One of the common complaints of traders is that they don’t have enough money to make a lot of profits. It’s only enough to buy x amounts of stock, and the price of x can only appreciate by y%, and that’s not enough money for them. It’s too slow. But what if there was a way of investing more money than you actually have? That’s margin trading.
The amount of extra money (called leverage) that you can invest depends upon broker to broker, but most allow you to invest between 3 to 10 times your investment, depending upon the risk and volatility of the stock.
However, you must remember, you have to close your books on the same day.
Day trading often will utilize short-selling to take advantage of declining stock prices. Short-selling allows you to sell a stock, at a high price, before you’ve even bought it, and then actually place the buy order later, when the price goes down. This allows the trader to benefit from both the upward and downward movement of the market. More Risk, More Rewards, but (potentially) More Losses The ability to leverage your money, combined with the thrill and instant gratification provided by day trading, and makes it easy to earn a lot more money than you could have hoped for. Unfortunately, that works both ways – you can easily lose more money than you can afford to. There’s another reason why day trading is riskier – it’s more volatile. While the price in the long term tends to hover around what it’s worth, there are plenty of fluctuations every day that give you an opportunity to make (or lose) money. Leveraging just multiplies that.
What method do I employ?
A day trader is a technical analyst, it’s vital you understand patterns if you need to benefit from them. We recommend you read our previous article on Technical Analysis, research further, and then start small and cautious – until results begin proving your instinct or method (nobody knows what it is!) right.
The two most popular styles of Day trading are:-
Scalping- Buying and selling of a large volume of stocks within seconds or minutes. The reduction of the trading window reduces the volatility, thereby decreasing risk, but also decreasing the potential rewards. Momentum Trading- This is the riskier method. It involves identifying moving stocks, which is easy enough, and then doing what traders try to do – buying on the bottom and selling on the top
1) Day trading, unfortunately, lights up the same area of your brain that gambling does. Remember not to allow the thrill and the emotion to impair your decision-making. It’s a good idea to have maximum loss cutoff that you decide on before you enter the frenetic game. Every online stock trading platform and stock trading app has a tool called stop loss to help you implement this.
2) Don’t ignore the fundamentals. Read this guide on how to combine technical with fundamental analysis.
3) Concentrate trade on highly liquid shares – high-cap, index based stocks that you will certainly find a buyer for. If you do not manage to find a buyer for your account before the end of the day, you must take delivery of the share.
4) Limit trading to 2-3 securities. While diversification is extremely important in long-term trading, here it’s vital to constantly track price trends, which is hard to do for more than 2-3 securities simultaneously.