Day trading for dummies: the best strategies
Day trading is the buying and selling of investment products on one trading day. For example, you buy a share and then sell it again within a few hours. By day trading in a smart way, you can achieve a high return in a short period of time. In this day trading for dummies guide you will learn all the strategies that you can apply.
How to day trade as a dummy?
You can day trade with special day trading software. It is important that day trading software is user-friendly: that way you can properly place stock orders. It is also important that you can open a short position on a falling market to respond to all market conditions.
If you prefer to buy shares yourself, you can choose eToro. At eToro, you can buy foreign and British stocks without commissions. Dummies can also try the possibilities here first with a demo:67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
If you want to actively speculate on CFD shares, indices, currencies and commodities, Plus500 is the place to be. At Plus500 you can try active day trading with no risk with a free demo. Use the button below to open an instant account at Plus500:72% of retail CFD accounts lose money.
What can you day trade in?
Dummies often do not know what you can day trade. In practice you can day trade almost every investment product: think for instance of shares, an index or currencies. Nevertheless, not every investment product is equally suitable for day trading.
It is very important that the investment product shows sufficient volatility. Volatility is a term that indicates that the security fluctuates strongly in value. As a day trader, you try to profit from short-term fluctuations: these are often not seen in stable shares without strong price movements.
However, it is important to remember that higher volatility also increases your potential loss. Day trading is a risky business and you can always lose (a large part of) your deposit.
How does day trading work?
If you want to day trade, you must open an order. For example, you can place an order for a stock. You always have the choice between two types of orders:
- Buy order: you will then achieve a positive result with a rising price
- Short order: you will then obtain a positive result in the event of a falling price
When you are day trading, you try to predict the direction in which the price of a share will move in the coming hours. Day traders keep an extra eye on shares when there is a lot of activity on the stock exchange. When, for instance, news comes out about company results, this can cause fireworks.
A good day trader therefore checks before he starts investing whether any important news comes out. In this way, you will not suddenly lose money due to an unexpected price movement.
How does the market work?
If you want to be successful as a dummy with day trading, it is important to understand how the market works. Whether you trade stocks or currencies, the way the market works is fairly similar.
On the stock exchange, you see that under the influence of supply and demand, a certain price is established. When the demand for an investment product increases, the price of the security rises. At the same time, a falling demand can push the price down.
As a day trader, you therefore always ask: what will the rest think of this? If you think that the masses are gloomy, it is better to take a short position. Is the confidence increasing? Then it might be better to open a buy position.
What is the best market for the day trader?
When you start day trading as a dummy, you can sometimes be overwhelmed by the many possibilities. For example, you might choose to trade an obscure ETF that tracks house prices in Venezuela; however, this is often not a good idea. Pricing is less transparent, and it is harder to keep up with the latest developments. In addition, liquidity in these markets is low, making it difficult to sell your investment in time.
In my opinion, the best market for dummies is the Forex market. On the Forex market you trade in the value of currencies. For instance, you could open a position on a rising Pound in relation to the dollar. Would you like to know more about investing in currencies? In this article you can read everything you need to know about trading currencies.
Trading stocks can also be suitable for dummies. It is important to select shares that are relatively well-known and have sufficient liquidity and volatility.
Day trading & leverage
When you have gained more experience, you can also choose to use leverage. Leverage allows you to take a larger investment position with a small amount of money.
If you use a leverage of 1 to 10, for example, with an investment of $1000 you can immediately trade $10,000 worth of shares. This way of investing makes it possible to achieve high returns. At the same time, you can quickly lose your entire investment.
A leverage effect magnifies both your profits and losses. If the value of the underlying stock increases by $1, you immediately make a profit of $10. Of course, this also works in the opposite direction so that you can also quickly lose a large amount.
Leveraged trading is often not suitable for day trading dummies. Therefore, build up your leverage slowly and avoid wasting a considerable amount of money.
Day traders often use charts to open their positions. On a chart, you can see at a glance how a share develops. You can view a chart on different timeframes. When you choose a longer timeframe, it is easier to see long-term trends. Some common timeframes are:
- Daily time frame
- H4 4 hours chart
- H1 1 hour chart
- M30 30 minute chart
- M15 15 minute chart
- M5 5 minute chart
- M1 1 minute chart
For dummies just starting out day trading, it is wise to start at a high timeframe. In this way you do not have to analyse the chart as often and you can use the trends which have been going on for a longer time and are therefore more stable.
Do you want to know how to analyse a chart? In our technical analysis course, we teach you everything you need to know about using technical indicators to trade:
Have a plan
When you are day trading, it is even more important than with normal investing to draw up a good plan. Within the plan you determine which strategy you are going to follow. You should draw up some basic rules: for instance, when will you open an investment position, and when will you close it again?
By setting clear rules in advance, you avoid acting emotionally later on. Dummies can sometimes get out of control: if things don’t work out the way they expect, they randomly open all kinds of positions and lose their entire investment balance in no time. This, of course, is what you want to avoid!
If you want to become successful as a dummy with day trading, it is important to start small. First make a small deposit and experience what it is like to lose money. Avoid the over-complicated investment products and spend enough time honing your skills. Only in this way can you, as a dummy, grow into a successful day trader.
Would you like to try the possibilities first with a demo? You can! By opening a risk-free demo, you can find out if day trading is for you. Use the button below to immediately compare the best parties:
Day trading strategies
When you want to start day trading, you can choose from several strategies. In the last part of this article we will briefly discuss what the best trading strategies are for anyone who wants to start day trading.
Scalping is an intensive method of day trading where you open and close several trades within a short period of time. As soon as you make a small profit, you immediately close the position. Is the price moving in the wrong direction? In that case, you also close the position quickly. Please note that this method of day trading is very intensive and therefore often not suitable for the novice dummy day trader.
This strategy is not suitable for investors who are afraid of risks. If you succeed in applying the fading day trading strategy correctly, you will be able to achieve a high return. In case of the fading strategy, you open a short position on a share, after this share has risen substantially. After a considerable rise you’ll see that people often take their profits, as a result of which the price will drop a bit again.
This type of day trading is best suited for dummies. Momentum traders try to anticipate strong trends. For instance, when there is positive news, you often see that the stock price can rise considerably. By buying the share or currency pair, you can move with this trend. You close the position when the price moves in the other direction again.
In this way of trading you look at the lowest and the highest point of a share or a currency pair on a day. The next day you open a buy position at the lowest point or a short position at the highest point. When the trend reverses, you close the position.
Which day trading strategy is best?
There is not one best day trading strategy: with every strategy you can achieve good results. Of course this doesn’t mean that every strategy will work for everyone. That’s why it’s certainly advisable to practise well first; this way you’ll be able to discover in practice which method of day trading suits you best.
What are the risks of day trading?
Day trading and risk are connected. If you apply a good strategy, you can make a lot of money. Nevertheless, at many brokers, 60 to 90 percent of the investors do not succeed in trading profitably. This is because many dummies take excessive risks and rather gamble than invest.
It is therefore important not to think too lightly of day trading: it really is a skill that you have to learn. Make sure you properly manage the risks of your day trading strategy by using a guaranteed stop loss, for instance. That way you’ll always know where you stand!
The trend is your best friend
When day trading, the trend is (usually) your best friend. The direction of the trend does not matter: as a day trader, you can achieve a positive result regardless of the exact direction. When you go long, you earn money when the price of a security is rising and when you short sell, you earn money when the price of a security is falling. In the end, you only need movement to be successful.
In most cases, it is wise to follow the trend, because when the price is rising, buying is the best option, otherwise you will lose money. Nevertheless, there are still many people who invest against the trend. This can turn out to be badly, and you should only do this if you have found clear indications that the trend is about to reverse.
When you start out as a novice day trader, going with the trend or with the crowd is clearly the best choice. When you invest against the trend, timing is essential and, as a beginner, you often do not have this timing yet.
Day trader by day…
Do you still have a job or do you simply not feel like following the prices all day? No problem, fortunately there are nowadays several possibilities to (semi) automatically invest.
Firstly, you can use orders, the position then opens automatically when a certain value is reached.
You can also use a take profit and stop loss to take your profits and losses automatically. You can then view the charts once a day and place orders based on them.
If you want fully automated trading, you might want to consider ZuluTrade. With ZuluTrade you can automatically follow the positions of experts, all you have to do in this platform is select some providers you want to follow.
It is best to practise a lot, in practice you will often find out what the best tactics are for you. Everyone trades differently and as a day trader, you have a wide range of possibilities and tools at your disposal. If you want to start trading yourself, you can take a look at our overview of brokers where you can open a free demo account.