1. Knowledge is Power
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks – the Fed's plans for interest rates, the economic outlook, etc. Do your homework. Make a wish list of stocks you'd like to trade and keep yourself informed about the selected companies and general markets. Scan business newspapers and visit reliable financial websites.
2. Set an Amount Aside
Assess how much capital you're willing to risk on each trade. Many successful day traders risk less than 1%–2% of their account per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.005 x $40,000). Set aside a surplus amount of funds that you can trade with and are prepared to lose (which may or may not happen).
3. Set Aside Time, Too
Day trading requires your time – most of your day, in fact. Don’t consider it if you have limited hours to spare. The process requires a trader to track the markets and spot opportunities, which can arise any time during trading hours. Moving quickly is key.
4. Start Small
As a beginner, it is advisable to focus on a maximum of one to two stocks during a day trading session. With just a few stocks, tracking and finding opportunities is easier. Recently, it has become increasingly common to be able to trade fractional shares, so that you can specify specific, smaller dollar amounts you wish to invest - so, if Apple shares are trading at $250 and you only want to buy $50 worth, many brokers will now let you purchase 1/5 of a share.
5. Avoid Penny Stocks
Of course, you're looking for deals and low prices, but stay away from penny stocks. These stocks are often illiquid, and chances of hitting a jackpot are often bleak. Many stocks that trade under $5 a share become de-listed from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity here and have done your research, stay clear of these.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns and pick appropriately to make profits. But for newbies, it may be better just to read the market without making any moves for the first 15-20 minutes. The middle hours are usually less volatile, and then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you will use to enter and exit trades. Will you use market orders or limit orders? When you place a market order, it is executed at the best price available at the time; thus, no “price guarantee.” A limit order, meanwhile, does guarantee the price, but not the execution. Limit orders help you trade with more precision, wherein you set your price (not unrealistic but executable) for buying as well as selling. More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.
8. Be Realistic About Profits
A strategy doesn't need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. The point is, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account, and that entry and exit methods are clearly defined and written down.
9. Stay Cool…
There are times when the stock markets test your nerves. As a day trader, you need to learn to keep greed, hope and fear at bay. Decisions should be governed by logic, and not emotion.
10. And Stick to the Plan
Successful traders have to move fast, but they don't have to think fast. Why? Because they've developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. There's a mantra among day traders: "Plan your trade and trade your plan." Don't let emotions get the best of your strategy.