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Day Trading for Dummies

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Whether you’re a day trader, swing trader or position trader, trading financial assets require in-depth education and training. We’ll highlight the most active trading style, day trading, and explain how to get started with what can seem like an overly intimidating learning curve. Welcome to the complete guide of day trading for dummies – even though we know you’re not a dummy!

Overview: What’s Day Trading?

Day trading is a style for exchanging financial assets. Day traders open and close their trades intraday. There are two main reasons why traders day trade

Eliminate the Luck Factor: Day traders open larger trade amounts. Their overall performance doesn’t depend on a single trade but on the average of all trades. If a day trader fails on a small number of trades based on bad luck, this will not affect the general result. A successful day trading strategy eliminates the luck factor in the long run. If your day trading strategy is successful, you’ll get results with relative accuracy over time.

Avoid Overnight Fees: When you day trade, you close your trades intraday. Your trades don’t stay open overnight and avoid all overnight fees that you can pay out of your pocket.

Before You Start Day Trading

You shouldn’t hop into the day trading battle unprepared. There are a few important things you need to know before you begin day trading. 

  • Understand Fees and Commissions: The fees and commission structure is of great importance when you day trade. The reason for this is the number of trades you open. If the brokerage charges come with the spread, you will need to find a tight spread. Every pip here matters due to the volume of trades. When you pick up a broker, you will need to prioritize low fees.
  • Optimize Your Strategy: Strategy optimization is a process where you improve and adapt your trading strategy for different market conditions. The goal of the strategy optimization process is to increase the success rate of your strategy. The higher the success rate, the more returns you will realize. Every percentage matters. The big number of trades involved in day trading makes strategy optimization a very important process.
  • Manage Your Money: Money management is a strategic process where you plan the distribution of your funds. If the success rate of your strategy is 100% (every trade is winning), you won’t need money management rules. Unfortunately, that never happens, so your account funds need to be properly planned. For example, if you put 50% of your funds in each trade, you’ll go bankrupt after two unsuccessful trades. As you see, it is not very smart to trade 50% of your funds in a single trade.

A smart way to trade is to risk no more than 1-2% of your funds with each trade. If you do, you’ll need 50-100 unsuccessful trades before you go bankrupt. If your strategy is decent, this is not likely to happen.

  • Know the Chart Time Frames: You cannot day trade on every chart time frame. It contains candles that represent a whole day. The opening and the closing of day trades happen on smaller charts – M1, M5, M15, M30, and H1. The reason for this is that you will need to observe the daily price action before hopping into a day trade. And you will need a number of candles to do this. A 24-hour time diapason with details about the chart time frames is described below:
  1. M1: Each candlestick represents a one-minute period. A 24-hour time diapason will have 1,440 candles.
  2. M5: Each candlestick represents a five-minute period. A 24-hour time diapason will have 288 candles.
  3. M15: Each candlestick represents a 15-minute period. A 24-hour time diapason will have 96 candles.
  4. M30: Each candlestick represents a 30-minute period. A 24-hour time diapason will have 48 candles.
  5. H1: Each candlestick represents a 60-minute period. A 24-hour time diapason will have 24 candles.

The number of candles for each of these chart time frames is enough to create a proper analysis. You can always use bigger charts, but only to see the bigger picture. You should never open and close daily trades based on bigger charts.

  • Understand Scalp Trading: Scalp trading is a day trading strategy in which you open trades and close them right after the price reaches profit levels. Scalp trades aim to get moves of 10-20 pips for a very short period of time. This is where the name comes from – you scalp the market for minimum profit. Scalp trading counts on a big number of trades per day. This way, you accumulate small amounts of profit into a big earnings pool (some, of course, will lose). Successful scalp traders will have a positive balance after a certain number of trades.

How to Start Day Trading for Dummies

There are four main steps to follow if you want to start day trading. 

Step 1: Build A Successful Strategy

Your trading strategy should contain specific rules for opening and closing trades. If the strategy is successful, profits will show after 100 trades.

Entry and Exit Points

You can use various trading indicators to build your strategy:

  • Candle patterns
  • Chart patterns
  • On-chart lines
  • Moving average indicators
  • Fibonacci indicators
  • Oscillators

Your strategy will suggest entry and exit points based on signals from indicators. There are indicators, which are good stand-alone tools like the Ichimoku Kinko Hyo. Some indicators like the RSI will need additional tools to help you successfully trade.

Stop-Loss Order

You should always use a stop-loss order for your trades. This way, you limit your losses. You can agree on a specific amount of loss for every trade you take and have the stop-loss fixed every time. The other way is to place your stop-loss order at a visual edge on the chart. Since tops and bottoms have a psychological character, they are likely to be a turning point on the chart. If they get intercepted, then the price might run against you, which is where the stop-loss comes in handy. Above, you see three trading examples with their respective stop-loss orders. We have two bearish trades and one bullish trade. In each of the three examples, the chart suggests a visual edge, which you can use for your stop-loss order.

MACD Indicator and Price Action Strategy

Let’s see an example with the MACD indicator. This is an indicator that consists of two lines and a histogram. We can use the crossovers of the indicator to open and close trades. Also, we will use a volume indicator to identify as more valid signals as possible. This is the 15-minute chart of the EUR/USD forex pair for October 2, 2018. At the bottom of the chart, you see the volume indicator and the MACD. The chart starts with a flat move, which turns into a drop. In the time of the initial drop, the MACD lines cross in a bearish direction (green circle). At the same time, the volume indicator identifies increasing trading volume.

This indicates that the bearish signal might be valid, which creates a good trading opportunity. If you sell here, a good place for your stop-loss order will be above the flat price move. Then you can hold the trade until the MACD lines cross in the opposite direction. This trading scenario identifies a potential trade for 43 pips’ profit. The trade takes five hours and 30 minutes intraday.

Step 2: Pick a Brokerage

Your broker is one of the most important factors to your success. If your broker is untrustworthy and has high fees, it will be useless and there will be no point trading at all. There are a few important features that every good broker needs to have:

License and Accreditation: Your broker needs to be a registered financial service provider to guarantee that it’s reputable. The broker needs to hold a financial license and needs to operate under the supervision of a financial regulator.

Tradable Assets: A good broker will give you access to many tradable assets – currencies, stocks, ETFs, indices, commodities, cryptocurrency, etc. in order for you to have a portfolio to secure your investments.

Analytical Tools: The trading platform needs to include many analytical tools to support your analysis. If the platform is not rich on indicators, your overall “view” will be limited, which can be an obstacle.

Fees: Larger brokers, which support hundreds of thousands of traders, are easier on fees. However, be cautious if fees are unusually low, as this might be a brokerage fraud indicator.

Ease of Use: Your broker’s website and platform need to be easy to use. There is no need to overcomplicate the trading process, as this could hurt your trading attempts. The account opening procedure and confirmation should be straightforward and easy. The broker should have easy deposit and withdrawal methods with no unnecessary processing wait times. The platform should be functional and user-friendly.

Choose a Reputable broker: The best day trading brokers will offer low commissions, great tools and research, and even a great mobile app. Here are Beniznga’s favorites.

Commissions
$0
Account Minimum
$0
Get started securely through Webull’s website
Commissions
$0
Account Minimum
$0
1 Minute Review

Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.

Webull is widely considered one of the best Robinhood alternatives.

Best For
  • Active traders
  • Intermediate traders
  • Advanced traders
Pros
  • Commission-free trading in over 5,000 different stocks and ETFs
  • No account maintenance fees or software platform fees
  • No charges to open and maintain an account
  • Leverage of 4:1 on margin trades made the same day and leverage of 2:1 on trades held overnight
  • Intuitive trading platform with technical and fundamental analysis tools
Cons
  • Does not support trading in options, mutual funds, bonds or OTC stocks
Commissions
$0
Account Minimum
$0
Get started securely through TradeStation’s website
Commissions
$0
Account Minimum
$0
1 Minute Review

TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.

Best For
  • Advanced traders
  • Options and futures traders
  • Active stock traders
Pros
  • Comprehensive trading platform and professional-grade tools
  • Wide range of tradable securities
  • Fully-operational mobile app
Cons
  • Confusing pricing structure to leave new traders with a weak understanding of what they pay
  • Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
Commissions
$0 $6.95 for OTC Stocks
Account Minimum
$0
Get started securely through TD Ameritrade’s website
Commissions
$0 $6.95 for OTC Stocks
Account Minimum
$0
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Best For
  • Novice investors
  • Retirement savers
  • Day traders
Pros
  • World-class trading platforms
  • Detailed research reports and Education Center
  • Assets ranging from stocks and ETFs to derivatives like futures and options
Cons
  • Thinkorswim can be overwhelming to inexperienced traders
  • Derivatives trading more costly than some competitors
  • Expensive margin rates

Step 3: Open an Account

After you pick your broker, you will need to open an account, preferably a demo account if you’re a beginner. The demo account is a practice account where you can train your strategy and get used to the platform.

Demo accounts are easy to open. You simply click the demo account button, fill out a simple form, confirm your email address and you’re ready to go. Live accounts require further confirmation as they involve real funds.

They will also ask you to confirm your identity and address. Some reputable brokers could also ask you to prove your assets, as trading is risky and certain brokers care about your financial stability.

Step 4: Implement Your First Trade

Now that you have a working strategy, a broker, and an account, you can implement your first trade. Follow the rules you’ve set with your trading strategy. When the right moment comes, open the trade and instantly set your stop-loss order.

Then wait until the price reaches your profit target (hopefully) or until it hits the stop-loss order and the broker automatically closes your trade. Note: It is not necessary that the price hits your stop-loss if the trade is losing. If you see that the market is going against you, you can close the trade in advance and avoid the extra loss.

Final Thoughts on Day Trading for Dummies

Day trading is a trading approach that might not be suitable for every trader. It involves strong discipline and mental toughness. If you’re a successful day trader, you won’t necessarily care about single trades; you’ll care about the bigger picture. A single day trade is only a small particle of the overall result.

Want to learn more? Check out Benzinga’s best day trading chat rooms, the best online day trading courses and the best online day trading brokers. If you’re just starting to trade, check out how to start day trading with only $100.

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