Trading

Who does not want to earn high profits while investing? Trading in the stock market helps the investor earn the desirable profit. They can make bids, purchase, sell a trade according to their investment plan. In this article, we will know about trading, its important features, and what are the basic strategies for you to become a good day trader. 

Trading: What is it?

When two entities sell and buy goods and services between each other, it is called trading. This basic rule is the foundation of all the activities in the economic and financial market.

With the help of trading, one can generate revenue that leads to the progress of society. A market is a place where such trades take place. A market differs for different trade activities. For example, a place where all the stocks are sold and purchased is known as the stock exchange market.

The market is made of two types, the first one is an organized market and the second one is an unorganized market.

Organized market: Organized market is managed and regulated with a set of specified rules. These rules are compulsory for anyone who wants to enter trading in these markets. It is also supervised by a regulatory body that oversees all the functioning of trade.

Unorganized Market: Unorganized Market does not have any rules or regulations. In case of any rules, adherence is not much required.

At present, the online trading option has become popular among investors and newcomers who want to invest in different stocks of different companies. Online trading has made the process easy and more convenient for traders.  In addition to this, technology is also helping novice investors make the right investment decision.

Trading: History

Trade is a part of human civilization since people learned to exchange goods. With time the form of trade and exchange has altered depending on geographical, political, and other factors. Trading does not come with a single pattern due to the scattered human population.

• The barter system is one such proof of trading styles. The goods and other things were exchanged for other needs. In the barter system there was no basic measurement to know the value of exchanged goods, with time it proved to be inconvenient.
• This led to the invention of money which was used as the basic mode of measurement for all goods and services. The invention of money paved the way for different financial and economic activities such as share trading, credit facility, etc.
• Stock trading was established when joint-stock companies were formed in Europe. It played an important role in establishing European imperialism. Slowly, informal trading platforms related to the stock market started increasing in different parts of Europe.
• Dutch East India was the first company to start a public share trade. It made its share available through the Amsterdam stock exchange. The economic progress due to joint-stock companies became the foundation of the financial world. The first stock exchange market for online trade of stocks was established in India as the Bombay Stock Exchange (1875).
• The two main exchange markets for the stock trade in India are the Bombay stock exchange and the national stock exchange.

Trading: Types 

At present, there are five types in which one can trade. These are explained below –

Day Trading: 

Day trading means that investors must buy and sell company stocks within a day. Day traders usually hold a stock for a few hours or minutes. Investors who are involved in Day trading are also required to close all the transactions before the financial market closure. With the help of market fluctuation, day traders can earn a profit.

If you want to be a day trader, then you must know how the financial market functions. you should understand market volatility, and the right moment to make the investment decision. Therefore, day traders are mostly those who have enough experience in the financial market.

Scalping:

Scalping and day trading are both parts of intraday trading. This type of trading is also known as micro reaping. In scalping, investors try to earn profit in small quantities over time. It is also done in a single day. 

However, you must know that every investment does not lead to profit, and in some instances, the traders may face financial loss. In scalping, the investor holds the stocks for just a few minutes, this is less than the period for day traders.

You can make a frequent transaction in scalping. One also needs to be a professional investor in case he/she wants to dabble in Scalping.

Swing Trading: 

Swing trading is based on the trend/pattern of the stock market. The capital gains are earned through trading under such patterns. You can earn a profit by selling your stock after a few days of purchase. The time frame is around one week. In such a type, investors follow the market patterns to analyze the value of a stock.

Momentum Trading:

Momentum trading is based on the analysis and exploitation of stock momentum. It means the stock value movement, either positive or negative. The investor waits for the stocks to break out and uses it in his favor.

If the stock movement goes upward, investors sell the stocks to earn a profit, if the stock value is negative or downward, the stockholder will purchase stocks in bulk to sell them when they show a positive market trend.

Day trading: strategies for beginners 

Day trading is a type of investment process in which the investor takes the benefit of market fluctuation.  You purchase and sell stocks of a company in day trading to earn profits. Day trading can be very beneficial as these small price fluctuations can help in gaining a significant amount.

However, Day trading is not an easy process for investors, and especially beginners. It is why most professionals invest in day trading. However, with time, investors started to follow some strategies to get the best possible returns. Here are a few important things for you to note when it comes to day trading- 

Knowledge is important 

If you want to be a day trader, then you need to follow news and other market-related information seriously. You must track the performance of the stock market, the global events, and their impact on the stock value. This includes the interest rate plan of fed.

So, make sure that you are well versed in market terms and important factors when it comes to day trading. Keep a list of your stocks and track their performance in the market. You should follow a relevant financial site for this purpose.

Have extra Funds

Before going for a day trading, make sure how much you can invest in it. Professional and experienced day traders go for 1 or 2% of their trade account. For instance, if your trading account value is around $40,000 and you want to invest 0.5% of it in each trade, then in case of a financial loss, you lose around $200 per trade. 

Always have a backup fund to support your investment. It should be the amount you are ready and comfortable to put at stake. Financial loss is not necessarily bound to happen but you should always prepare for the worst-case scenario.

You need ample time investment

If you are thinking of becoming a day trader and investing through trading then you need to invest your time. Day trading needs proper attention and analysis of the investor. 

It becomes crucial for a trader to spend the day tracking the market fluctuation.  Day trading is some serious business, if you think it can be done partially, then maybe you have the wrong approach.

Begin with Small

When you start day trading in the beginning, you should track one or two stocks during a market session. You can easily earn profit with the help of just a few stocks. At present, there are also options for investors to buy from fractional shares. With the help of fractional shares, you can purchase a small portion of the shares of big companies.

With the help of fractional investment, you can invest the amount you are comfortable with easily. For example, If a company has a share that is trading around $3000, you can now purchase a part of it with the help of a broker. This amount can be very low around $20 or even around 1% of the actual trade.

Do not go for Penny Stocks

There are times when newcomers want to go for the best investment opportunity at an affordable price, such stocks are known as penny stocks. Penny stocks are not the best investment choice as they are mostly illiquid and higher returns are often hard to receive.

Many minor stocks that have a value of around $5 often get delisted from the major financial exchange platform. These types of stocks can only be traded via Over counter. Unless you have a complete idea about penny stocks, you should avoid them.

Time your Trades

Price volatility is higher during the morning time. It is because the orders are executed as soon as the financial market starts trading. A professional investor may be able to recognize these market patterns and make the best possible returns accordingly.

 However, newcomers should observe the market for the first few minutes before making any investment.

The mid-hours of a market are more stable, the fluctuations again start around the closing time of the financial market. Rush hours in a financial market are beneficial but for newcomers, it is best to observe first.

Cut your losses with Limit Orders

Before investing through day trading, you should decide the order to enter/ exit a financial trade. You have two options: a market order and a limit order.

Market order provides the trade opportunity according to the best prices available in the financial market at the given time. It does not come with any price guarantee.

Under a limit order, investors are given a guaranteed price but the execution is not sure.  Limit orders are more profitable since they allow investors to invest with accuracy. You decide your price for the trading of stocks.

Have realistic return goals 

While making an investment you not only need to pay attention to high returns but also on minimizing the losses. Sometimes, the best strategies do not work in the investor’s favor. 

But this is how it works, many professional traders can only receive around 60% of their investment without losing much amount. You can save yourself from such a dilemma with the help of realistic investment and return goals. You can follow a specified percentage of your trade account to minimize the loss.

Keep Your Emotions in Check 

The stock market investment comes with lots of ups and downs. There are moments when you feel fear, greed, and extreme emotions. In such cases, you need to be careful with the decisions you make.

Stick to Your investment Plan

When you start day trading, you should make an investment plan to tackle any difficult situation. In case of any unexpected market movement, you can make the right investment decision. The right investment strategy will help you make disciplined decisions. You won’t be affected by your emotions.

 Day Trading: What makes it difficult 

Day trading can be a difficult investment choice for newcomers. There are many factors that affect day trading and makes the process a little complex-

• Day trading is mostly practiced by professional day traders who have years of expertise and experience in this field. These day traders have the best market and stock analyzing tools that give them an edge over newcomers.
• Professional Day traders have contacts and know-how to recognize a profitable market pattern. In most cases, newcomers help them gain more profit. 
• Any professional investor will try to minimize your profit. You also must pay tax if you earn any profit on your investment for the short term.
• Day trading comes with huge psychological pressure, it can significantly affect your performance. Professionals can handle such psychological strains calmly. For newcomers, it can be overwhelming.

Day Trading: When and What to purchase 

Day trading means taking advantage of the financial market fluctuation at its best. You follow the positive and negative trends to trade and gain higher returns within a day.

The financial assets used in day trading are futures, stocks, shares, and options, etc. Here are a few things you should note before trying day trading-

1. Liquidity: LiquidityHelps the day traders to enter and exit a financial market at a good price. For example, low slippage, tight spreads, ask price and bidding price difference, the actual and expected value of a stock or trade.
2. Volatility: Market Volatility is the price value of a particular stock in a financial market. Day traders usually operate according to these expected price values of stocks. Price volatility or fluctuation can result in higher returns or big financial losses.
3. Trading volume: Trading Volume simply means the frequency of a stock getting traded in the financial market. It is also called Average daily trading volume. The higher the trading volume of a stock, the higher the interest of investors.It also indicates the rise or fall in the value of a stock.

Day Trading: Best Entry Points 

You need to know the exact time you should buy a stock or sell it to earn a higher profit. Here are some tools that can help you analyze the market trends- 

1. News Updates: News helps you follow the latest trend in the financial market. It also helps you decide what stock to invest in. So, it is best for you to be in touch with news to get the best market opportunity.
2. Electronic Communication Network: With the help of ECN services, investors can check the best bid available for a stock in the market.

Day Trading: When to sell 

You can decide when to exit a trade when you meet your investment target or are in a winning position. There are many methods such as profit target, trailing stops, etc. Here we have explained some best options for you to decide-

Day Trading: Limit your financial loss 

Day trading is a risky venture and it comes with the risk of financial loss. Here are a few things you can follow to minimize your financial loss-

• A Stop-loss order helps, you can limit your financial loss.
• Have a definite amount set for investment. In case of unseen circumstances, you can make the right decision.
• In case a stock value does not go in your way, you can immediately exit the trade to keep the profit.
• Have a perfect exit point that can help you over time.
• Set a definite amount of loss per day you can afford. Stick to your decision and strategy.
• Define your entry and exit points clearly. 
• Evaluate your investment strategy for the potential risks. Modify it if it does not fit well with your risk limit.
• Keep re-evaluating the past market trends. It will help you analyze the potential of your investment plan.
• You can also try trading with a demo account. Check if the strategy you planned is helping you earn the profit.
• If you are borrowing your investment funds from a broker or a financial firm, you can get influenced by the sharp rise and fall of the financial market. Margin increases the vulnerability and losses in case the market trend does not go accordingly.

Day Trading: Which strategy to follow 

Following the market, the trend is one of the easiest market strategies for day trading. If you are a beginner, this strategy will help you understand the market trend. Any investors who go according to the trend will purchase stocks when prices are high or short sell the stock when the prices are low. This is done based on market and price fluctuation.

You should go for this strategy if you are a newcomer in day trading. Other strategies like scalping and news trading may need the assistance of a professional advisor.

Trading – FAQs 

Q1. Explain Day Trading in Simple words?

Ans. Day trading is a type of investment tool. It helps the investors make a profit with the help of market price fluctuation. It is called day trading because an investor must make investments within a day.

Q2. Can I do Day trading just for a hobby?

Ans. No, Day trading involves money and investment. It is a serious business. If you think you can do day trading as a hobby then you are wrong.

Q3. What do I do if I do not have any knowledge about day trading?

Ans. If you want to become a day trader but have no knowledge of it, you can take the help of a professional advisor.

Q4. Does Day trading include financial risk?

Ans. Yes, day trading is a form of investment that includes financial losses. If you are new to day trading, you should make yourself familiar with the financial market.

Q5. Can you explain the price fluctuation of a financial market?

Ans. Price fluctuation in a financial market means the value of a stock is rising or falling. In case of a positive price rise, you may get the benefits of higher returns.

Q6. Can inexperienced people do day trading?

Ans. Yes, anyone can do day trading without any prior experience. However, you should gather information before becoming a day trader.

Q7. What are the different types of trading options available for the investors? 

Ans. Day trading, swing trading, scalping, momentum trading are some major trading options available to investors.