‘Day trading’ is a form of buying and selling financial instruments in a period of about 1 day and does not take too long.
Taking profits from low price movements can be a profitable situation if done with the right methods.
However, it can be a dangerous thing for those who are just starting to trade or anyone who is not following the right strategy.
In this article, we will share 10 tips for those who are just starting to invest in stocks, especially for those who are called ‘day traders’.
1. In addition to knowledge of basic trading procedures, ‘day traders’ need to know about the latest stock market developments and important events affecting the market. For example, plans and interest rate changes of the United States Federal Reserve (FED), economic projections and so on.
Do your ‘homework’. Make a list of stocks you want to trade and make sure you keep abreast of developments about your chosen company and the general market. Read economic news and visit trusted financial websites.
2. Calculate how much capital you are willing to risk for each trade. Many successful day traders risk less than 1% to 2% of their account per trade.
For example, if you have a trading account with a total capital of RM40,000 and are willing to risk 0.5% of your capital for each trade, your maximum loss for each trade is RM200.
Put aside excess funds that you can trade and you are ready to lose. Remember, that may or may not be the case.
3. ‘Day trading’ takes your time. That is why it is called ‘day trading’. You have to spend most of your time. Don’t ‘dream’ of trading if you only have a limited amount of time.
The trading process requires the trader to identify the market and see the opportunities that may arise at any time during the trading session. Moving fast is the key.
4. As a ‘newcomer’, focus on a maximum of one or two stocks in one trading session. Tracking and finding opportunities is easier with just a few stocks. Right now, you can trade a fraction of the stock, so you can specify a specific amount of money you want to invest.
For example, if Maybank shares are trading at RM250 and you only want to buy shares worth RM50, many brokers now allow you to do so.
5. You may be looking for low priced stocks but you are advised to avoid buying ‘penny stocks’. The stock opens at 50 cents and below for a unit price.
These shares are likely to be of poor quality and belong to loss-making companies. Unless you see this stock as an opportunity and have done a bit of research, stay away from ‘penny stocks’.
6. Many orders are made by investors and traders as soon as the market opens in the early morning, which contributes to price fluctuations. An experienced trader may be able to identify patterns and make the right choices to generate profits.
But for ‘beginners’, it is better that you take a moment to read and analyze the market for 15-20 minutes first before you start the move.
The noon time is usually unstable and the movement starts to increase towards the close of the trading session. Although peak times offer opportunities, it is better for ‘beginners’ not to make any trades to avoid high risks.
7. Determine the type of ‘order’ you will use to enter and exit the market. Will you use ‘market order’ or ‘limit order’?
Market order is a stock price offer and demand activity that occurs between the seller and buyer of shares but not all prices offered will be accepted because it depends on the market and lots of shares available.
Limit order is the price set by investors to buy and sell a stock. The price may be higher or lower than the current price depending on the investor's 'order'.
8. A strategy does not guarantee profit at all times. Most traders only profit 50% or 60% of their trading. However, they make a lot of profit from the losses incurred.
Ensure that the risk for each trade is limited to a certain percentage of accounts and the entry and exit methods are clearly defined and written.
9. Sometimes the stock market will ‘test your patience’. As a ‘day trader’, you can learn to guard against ‘greed’, ‘hope’ and ‘fear’. Decisions should be made based on logic and not emotion.
10. Successful traders need to move fast but they don’t have to think fast. Why? Because they have developed a trading strategy in advance, along with the discipline to stick to that strategy.
It is important to follow your formula carefully rather than trying to chase profit alone. Don’t let your emotions dominate you and ignore your strategy.
There is a mantra among ‘day traders’ which is “Plan your trade and trade your plan”.
