day trader may open and close just one trade in a day. Alternatively, they could trade multiple times throughout the course of a day, opening and closing multiple trades.
Which markets to day trade in Singapore?
A day trader is looking to profit from small price fluctuations in very liquid markets. Market liquidity is important to day traders, because they need to be able to move in and out of positions quickly. Any delay to the trade could make a difference between a profit or loss. So, whilst it is possible to day trade on any market it is most commonly seen on:
Costs are important to traders. Costs are particularly important to day traders given that they are looking to take advantage of relatively small moves. Therefore, day traders often trade markets which have a tight spread. In other words, markets where the difference between the buy and the sell price is small. As day traders aim to make a profit and quickly, a large spread would make this style of trading very difficult. For example, the EUR/USD has a spread of just 0.5 as times, compared to stocks which have a commission charge. The movement in the share price would need to cover the commission charge before the position moves into profit.
That said day trading shares does come with one significant advantage; it avoids gapping risk. This is the risk that share traders run by holding stocks overnight. The share price could open notably higher or lower the following day. Beginners often favour day trading shares.
When to day trade?
Day trading can be a very effective strategy when there are big swings in the markets. However, it can be more challenging when the market is in consolidation mode and there is less movement to capture. Days with high impacting data can be ideal for day traders. Using the economic calendar, it is possible to identify days and times when volatility is likely to be higher and the markets provide more day trading opportunities.
Day trading strategy examples
Scalping – this is very short-term trading strategy whereby the trader aims to take lots of small profits. This involves frequent trading and requires a high win rate.
Trend trading – this strategy works for long term trading or day trading. The trader looks to identify a trend, so a series of higher highs or a series of lower lows and then take a long position in an upward trending market or a sell position in a downward trending market. A trend can be identified just by looking at the price action or by using trend lines or moving average indicators.
Risk management strategy
Having a solid risk management strategy is essential when day trading. If risk on trade is not kept under control, then a single trade could quickly wipe out any profits on an account. Day traders often use the market structure to set stop losses, for example support and resistance levels, moving averages or the Fibonacci retracement indicator.
A key advantage of day trading is that it negates the risk of a running trade being affected by price movements through the night or gapping when the stock market opens in the morning in the case of trading stocks. This makes it popular with traders who prefer to finish the day on a clean slate, without overhanging fears of what may happen across the night.
One of the big disadvantaged to day trading is that it can be a time-consuming trading style. Day traders will often sit at their screen for many hours a day watching and analysing the markets. Day trading is fast paced, so it requires proficiency and skill to analyse the market and take rapid decisions. This can be very stressful and is certainly not suitable for everyone.
- Day trading is the opening and closing of a trade or multiple trades within a day.
- It is best done on liquid markets with tight spreads.
- Day traders often trade FX and indices for this reason.
- A sound risk management strategy is essential in order to prevent wiping profits out.
- Whilst this style of trading avoids the risk of overnight movements or gapping, it is fast paced, time consuming and can be stressful.