Day Trading and Risk Management

09 Oct 2020

The first thing to understand when it comes to day trading it is not a get quick rich scheme. The best stock trading tips in the world won’t amount to much if the trader doesn’t have a trading plan in place.

If you want long-term success then understanding the fundamentals of day trading trading is crucial. A day trader is only interested in what a stock does within the day he or she is trading it, not how it will do months and years later. The day trader’s fundamentals consist of learning to read charts, investigating patterns and protecting themselves from extreme volatility through the use of indicators.

Minimizing Risk

Day trading is risky, but smart traders soon learn to minimize risk by using stop losses. A stop loss allows you to sell the security once it hits a predetermined price. At that point, it becomes a sell order at market price.

Evaluating and Studying Stocks and Markets with Technical Analysis

Patterns

Technical analysis involves recognizing patterns in the market cycle and buying and selling based on these patterns. Traders use chart patterns to make decisions, but while chart patterns are useful, they are not always 100% accurate. Some of the better known chart patterns include:

Head and shoulders – this pattern points out that a trend reversal is possible.
Triangle – consisting of several types these patterns show potential breakouts and breakdowns of a stock.
Wedges – this pattern suggests bullishness when decreasing and bearishness when increasing.
Indicators

Evaluating day trading stock recommendations requires a firm grasp of technical analysis. This involves the use of indicators, including:

Moving averages – a stock’s average closing price over a particular period
Oscillators – these indicators show upward and downward flow. The most used include stochastic, the Relative Speed Index (RSI) and the Moving Average Convergence Divergence (MACD).
Volume – these indicators measure a price trend’s strength using price data in conjunction with volume.

There are many indicators available. A day trader should experiment and see which best suit their individual trading style. While indicators are invaluable for market evaluation, it doesn’t make sense to use more than a few of them when trading. This is because useful indicators should always send you in similar directions when trading.