Let’s assume you are a normal 9-5 worker and you want to invest in the stock market. You’ve heard that day trading is for ultra-rich people and so you decide to start with a mutual fund instead. You’re happy that you can buy stocks in your sleep and leave the markets when it’s time to go home.
Wrong! The “day traders” I’m referring to are some of the most talented investors on earth, having managed billions of dollars worth of assets through their unique short-term trading strategy, yet still, manage to beat the averages consistently.
I’ve also been affiliated with several of these traders and I’ve seen first-hand how their strategies manage to outperform even the best long-term buy-and-hold investors.
First, what on the earth is a day trader?
A day trader is an investor who buys and sells the same security within the same trading day. Since they are buying low and selling high of the same stock, they are taking advantage of small price differences created by market fluctuations over time.
This means that good day traders have to be very fast in their decision-making to be able to take advantage of these pricing differences while they last.
The short-term price movement of a stock is primarily caused by two factors: supply and demand, or news regarding company activity in regards to earnings reports, new products, partnerships, etc. The faster you learn to spot these nuances, the better your results will be.
The basic trading day for day-traders is 4 to 6 hours and consists of 4 phases: Position Opening, Position Holding, Position Closing, and Position Maintenance.
This means that a trader will open one position (buy or sell) at one point in time, hold that position for the period of time required (depending on the security), close out that position towards the end of the trading day, and then often re-enter into another position.
Whether it be a stock or a futures contract, traders must be able to stay constantly aware of price movement throughout their entire session as well as have strong market awareness in order to trade successfully.
What are the actual day trading fundamentals for the win?
A good trader is always well-informed about fundamental data regarding certain security. They know how large the company is, how their financials are looking, and what the stock has done in the past and they have strong analytical skills to know if they should be long or short a certain stock.
While the emotional aspects of trading are crucial to consider, the majority of learning to day trade is based on studying charts and technical indicators.
Professional traders learn to see what the chart is telling them and it doesn’t matter if they don’t really care about the fundamentals.
A good trader will always be able to find a way to make money even if they don’t have time to study all of the fundamentals yet.
Never assume that you can outsmart someone who works harder than you do. This can especially apply in trading when people assume that just because they’re profitable, it means they must be smarter than everyone else. They’re not! The most successful traders work harder than anyone else because they learn from every mistake and loss.
Get started on your trading journey by learning to trade with a small amount of capital. In general, you should stick to the 10% rule which means that you should never use more than 10% of your trading capital on any single trade.
This will help protect you against losses, but still, allow you to take advantage of gains if they come your way. It’s similar to having a $1,000 budget for online shopping, but only spending $100 at any given time.
You can learn how to day trade from many different sources and each trader will have their own set of rules that they follow in order to be successful. You’ll have to decide what works best for you and see what strategies work in the long run.
It’s not like you can’t earn healthy income day trading. But if you are a normal 9-5 worker who is dreaming of get-rich-quick without knowing the market fundamentals, you are setting yourself up for failure.
The day traders I’ve been associated with and seen their portfolios blew up many times over and they didn’t give up until they had mastered the fundamentals, after which they took giant leaps towards success.
In addition, when they learned the fundamentals, they started to view the markets differently and this changed their strategies as well. You can learn to trade successfully by following these simple rules:
Find a trading mentor who is successful enough for you to ask questions about their trading rules and strategies. The best mentors will be very honest in explaining how specific decisions can affect your profits but also give you information on why certain decisions were made.
The rule of thumb is that if you can beat the averages, you will make billions.