Day trading can sound exciting, but for beginners, it often feels like a steep mountain to climb. The good news? With the right approach, the right tools, and a little guidance, you can make the journey smoother and more manageable. In this article, we’ll break down 5 smart steps to help you start day trading, with a particular focus on risk management and strategies that work for new traders.
So, if you’re ready to start your trading journey, let’s dive in!
Step 1: What Is Day Trading and How to Choose the Right Platform
Day Trading Explained: Day trading involves buying and selling financial instruments like stocks, futures, options, or even cryptocurrencies within the same day, typically aiming to profit from small price movements. To succeed, you need access to a reliable broker and, depending on your style, potentially a prop firm.
Choosing the Right Platform:
Before you start trading, it’s crucial to select a broker and platform that suit your needs. Your platform is where you’ll execute trades, analyze market data, and monitor your positions.
For Beginners:
Schwab’s ThinkOrSwim: If you're just getting started, Schwab is a great broker for beginners. Their ThinkOrSwim platform is user-friendly and packed with tools for charting, market analysis, and executing trades—all available for free simply by being a Schwab client. ThinkorSwim is a solid choice for learning and testing strategies.
Why Schwab? Schwab offers low fees and integrates smoothly with ThinkOrSwim, making it easy for new traders to manage their accounts and access the resources they need to grow as traders.
For Active Day Traders:
Interactive Brokers (IBKR): If you're moving beyond the basics and ready for faster execution and more advanced trading tools, Interactive Brokers is a fantastic option. They provide access to global markets, low commissions, and a high-performance platform that's perfect for active day traders. The Trader Workstation (TWS) platform offers advanced features like algorithmic trading, customizable charting, and real-time market data—key tools if you plan to scale your day trading.
Why IBKR? IBKR’s fees are low, especially for high-volume traders, and their platform is robust enough for serious traders. They also offer paper trading to practice your strategies before committing real capital.
LightSpeed: Another broker that’s ideal for day trading is LightSpeed. Their platform is highly customizable, with low-latency execution and tools designed specifically for fast-paced day trading. LightSpeed is a great choice for active traders who want real-time data, advanced charting, and quick order execution.
Why LightSpeed? LightSpeed is optimized for traders who require speed and precision. Their low-fee structure and top-notch platform make it an excellent choice for professional traders looking to scale their day trading operations.
Prop Firms: A Great Alternative to Trading Your Own Money
While brokers like Schwab, IBKR, and LightSpeed are essential for trading with your own funds, there’s another option to consider—prop firms. These firms provide you with capital to trade without risking your own money, which can be especially appealing for new traders who are still learning or those who prefer to limit their personal risk.
A proprietary trading firm (prop firm) like Apex Trader Funding offers funded trading programs. Here’s how they work:
You can trade their capital (funded accounts) and keep majority of the share of the profits (90%).
The firm has certain evaluation processes or challenges (like a demo phase), and once you pass, you’ll be given access to larger amounts of trading capital.
It’s a great option for those who want to leverage capital and avoid the financial risk of using their own funds.
Why Apex Trader Funding?
No risk to your capital: You trade with the firm’s money and, if successful, keep a percentage of the profits.
Easy entry: Apex offers a simple evaluation process, making it easy to get started with a funded account.
Focus on strategy: Instead of worrying about losing your own money, you can focus on refining your trading strategies.
If you’re someone who doesn’t want to risk your own funds, a prop firm like Apex Trader Funding can be an ideal way to begin day trading.
Step 2: Coming Up with a Trading Strategy (And Why Risk Management is Key)
Building a trading strategy is arguably the most critical part of becoming a successful day trader. Without a clear strategy, you're simply guessing. A well-thought-out strategy gives you a blueprint for entering and exiting trades based on specific criteria, helping you stay disciplined and avoid emotional decisions.
But even the best strategy can go awry if you don’t incorporate risk management. In fact, risk management often makes the difference between profitable traders and those who lose their shirts. Here’s how to develop a strong trading strategy with risk management built into it.
Key Elements of a Trading Strategy:
Trading Style: Your trading style will largely depend on how much time you can devote to trading and your risk tolerance. The major styles in day trading are:
Scalping: This involves making quick trades to profit from very small price movements. Scalpers enter and exit positions within minutes or even seconds, often executing dozens or hundreds of trades in a day.
Momentum Trading: Momentum traders seek stocks or instruments that are moving strongly in one direction and try to capitalize on these price moves. They typically hold positions for minutes or hours.
Trend Following: Trend followers look to catch and ride trends, buying when prices are rising and selling when they start to fall. This strategy requires patience and can often result in holding trades for several hours or even days.
Range Trading: This strategy focuses on identifying price ranges where an asset trades between specific high and low points. Traders sell at resistance (the upper range) and buy at support (the lower range).
Breakout Trading: Breakout traders look for price levels where an asset’s price has been “stuck” in a range but is now likely to break out in one direction. Traders use indicators or chart patterns to predict when these breakouts will occur.
Key Indicators and Tools: Your trading strategy should involve specific indicators or tools to guide your decisions. Here are some commonly used indicators and tools:
Moving Averages (MA): These smooth out price data and help you spot trends. The 50-period MA and the 200-period MA are especially popular. When a short-term moving average crosses above a long-term one, it signals a potential buying opportunity (bullish crossover).
Relative Strength Index (RSI): RSI indicates whether a stock is overbought or oversold, helping you identify potential reversals. An RSI above 70 signals overbought conditions, while below 30 signals oversold conditions.
MACD (Moving Average Convergence Divergence): MACD is used to identify changes in the strength, direction, momentum, and duration of a trend. It’s especially useful in spotting bullish or bearish crossovers.
Bollinger Bands: These bands are used to assess volatility. When the price moves outside the bands, it can signal the start of a new trend.
Volume: Pay attention to volume because price movements on low volume can be misleading. High volume indicates strong momentum and can confirm the validity of a price move.
Setting Entry and Exit Points:
Entry Points: A clear entry point is crucial. This could be when a stock breaks above resistance (breakout), when the RSI dips below 30 and then starts to rise (reversal), or when a stock bounces off a moving average (trend following).
Exit Points: Deciding when to exit a trade is just as important as when to enter. You can exit a trade at a pre-determined target (e.g., a certain percentage profit or a resistance level) or based on a stop-loss (e.g., exiting if the stock drops below a certain price level).
Stop-Losses and Profit Targets: These are your safety nets. A stop-loss ensures you don’t lose too much on a bad trade by automatically selling when a certain price level is hit. A profit target helps you lock in gains when the price moves in your favor.
Risk Management:
No matter how confident you are in your strategy, risk management should always be a priority. Proper risk management helps you protect your capital from big losses.
Risk-to-Reward Ratio: A good rule of thumb is to aim for a 2:1 risk-to-reward ratio. For every dollar you risk, you should aim to make at least two dollars in profit. This ensures that even if you have a losing trade now and then, you can still be profitable over time.
Position Sizing: Never risk more than 1-2% of your trading capital on any one trade. For example, if you have a $10,000 trading account, risking 2% means you’re willing to lose $200 on a single trade. By limiting how much you risk on each trade, you protect yourself from wiping out your account during a losing streak.
Avoid Overtrading: Stick to your plan and resist the urge to take unnecessary trades. Overtrading can quickly lead to losses due to exhaustion, emotional decisions, and higher commissions.
Popular Day Trading Strategies:
Now, let’s dive into some specific strategies that are popular among day traders, with an emphasis on risk management:
The Opening Range Breakout (ORB):
The Opening Range refers to the price range of the first 30 minutes to 1 hour of trading. Once that range is established, the price is expected to break out of it, either upward or downward. Traders use this breakout to enter trades.
Why It Works: The market often shows clear direction after the opening range, so the breakout strategy capitalizes on early momentum.
Risk Management Tip: Place your stop loss just outside the opening range to limit losses if the breakout fails.
Pullback Strategy:
In this strategy, traders wait for a pullback (a temporary reversal) in a trend, and then enter the market once the trend resumes. It works well in strong uptrends or downtrends.
Why It Works: Pullbacks offer a lower-risk entry point while still allowing you to ride the main trend.
Risk Management Tip: Use Fibonacci retracement levels to identify where the pullback may stop and resume in the direction of the trend.
News Trading:
Some traders use economic news or earnings reports to trade stocks. The idea is that certain news events can move prices sharply, and by staying informed, traders can enter positions in anticipation of big moves.
Why It Works: Market-moving news can create substantial volatility, providing opportunities for quick profits.
Risk Management Tip: Use tight stop losses and avoid trading during low-volume periods to prevent slippage and excessive risk.
Momentum Trading:
Momentum traders look for stocks or instruments that are showing strong trends in one direction. They aim to ride the momentum as long as possible.
Why It Works: Stocks that are moving strongly in one direction often continue that trend for some time.
Risk Management Tip: Momentum trades often carry more risk, so ensure you use trailing stops to lock in profits while protecting against reversals.
Scalping:
Scalping involves making small, frequent trades to capture tiny price movements. It requires quick execution and lots of practice.
Why It Works: The smaller the trade, the lower the risk, and with a consistent strategy, scalpers can make a lot of small profits that add up over time.
Risk Management Tip: Because of the frequency of trades, it’s important to keep transaction costs low (like commissions) and avoid excessive risk on each trade.
How TradingView Helps Implement These Strategies
To implement all these strategies effectively, you need a robust charting and analysis tool, and that's where TradingView comes in.
TradingView is the go-to platform for day traders because it provides a comprehensive, real-time charting experience with advanced technical indicators, drawing tools, and customizable layouts, making it ideal for executing the strategies discussed above. Here’s how TradingView can help:
Customizable Charts: Whether you're using Moving Averages, RSI, or MACD, TradingView allows you to customize your charts with the indicators you use most. You can overlay multiple indicators to get a clearer picture of price action.
Real-Time Alerts: Set up price alerts for specific conditions, such as when the price breaks above resistance or when an RSI value crosses certain thresholds. These alerts help you stay ahead of market moves and act quickly when a trade setup forms.
Drawing Tools: Use tools like trend lines, support and resistance zones, and Fibonacci retracements directly on your charts to visually identify trade setups.
Backtesting: TradingView allows you to backtest your strategies using historical data. This is invaluable when you want to test out whether your strategy works in different market conditions without risking real money.
Paper Trading: Practice your strategies without real money by using TradingView’s paper trading feature. This is perfect for refining your approach and getting comfortable with your trading system.
Community and Ideas: TradingView also has a strong community where traders share their ideas, setups, and trade alerts. You can learn from others and adapt their strategies to your own style.
By incorporating TradingView into your day trading routine, you can seamlessly apply the strategies mentioned above, track your performance, and make data-driven decisions with confidence.
Final Thoughts on Strategy and Risk Management
A trading strategy without risk management is like a ship without a rudder. It might move forward, but it can also easily sink. Therefore, make sure you test your strategy, use proper position sizing, and always have a stop-loss in place to protect your account from major drawdowns.
Step 3: Practice in a Simulation and Prove Your Strategy Works
“Practice makes perfect” is especially true for trading. Jumping straight into live trading can be daunting, so it's essential to first test your strategy without risking any real capital.
Why Simulation Is Important:
Using a simulated trading environment allows you to:
Learn the platform: Get comfortable with the interface, order types, and trade execution.
Test your strategy: See how your trading strategy plays out in real market conditions without losing money.
Build confidence: Start small, and gradually scale as you get better.
Affiliate Suggestion: Apex Trader Funding and MyFundedFutures Both Apex Trader Funding and MyFundedFutures offer demo accounts where you can practice before you start trading with real funds.
Step 4: Picking a Reliable Scanner to Spot Trading Opportunities
A scanner is a tool that helps you find the best trading opportunities by filtering through thousands of stocks, futures contracts, or forex pairs in real-time.
Why You Need a Scanner:
Save time: Instead of manually searching for trades, a scanner does the work for you.
Find potential setups: Identify trending stocks or instruments based on specific criteria like price movement, volume, or volatility.
Recommended Scanner: Trade Ideas
Trade Ideas is one of the most powerful and popular scanners available for day traders. It automatically scans the markets for you and sends alerts when it spots potential opportunities based on your specific trading criteria.
