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Day trading guide

Day trading is a popular short-term trading strategy, which involves the buying and selling of financial instruments with the aim of closing out of the positions by the end of the day to profit from small movements in price. Day trading strategies can differ from longer-term trading strategies, in that they focus more on profiting from shorter-term movements in the market, as opposed to moves that take place over a number of days or weeks.

In some ways, day trading is like a 'made-to-order' profession. To a large extent, you can work when and where you want. You can dictate exactly how and when you want to trade, working from your office or home, or even when travelling, thanks to the advances in mobile technology and the increasing popularity of mobile trading.

Private day trading allows you to be your own boss, putting you in control of your own time and money. So what's the downside? The very fact that you have total control is sometimes a frightening prospect for many, especially those who find it difficult to create and manage their own timetables.

How is day trading different to longer-term trading?

Technically speaking, the only difference between day trading and other forms of trading is the timeframe used. Instead of taking positions for weeks or years, day traders typically hold positions over one day, often exiting positions before the market closes. Active day trading requires much more focus than other types of trading due to the shorter timeframe, and because the market moves quickly over the shorter term.

Things to remember when day trading

  • Know your state of mind

Take stock of the thoughts and motivations that are running through your mind while you're trading and if your thoughts are a little 'off', don't hesitate to take a break. Day trading is hard work and it requires constant attention. You need to be focused and in the right frame of mind when you're trading.

  • Follow your own rules

Discipline is by far one of the most important attributes that successful traders have in common. Keep a watchful eye on your bad habits. Know what they are and look to resolve them as soon as possible. One way to check to see if you are trading in a disciplined way is to define a set of rules to govern your trading decisions and then check to see if you are following them. Your rules should be carefully considered and they should be designed to help you trade successfully.

As a day trader, it's a good idea to re-evaluate your rules at the end of each month, due to the shorter time frame of this style of trading. Keep in mind that you will break your rules occasionally - it's inevitable, but it's not a good habit to get into. Find ways to stop yourself from breaking your rules and look to address it if it is becoming a problem.

  • Manage your money

Money management is essential if you want to become a successful day trader. In fact, money management is one of the essential elements of successful trading over any time frame. Certainly, if you are planning to trade for many years to come, you are going to need to apply successful money management strategies. There are whole books dedicated to money management, containing many approaches, and you need to take the time to find a method that you're comfortable with.

Some traders look to enter trades that have the potential to gain twice what they are risking on the trade. This is known as a risk-to-reward ratio. If a risk-to-reward ratio in excess of 1-to-2 is maintained, the chances of remaining profitable are better. Remember, it doesn't matter if you win 90% of the time if your losses are much larger than your wins. What's important is that your wins are larger than your losses.

  • Always use risk management

Never forget to use stop losses to manage your risk when you are placing your orders to enter the market. This is your insurance. You need to be aware of exactly where your stops should be prior to entering the trade. This is a good habit to have and it will ensure you are constantly thinking of how to protect yourself from trades that go against you.

Technical trading strategies

Many day traders use technical analysis and charts and would recommend a 'clean' approach to trading strategy. These traders prefer not to load their charts with lots of different indicators in order to try and second-guess direction. Rather, they will focus solely on price; this is often referred to as 'price-action trading'. There is definitely some merit to this and, when trading in this way, you still have some key reference points based on what has happened previously to help you plan future trades.

For some day traders the previous day’s high and low are important levels to watch when it comes to planning a strategy for today. This is actually quite logical: yesterday's high marked the point where sentiment changed and the sellers came back into the market and pushed the price lower. The market consensus was that the price was too high.  And of course the previous day's low shows where the buyers regained confidence as they felt the market was undervalued – they voted with their wallets and bought. It is not too much of a stretch of the imagination to think that these levels could well be important if they come into play again, and this can be the cornerstone of a day trading strategy. 

The psychology of day trading

Once you have developed an informed opinion – try to act quickly and decisively. When your price levels have been reached and the prerequisites for your trade have been met, you should consider acting quickly, otherwise the trading opportunity may be missed and all of your planning and research may have been for nothing.

  • Always try to remain calm. This is especially true when you are faced with a loss. Maintain a calm disposition and react in accordance with your rules. Mentally rehearse your worst-case scenarios so, if they do occur, you are prepared and can keep a level head.
  • Don't let other traders' opinions influence your trading. Sometimes other traders will offer their views on the market and give advice without considering your trading methodology. Remember, no one has put as much effort into your trading system and style as you have. You know your timeframes and your stops, so you need to stick to them. Other traders will have a bias. If you want advice you should consult a professional who will be able to appreciate your style of trading and give their thoughts accordingly, without throwing you off course.
  • Don't let other traders' opinions influence your trading. Sometimes other traders will offer their views on the market and give advice without considering your trading methodology. Remember, no one has put as much effort into your trading system and style as you have. You know your timeframes and your stops, so you need to stick to them. Other traders will have a bias. If you want advice you should consult a professional who will be able to appreciate your style of trading and give their thoughts accordingly, without throwing you off course.
  • The importance of patience when trading. If you can't find any viable trading opportunities, don't force yourself to trade. As you get to know a market you may find that knowing when to trade becomes easier. Your intuition is something that sharpens as you become more experienced as a trader.
  • Be aware of your stress levels. Day trading can be stressful as it requires constant attention and motivation. You can counter this by taking time to think about your priorities. Get some perspective on trading and its place in your life. Increased stress levels can have a negative impact on your trading decisions so, if you feel like your stress levels are rising, it's probably a good time to step away. You can come back to trading later when you are in the right frame of mind.
  • Be flexible with your positions. Market conditions can change rapidly and so you need to be flexible in your approach. You need to be ready to adapt to changing market conditions all the time if you want to stay ahead.
  • Stick to your chosen market and a particular timeframe. These are two parameters you can control in an environment that can change very quickly.
  • Never be afraid of taking profits. If you find that you have exited a trade at a profit but the trend continues, don't regret your decision. Let the other traders out there fight over the last part of the move. You have made a profit, which is a lot better for your account balance than making a loss, and you can start looking for the next opportunity. If you worry that you are continually exiting too early and are missing out on profits, you could design and test a re-entry technique. If, as a short- term trader, you find yourself making more profits than losses, you shouldn't worry too much about taking profits a little bit early sometimes.

Creating a day trading strategy

No strategy works all the time, but a simple day trading strategy like this can help pinpoint low-risk, high-reward trades at important points throughout the day. Some traders would also use the failure of one trade as an opportunity to set up another. If the level breaks (as the previous day’s high did later on in the session) it can signal a new trend is starting, presenting another opportunity to try and profit. 

Keep detailed trading records

When you are running a particular trade you should look to write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you can increase your learning curve and success. Taking the extra time to do this can help you improve your trading.

You also need to have a clear picture of whether you are in front or behind for the day, week or month. Keep these numbers handy as you need to take responsibility for them. We all know that there is a lot to be learned from hindsight so, after you have been day trading for a month, take some time to evaluate what you have done. Look at your trades and ask yourself whether, if you could do the trade again, what would you do differently? This can help you to become a more consistent and successful trader in the long term.

Become an educated trader

The above example of simply using the previous day’s levels highlights how a strategy does not have to be overly complex to still present at least one or two perfectly reasonable trading opportunities across many different markets. There are many different strategies that can be applied to day trading and a number of other factors to take into consideration. The best thing you can do to improve your chances of trading success is to educate yourself via the many written trading resources and trading strategy videos available. 

How much money do day traders make?

Day traders aim to make small but frequent profits based on the fluctuating price movements of an asset. These profits can add up over time if the trader is successful. Day traders, like all CFD traders, are subject to spreads.

Is intraday trading good for beginners?

Intraday trading is suitable for both beginner and professional traders, but it requires a lot of patience, focus and dedication. Improve your knowledge about technical analysis and learn to read and understand price charts before opening a position.

What is the best indicator for day trading?

Most day traders tend to rely on price action rather than filling their charts with technical indicators, as this allows them to focus on clear price direction and trends. However, some indicators can enhance your understanding of the financial market when trading intraday. Learn more about technical indicators and technical analysis tools available on our platform to your day trading.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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