Beginner Day Trader Guide

Beginner Day Trader Guide

This article provides an insight into getting into the world of day trading as a beginner with a small investment.

When getting started, it is important to learn from professionals to help develop strategies that consistently make profits. Day trading is a difficult and sometimes stessful profession to master with only small percentage of traders having ongoing success. Learning from professionals can help you become a more consistent and profitable trader.

Becoming a Pro

Professional traders have usually been trading for a long period providing them with several characteristics that take time to develop. As a beginner, it important to aim to develop the same skillset as pros to eventually become one yourself. Some important characteristics include:

  • Market Knowledge: Pros have information accumulated over the course of their trading experience.

  • Tools and Software: Pros have reviewed and used a number of different tools and software, knowing which ones work best for difference scenarios.

  • Community Support: Through networking, pros have established connections to community groups and peers enabling them to enhance their knowledge and getting support.

  • Rule Based Strategy: Pros always follow a specific system every day when trading which is a rule based strategy that takes out the emotion when buying and selling, making the system much more transactional and consistent.

  • Discipline: Following on from rule based strategy, pros know they need to remain disciplined in their approach to trading, always following their systems and strategies.

  • Proven Track Record: Pros have refined their winning strategies by evolving their rules and strategies based on historical success and failures.

  • Intuition: Over the course of trading, pros develop an educated intuition of market sentiment and price movements. This enables them to gain a better feel for predicting trends and maximizing profits when opportunities arise.

Gaining Market Knowledge

The following are some ways to accumulate market knowledge over time to expedite your learning experience, depending on which format you prefer for your own benefit:

  • Youtube: Perhaps the easiest entry point is to head to youtube and search for information on "Day Trading", which will then open up videos on beginner guides, interpreting candlestick charts, understanding common patterns that indicate price movements and trends, and general trading strategies for continued success.

  • Books: There are numerous books that have been published which follow on from the content you can obtain from watching videos. The benefit of books is that they go into more detail and can be useful as a quick reference.

  • Simulations: Software is available that simulates a trading environment. A number of trading platforms have virtual/simulation features that enable you to create an account and then begin getting hands on experience trading in a simulated environment to get used to trading strategies by immersing yourself into the environment. It's important to avoid investing real money until you have gained sufficient knowledge of the platform first.

Developing a System

Ideally you should begin by adopting a system from an expert to give you a baseline starting point. Through obtaining market knowledge from the previous steps, there should be various systems that you would have noticed and are comfortable with the general strategy.

As a framework the following aspects need to be fleshed out to build a comprehensive system that can be used. It's important to have this in place before investing any real money.

  • Market: Which markets to invest in, eg. US stock market, and then specific types within that market, eg. stocks with small caps

  • Time of Day: The start and finish times of your trading period, eg. 9am to 12am. This decision should be based on the best times that suit the market you are investing in, taking into account pre-market so you should be ready to go when the market opens (eg. if market opens at 10am, then perhaps starting your day at least 1 hour earlier would be beneficial). For any stocks you are interested in, look for company announcements during the trading window, particularly on the hour when information is generally released.

  • Starting Capital: As a beginner, $500 provides are solid starting account. You could start as low as $100, but $500+ gives you more flexibility. As you become more confident and develop consistent results you can build this capital base. Assuming your profit strategy is percentage based, this means as your capital builds so do you profits. Eventually,

  • Selection Process: This involves how to choose what to invest in. A solid general strategy is to look for assets that are moving, which involves looking at the market and filtering on the ones with most movement. For example, in the stock market, it is quite normal for the majority of stocks to have price movements in the +/- 2% range (ie. -2% to +2%), so you could set a selection rule to filter for any stocks that have a +/- 4% price movement range, which could eliminate 99% of the available stocks. Then from that list, sort by price movement and take the top 5 as a selection group to review more closely. From there you would develop more selection strategies to choose the most appropriate to invest in - this could be looking at other metrics such as trading volume and supply.

  • Risk Management Rules: You need to set rules to manage your risk. Assuming your capital is $500 and you invest the full amount in a single stock does not mean you are risking 100% as the only way that would happen is if the stock went to $0. So the idea is to set points at which you would exit the trade (sell your stock) to minimize the loss, and at the same time you also set the high point to sell based on your ideal profit point. Most traders make use of "Risk Reward Ratios" (RR ratio) to set these targets. An example is using a 1:2 RR ratio (1 unit of loss for 2 units of gain) and setting the unit at $50, which means from your starting $500 investment, you would set a sell point of -$50 ($450 worth) called a "stop-loss" and another sell point of +$100 ($600) worth called a "take-point". If you could maintain a 1:2 ratio on your investments, this equates to a 33% success rate (ie. accuracy) for your break-even point, and so if you can aim for a 50% accuracy you would consistently earn a solid profit. Bottom line; select assets to invest in that you are confident in meeting the given RR ratio with a +50% accuracy rate for consistent results. Refer to the Risk Reward Ratio Guide article for more information on this topic.

  • Entry/Exit Indicators: Expert traders look for patterns and indicators in trading charts to make informed decisions on price movement trends. Refer to the Understanding Trading Candlestick Charts article for more information on this topic. For any asset you have selected for investment, you would then review the trading chart for that asset to observe the patterns and indicators to develop your strategy for the initial entry point and amount you are will to risk to formulate your trading strategy. For example, you could have a entry strategy to look for a price movement up, then a small pull back, which is then expected to follow with another price gain, so you could enter the market at the bottom of the small pull back setting your appropriate stop-loss and take-point.

  • When to Stop Trading (each day): Firstly, you would set a max loss point at which you exit all trading if that point is reached (worst case scenario). Secondly, you set a daily goal to reach. While you could exit fully at that point you could squander the potential for further profits on a good day. Therefore, it's a good idea to set another point after daily goal is reached to exit fully - this could be 50% loss of the amount gained (ie. 50% of the daily goal) or more conservatively 20% (80% of the daily goal). Another exit point trigger to consider on any day is when your emotions become activated, eg. getting angry or frustrated when price movements don't go as expected. Finally, you should set a rule to never hold onto a position at the close of the market - win or lose you should always sell out, otherwise, you risk a bigger loss with any overnight changes.

  • Discipline Strategy: Perhaps the most important aspect of trading successfully is building discipline, which entails strictly adhering to the trading strategies and rules you have in place. Building discipline can come from other aspects, such as daily exercising or meditation - basically any technique that requires discipline for continual improvement. By staying disciplined ensures you can stick to your trading system, which leads to more consistent results.

  • Practice/Review/Improve: Once you have a basic plan in place, you need to put the time in to practice the strategies that you developed. As you practice, you can review the results (ie. via metrics in your trading platform), and therefore refine and improve the rules you have in place. In the early days, you can use simulations to essentially run proof-of-concept (POC) tests on your strategy to test the feasibility and consistency. Then once you are confident of ongoing success, put that practice into real trades, and keep repeating the practice/review/improve cycle to enhance your system.

Managing Expectations

As with any good system, day trading requires discipline and knowledge to improve results for ongoing consistency in profitable returns. Rather than focus on short-term gains, the beginner day trader needs to focus more on practice and refinement to achieve consistent results. Only then can they take the next step to be able to set more realistic profit goals to maximize their return on investment and grow capital.

Additionally, traders need to factor in other factors that affect profitably such as transaction fees and taxes, as well as managing the personal challenge of working in a stressful environment that comes with making quick financial decisions on a frequent basis.

In practice, a professional day trader would maintain a much higher account balance than $500, and usually risk no more than 1-2% of their trading capital per trade. In fact, in the US stock market, there are regulations in place for day traders that specify the need to maintain a minimum account balance of $25,000, limiting trades to margin accounts.

Finally, the statistics for day traders show that while it's possible to earn consistently solid profits, as few as 15% of day traders have ongoing success in the medium to long term. To be successful requires a big investment in time while maintaining a disciplined approach adhering strictly to the trading strategies in place.