For successful day trading, you will need to identify stocks that can be easily traded. For that to happen, a stock needs to have liquidity (i.e. high volume) and volatility (i.e. fluctuations in price). This would allow you to buy stocks in bulk and sell them off—hopefully, at a higher price. Stocks that exhibit these features are best suited for day trading.
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To be a successful day trader, you must closely study how the market works and how stocks behave. Most intraday traders find a particular sector of interest and divert their focus to studying a few shares in that sector. It is important that you understand company policies and stock behaviour before trading them.
The stock market sees highs and lows depending on a number of factors. These include major political changes, critical business decisions, and natural calamities, among others. Most stocks in the market follow the rise and fall of the market. In other words, the value of a stock rises if the market does well and falls when the market loses. It is always smart to trade in such stocks as these follow a pattern. So, it is easier to predict their flow. But some stocks follow no particular pattern and are difficult to predict. These are called chaotic stocks and are best avoided.
It is important for an intraday trader to identify the right prices for entry and exit in the stock market. Most traders use a formula or strategy to arrive at their entry and exit numbers.
For example, a trader may first find the base price of a stock. This is the average value of the high, low, and closing values of a stock. The next step is to compare the current prices with the support and resistance prices. Support and resistance prices are two predetermined parameters between which the price of a particular stock is believed to travel. With this in mind, traders often buy stocks when the price is above the base price and sell these off at their resistance price. On the other hand, imagine a situation where the prices fall below the base value. Here, the traders will look to sell the shares at their support prices.
As a trader, you might cash in once the stock prices reach profit levels. Or you might take the risk of waiting longer, which could result in a bigger profit or a loss. The important thing is to follow the strategy you have outlined. Avoid making any trading decisions on the fly. Be disciplined and follow your plan. This is the key to success for a day trader.
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This is an important parameter for cutting down on losses. Stop loss is a value that you set. This reminds your brokers to sell off the stocks if the prices fall below that amount. If your stop loss is set at 5% below the cost price, then your loss will be limited to 5% only.
Even though this is a critical measure to limit losses in the market, traders often fail to comply with it. As a result, they might get stuck with falling stocks for a long time or incur heavy losses in trying to sell those stocks.
It is usually a good idea to hold on to a stock when the market shows an upward trend. But if the market looks bearish, then it is best to sell short. It is important to look at the bigger picture while taking day trading decisions.
What are the determinants of success in day trading? Constant study of changing market situations, discipline while trading, and experience in buying and selling stocks are certainly important. If you are interested to find out how to do intraday trading, your first step should be to open a trading account. Start trading to get a feel for how the stock markets work.
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