Although profitable, day trading can be challenging for inexperienced investors who lack preparation and strategy knowledge, not to mention even versed traders can sometimes hit a snag and suffer some losses. If you are interested in turning day trading into a career or a source of additional income, you have arrived at the right place.
TradingPedia presents readers with a detailed guide on the ins and outs of this form of investment. Our day trading academy is suitable for novices who start from scratch as well as for seasoned traders looking to improve their knowledge.
Definition of Day Trading
The term day trading refers to buying and selling securities within a span of 24 hours only. This dynamic style of trading is available across many different instruments but is mostly used by those who trade currency pairs and stocks. People who adopt this approach are looking to profit from the short-term fluctuations of the markets.
The movements in the prices are typically minuscule in this case. Day trading bears some similarities to another approach, called scalping. However, the difference between the two is that day traders normally open trading positions within 24 hours and close them at the end of the day, either profiting or losing from them. Day traders prefer not to hold overnight positions, which is not the case with scalpers.
Who Should Try Day Trading
This approach is predominantly suitable for people who can afford to spend enough time on extensive market analysis and price monitoring. It is not recommended for those who have regular, full-time jobs that prevent them from extensively monitoring the market movements throughout the entire day.
This is because day traders must remain well-informed on all important events that could lead to market fluctuations if they are looking to be successful. Armed with this information, they can make better decisions regarding what direction to take, with the two options being going long (buying) or going short (selling).
Suitable Currency Pairs for Day Traders
One of the most important factors to consider when you start day trading is the spread. The latter could play a major role in determining whether one turns a profit or not. From this perspective, certain currency pairs are more beneficial for day traders than others.
Another thing to keep in mind is that the spreads offered by some retail brokerages are more difficult to overcome by day traders. The best brokers for day trading deliver speed and reliability at nominal cost.
Spreads can also impact what strategies day traders choose to implement. Very active day traders, who focus on a specific pair, are recommended to pick the pairs that have the lowest possible spread-to-price-fluctuation ratios.
It is essential to keep track of these movements throughout the day to determine when a pair is worth trading and when it is not. Another thing to keep in mind is that spreads are of less significance during periods of increased market volatility. Due to all these factors, many day traders prefer to buy or sell major currency pairs such as GBP/USD and EUR/USD.
Day Trading and Money Management
Adequate money management is an essential trait all successful day traders share. This has to do with managing your positions’ size, establishing what initial capital you should start with, and determining whether you should request a withdrawal of your profits after successfully closing your trading positions.
The size of the withdrawals is also important for day traders. The purpose of all this is to achieve profit maximization while safeguarding your trading capital at the same time. Day traders are also recommended to set maximum stop-loss orders, avoid positions that involve significant risk, and even take short breaks. The last piece of advice stems from the fact that overtrading tends to impact negatively traders’ psychology, leading to emotional reactions and hasty judgments.
Popular Styles of Day Trading
Day traders resort to a variety of styles and strategies, with the most common types being arbitrage and news trading. A successful trader must continually improve and refine whatever strategy they are using until it starts to yield the best possible results profit-wise. Refining your strategy also helps you cut your losses to the bare minimum.
Apart from market observation day, traders also rely on advanced technical analysis and various charting tools. This allows them to capitalize on multiple trading positions throughout the day as well as to cap their losses from unsuccessful trades.
Arbitrage trading enables traders to profit from minuscule differences shared by related markets. The trader achieves this by opening equal or opposite positions on these markets simultaneously.
As for news trading, the technique involves opening positions on the basis of official news releases and reports. This way traders can capitalize on new trends. For further information, check TradingPedia’s in-depth guide on day trading where you will find everything you need to know about this approach.
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