Day Trading [2020 Guide ]
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Have you ever heard about intraday trading or day trading? if the answer is no or you still want to keep learning, this article will give you a detailed explanation about:
- What is Day Trading, the basics
- How to trade intraday
- Best Day Trading Strategies
- Best Indicators
- What are the risk involved in day trading?
- Best timing to trade
- Tips for Beginners
- Key Features of Day Trading
- Best trading Practises
Day trading is a trading system that consists of opening and closing trades in the same day. This type of trading can be practised in any market, but is most frequently applied to the Forex-, stock- and index markets.
The IntraTrader takes advantage of the small price movements within the day or session. The trader opens positions during the day or the session and closes these before the end of that day. The trader takes advantage of the market movements during the day session. Therefore, these traders prefer liquid markets such as the currency-, stocks- or index markets.
A prerequisite for success in intraday trading (or any other type of trading) is having sufficient market knowledge.
- There is no set formula for success as a Forex trader. Adequate market knowledge and having a trading plan are both essential, but do not guarantee success.
- Risk increases when prices fluctuate sharply throughout the day.
- Commissions & fees for keeping positions open overnight, commonly referred to as Swaps, are not applicable to intraday trading. Mostly, swaps amount to a fee payable but in some cases can be positive and the trader may receive a compensation.
- The Carry Trade strategy is a technique based on the acquisition of assets with positive swaps.
- In applying intraday trading strategies the trader avoids exposure to the risks associated with large price movements or price gapping overnight - at which time we cannot control the market or it is closed.
- Indray day trading normally entails opening multiple trades and holding these for short periods of time in order to make small profits. Day trading positions account for an integral part of the daily trade volume and provide liquidity to the market.
How to trade Intraday?
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Whilst intraday trading might be profitable it is not easy. Intraday trading, as any form of trading or investing, carries risks and should not be assumed without prior training and a vast understanding of the markets. Experienced traders can attest to the fact that a trading plan which includes detailed risk management rules, is essential. On the basis of this plan, the trader scans the markets for trading opportunities, the best entry and exit points and assesses possible trading opportunities for a healthy risk/reward ratio.
Interested in getting started with Day trading? Let's discuss the key factors that market veterans list as pivotal for their trading successes!
Understanding the dynamics of the stock markets
A thorough understanding of the market's dynamics and the main factors driving market movements is essential. Intraday traders monitor technical and fundamental indicators to gain insight into the market sentiment and possible future price development. Solid insight into what moves the markets enables the trader to identify the most favourable opportunities and make informed trading decisions.
A disciplined approach
In all aspects of life, discipline is important. Lack of a disciplined approach to intraday trading can result in large losses. Trading in lieu of a systematic and disciplined approach is essentially gambling. Therefore long term success in trading without discipline is next to impossible. A trader must be able to monitor prices during certain periods without acting on emotions and making reckless decisions.
This is why it is imperative that trader follow a set trading strategy that clearly specifies the conditions for entering the market. The trader would scan the market on the basis of the parameters set out in his strategy and would only act when a set up meets his rules. When the markets move vigorously traders can be tempted to place trades to 'get in on the action' or be reluctant to enter into a position after a few losses. Acting in accordance with one's trading plan can be challenging and requires discipline.
Sometimes the market follows the course you expected, but just because you were able to predict a certain movement does not mean you should use your gut feeling as an indicator to place trades. Even though it can be painful to miss an opportunity you had anticipated, making random trading decisions will ultimately result in losses. Sticking to a strategy is the only way to gain profits consistently and establish long term success. It is also the only way to monitor and improve your performance.
A tailored trading strategy
In the previous section we have touched on the importance of basing investment decisions on a trading strategy. While the disciplined application of a triaging strategy is a key factor to trading success, it stands or falls with how well suited the strategy is to current market conditions.
Market conditions can vary from day to day and it is imperative that the applied strategy is suited to the current circumstances in the markets. As intra day trading is executed on lower timeframes, the overriding market trend can differ from one day to the next. The trader would thus need to check daily if his strategy is attuned to the new market conditions and would need to adapt or fine-tune accordingly.
Successful day traders are disciplined in their approach yet flexible when it comes to their trading strategy. The market dictates how, when and under which conditions they enter a trade.
Day Trading Strategies
Trend trading Strategies
Trend trading techniques are generally favoured among novice traders. Looking for trading opportunities in the direction of the general trend is commonly viewed as the simplest and most reliable approach as markets move in line with overriding trends 80% of the time. In applying trend trading strategies the trader seeks to find sharp movements, trading on large volumes that follow the direction of the trend. As the saying goes: the trend is your friend.
Intraday trading is often described as the fastest way to make money in the stock market and has thus gained a lot of interest over recent years. What most recommendations fail to mention is that this particular trading style is complicated and requires constant monitoring of the markets. Day trading can be very lucrative but also carries a high risk and is not suitable for every trader.
Counter Trend trading strategies
Counter trading is generally viewed as a more advanced trading style and best suited for experienced traders. In order to successfully execute counter trend trading strategies the trader would not only need to anticipate the end of the current trend but also time disposition to take advantage of the change in trend. A counter trend trader must be able to identify (temporary) changes in the trend direction with high precision and predict the strength of said movement.
As so counter trend trading requires experience and mastery of price action and technical analysis techniques. Day traders wanting to experiment with these trading strategies can use a demo account or trading simulator to get acquainted with the basics of counter trading trading. They can gain experience in a risk free setting.
The chart below illustrates the use of the pivot point indicator to help identify potential turning points in the market trend.
What are the best indicators
There are many trading indicators that can be used to support the day trader in his trading activities. Which indicators can be referenced as best indicators for day trading is largely dependent on the chosen trading style & instrument and the personal preferences of the trader. Combining different tools and techniques can confirm and fine-tune signals generated to improve the reliability. An example of a popular combination of day trading indicators is:
- The Fibonacci indicator - the Fibonacci tool indicates the areas of interest for the next trading session
- The MACD indicator can be a good complementary indicator.
What risks are involved?
Generally, the tighter the time horizon chosen for trading, the larger the risk. Hence, Intraday Trading and Scalping are considered to be the more riskier trading styles. Price will move within a limited reach over a short time period. As markets usually only move a few points in a session, intraday traders use high risk trading strategies to increase their profit margins.
Such strategies entail:
- High levels of leverage to attempt to multiply profits made on (relatively limited) price movements
- Increase in the number of trades - as day traders aim for small profits per trade they would generally open more positions to reach their profit goals
It is vital to remember that opportunity and risk go hand in hand. To reiterate, aforementioned strategies are classed as 'high risk' which means the likelihood of large losses is relatively high and it is generally not advised that aspiring traders start with these strategies.
What is the best approach then? Educate yourself. We offer FREE online trading courses - enrol by simply clicking on the banner below and signing up!
Best times to trade
As mentioned, having a sound trading plan is essential for success in trading. An adequate trading plan is more than just a strategy, it also specifies risk management measures and a trading schedule. The level of volatility can differ greatly during various trading sessions and on certain times of the day. It is important to know what the characteristics of the times and sessions during which you trade are and to adapt your strategy accordingly.
Some useful guidelines to help you figure out the best time to trade intraday:
- Monday is a quiet day in the markets. Day trading requires sufficient price movement over a short period of time. If the trading volume is low there may not be enough price movement to execute said trading strategies. Furthermore, the lack of liquidity can lead to sharp movements.
- Opening of the London trading session is generally a favourable time for short term trading as we usually see a lot of activity during this time period.
- The last hour of trading (in the London session) often showcases how strong a trend actually is. How the trading day ends is believed to be indicative for continuation of the current move. It is thought to be likely that the after a breakout to the upside will end when it is followed by a low closing price and vice versa for a bearish trend.
A breakout strategy can be used when a new maximum or minimum has been reached. Buy at the first pullback after a new high or sell at the first pullback after a new low.
- Don't trade on public holidays or late in the day onFridays.
- Don't trade when the market has moved beyond a 20-30 pips range over the course of the day.
- Sometimes not holding a position in the market is as good as holding a profitable position.
- The first hour's range is used as a benchmark for the range in which the price will move throughout the rest of the trading day.
How frequently you trade is dictated by your trading strategy. Let's say your chosen strategy has a win ratio of around 60%. If you don't trade setups that meet your rules you are more likely to miss out on winning trades (60%) than losing trades (40%). Be consistent and trade the opportunities that meet your rules, the aforementioned guidelines will help you identify the most favourable times for trading.
Tips for beginners
The first step to becoming a profitable day trader is straightforward and not much different from other trading styles. As a beginner, it is advisable to start with a demo account to gain familiarity with the workings of this trading style, the dynamics of the markets and the functions of the trading software.It is important that the trader learns how to conduct proper analysis and knows how to open, close and manage trades. This seems pretty straightforward but experience has shown that these steps are easily bypassed by enthusiastic beginning traders.
Another important consideration is selecting a reliable forex broker. Intra day traders carry out a large number of orders daily and the spreads and fees can add up. These costs are an important factor and can affect your trading results. Different brokers charge different fees and commissions - choose a broker that is transparent and trustworthy.
As with any form of trading and investing there is a possibility of losing your investment, so it is wise to only invest money that you can "afford to lose". Make sure you know what you stand to lose should the trade turn against you. Traders may not always be aware of what they are risking, especially when using leverage.
In August 2018, ESMA defined differences between professional- and retail traders and capped the levels of leverage available to the latter category. This regulation is geared to prevent new traders losing large amounts of money when applying leverage techniques.
How to get Started
- The first thing that a beginning intraday trader should assess is his or her risk tolerance level. Your aversion or appetite for risk will greatly impact your trading decisions and is a leading factor in finding a suitable trading strategy.
- Develop a trading plan and stick to it!
- Short term trading strategies such as day trading usually entail a great risk exposure due to the higher number of trades. Regardless of the trader's risk profile, it is advisable that the aspiring day trader tests any new strategies in a risk-free environment, such as a demo account, a trading simulator or through backtesting.
- Short term trading strategies require that the trader makes multiple decisions over a short time span. As such traders rely heavily on technical analysis techniques and indicators.
- An adequate intraday strategy takes into account key factors such as volatility and liquidity.
Volatility refers to the intensity and frequency of the market movements. Short-term trading requires high levels of volatility as price needs to move sufficiently in a limited time frame.
This determines which markets and instruments are suitable for such trading styles. Another factor that should always be considered when selecting trading instruments is the market liquidity. If the liquidity in a market is insufficient, orders can not always be executed at the desired price. Whilst a long term trader can afford to lose 10 pips, a short term trader who is aiming for profits of a few pips does not have the same luxury.
Most intra day traders will focus on the most liquid markets and assets, such as the major Forex pairs, the most important indices and blue chip stocks.
- Since markets generally only move a limited amount of points in a trading session, intraday traders use high risk trading techniques to increase their profits. Bear in mind that the possibility of greater profits goes hand in hand with a greater risk.
- Intraday traders should be very conscious of major news events and data publications as these can turn market conditions in a matter of seconds. As a novice trader it is wise to avoid trading in unpredictable market conditions.
Can you live from the Trading?
Many are attracted to day trading by the potential of earning a lot of money. There are many examples of traders who have been very successful, but gaining profits consistently is not easy. Those who aim to make a living from trading should consider that a larger starting capital is required. Due to the risks associated with trading, capital can be lost in a matter of seconds.
Unless you have a strong background and experience in trading, most traders won't start off having their profits from day trading as their main source of income. Our advice is to educate and train yourself. Always test all your strategies on a demo account or trading simulator, where you can practice in real time market conditions in a risk free environment to avoid putting your capital at risk. From here it is an easy transition into live trading.
Admiral Markets' demo trading account enables traders to gain access to the latest real-time market data, the ability to trade with virtual currency, and access to the latest trading insights from expert traders.
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Experienced traders will attest to the fact that long term success is dependent on constant fine-tuning and improvement. The markets are always in motion and the best results come from a strategy that finely attuned to the current situation. Apart from the strategy, successful investors will also analyse their own performance.
Traders ask themselves the following questions:
- Is there a position I shouldn't have taken based on my strategy?
- Have I followed my strategy and trading plan?
It is as important to follow your trading plan as it is to evaluate it at the end of a trading session..
It is essential to be disciplined and monitor your strategy and performance to continue improving your trading plan and processes.
Your goal should be to reduce the number of trading errors you make each day. Ask yourself:
- Is it a good day?
- Is it a regular day?
- Is this a regular day in terms of your trading system and your backtesting test?
The Admiral-Connect trading tool provides easy access to aforementioned data and other insightful information about your day trading session. This Expert Advisor that is part of the Exclusive Admiral Markets MetaTrader Supreme Edition plug-in. Click on the banner below to start your FREE download:
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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.