Day Trading 101 – Beginners guide to being profitable
Hey, everybody, it’s Aaron from Wealth Discovery. So here at Wealth Discovery we understand that trading can be overstimulating and often an intimidating experience for new traders. Actually, it can even be the case for people who have been trading for a long time, so it’s always good to refresh your skills and outlook. So in today’s post, we’re going to go over a little step by step guide on how you can effectively trade in the stock market, we’ll go over everything from picking a broker to where and when to get out of trades. And we’re going to keep it Triple-S, short, sweet and simple. So let’s go get after it.
The right Broker for you
So the first thing you got to do to get started trading in the stock market is to choose a broker. Some companies charge a percentage of the overall amount of the trade, but most will charge a flat fee per trade. This is called a commission of course, where some platforms such as Trading212 and RobinHood offer Zero commission trading. Problem with these type of accounts is their execution times are really slow and they generally offer larger spreads. So this means when you place a buy order for a stock, it’s likely to get filled a little bit later than it would on something like ThinkOrSwim, IG Trading or on E-Trade etc. If you’re new to trading you might be thinking, so what?! Execution times are something that you need to keep in mind when you’re picking a broker, because the slippage can be the difference between being profitable or a losing trader. Platforms like Robin Hood & Trading212 can also be very limited in other ways. So when you go for cheaper or zero commission trades you need to keep in mind that there is a cost benefit to everything.
If you’re paying nothing for commissions, but you’re not going to get execution and you can’t find profitable stocks to trade is it really worth it? That’s something you have to balance yourself, based on your own trading style and results. I say that not as a cop out, but because everyone has their own experience with trading. So find your feet as you go along, try things our and see which broker best suits your style.
Brokers like TD Ameritrade and IG Trading have average trading fees, but they also have quick execution. And they come with excellent trading platforms which is what we use 90% of the time, sometimes we use Robinhood or Trading212 for certain positions and long term investments. And once you’ve picked your broker, you’re going to want to fund your account. And generally This can take a few days to be approved, depending on the broker. Several brokers do have instant deposits, but some like Trading212 charge for depositing your own money instantly. So if you’re anxious to trade, and willing to incur an initial cost to do so you might want to consider this.
Start Trading?
Once you’ve funded your account, you’re ready to trade, it’s time to open your chosen platform. Again, I’m going to be using IG Trading and Trading212. (TD Ameritrate, Webull or Thinkorswim in the US) because IG is super customizable. It has great indicators and editable charts which are head and shoulders above the rest. And it’s overall pretty easy to use, once you get the hang of it of course.
It looks a little bit intimidating at first, especially if you’re used to something basic like Trading212 but I promise you once you get through this blog, you’ll have a good or at least a better understanding of the platform. If you’re completely new to trading or want to practice first, then IG offers paper trading that you can use in order to practice making real trades with fake money.
A lot of other brokers have this as well, so Google the pros and cons of each broker, and see if they offer paper trading. One site that offers paper trading is investopedia.com if you wanted to start practicing right away. But with paper trading, you can practice first growing a fake account before actually risking real money. Lots of people dislike paper trading because it’s not realistic, as it takes the emotion out of trading. But this way you can actually prove to yourself that your strategies are working before adding the extra emotional element. And you’re not going to just wipe out your account in two weeks because 90% of traders at the end of the day do fail.
What to trade?
So once you’ve practiced and honed your strategies, the first step you’re going to need to take is to find a stock to trade. You can do this in many ways, but a simple way to find a stock to trade is by going to the scan function on your platform and setting criteria based on what you’re looking for. If you plan to trade mostly small caps and high volume stocks, set your stock screener accordingly. You can also set up a watchlist that automatically find stocks that you’re looking for. But that’s a topic we’ll cover in another blog post. So if you’re interested in that, make sure you follow on here and on our YouTube.
And so there’s a lot of different criteria you could look for in buying stocks. But one of our favourite patterns to look for are stocks that had just experienced a reasonable dip that have a history of recovering from dips. Tesla, for example does this all the time, you see the stock price being discounted, and then recovering month after month.
The Secret with trading is buying when the stock is being oversold. And then selling when people pump it over value into overbought territory. We’ll go over how to figure this out later in the post, so just stick with me. The most important part of trading is something we covered a lot before, and that is to always have a plan. What I mean by this is you need to plan exactly when you’re going to take your entry point. And then when you’re going to sell if the stock does what you want. And when you’re going to cut your losses if the stock doesn’t do what you want. Not having a plan is the main reason 90% of traders fail. Trading on emotion instead of strategy is a recipe for disaster.
When to buy
If you have a plan, and a steady strategy, you’re already a step ahead of the game. Next, you’re going to need to figure out what a good entry point is. Now a lot of people choose to take people’s opinions on stocks as their ideal entry points, but nothing you hear or read about on sites like stocktwits should be taken seriously. Most of the time these are paid promoters, and they’re just there to make money for themselves and their companies. If I’ve learned anything through my life it’s not to risk money on blind trust alone.
And let’s face it most of what you hear is rarely true with the stock market. Most of the time, these people have no idea what they’re talking about, or even worse are being paid to spread misinformation about companies. So it’s important that you learn to use clear plans and strategies in order to figure out what stocks you’re trading. And when to get in and out of trades. To figure out when to get in, you’re going to want to make a list of criteria that a stock needs to hit in order for you to want to trade it. And obviously, you’re going to want to adjust the strategy based on what you’re looking for.
I’ll give you an example of one scenario. So if I’m looking for a stock that has recently been dipping, then I’m going to want to look for a stock that’s nearing its level of support, which is the bottom price that the stock reached during the last several trading periods or whatever time period you’re looking at. And that stock also needs to have a lot of upward growth potential all the way back up to its level of resistance. Now resistance is the opposite of support. Resistance is basically an arbitrary ceiling where the stock traded highest in the last few trading sessions. So the key and basically the biggest foundation with trading stock is you want to buy near support and then hold until it hits resistance at which point you sell. And that’s the secret, as boring as it may be.
Now, you’ll also want to make sure that it hits your other indicators too, because just holding from support to resistance isn’t going to be a clear strategy. This is because sometimes it won’t actually make it to the resistance level, so you need to make sure all of your indicators are on point. I use several indicators when I’m placing my trades. If you want to add these indicators, then it’s should be easy and straightforward for you to do so when you’re used to your trading platform.
RSI Indicator
My favourite indicator is the RSI indicator. If a stock is below the bottom yellow line on the indicator, that means it’s oversold. Being oversold is a good indication that a stock could be in a temporary dip where you can buy in at a discount. If a stock is above the top line, that means that it is overbought, you see a stock that recently crossed over the overbought line. If all else is equal, it might not be a bad time to start considering exiting out of a position because once it hits into oversold territory, the chance of it going down a reversal is much higher than before. You never want to buy into a position if the RSI indicator is showing that it’s in that overbought range. And the reason is because in the overbought area you have the highest risk of the stock tanking after buying. So you want to make sure that your risk potential isn’t ridiculously high so that you can actually make money consistently.
If a stock is in the middle of the RSI indicator. That means that it’s in the fair value range. And this range basically means that you’re not getting it at a bad deal, but you’re not getting it at a good deal either. This is about the fair price based on previous price action for the stock when entering a position you generally are only going to want to buy a stock at either the oversold or fair market range. However, buying a stock in the oversold territory is going to give you the highest potential upside. So you should aim for getting as close to oversold as possible because what trading is, a game of probability. You can any the position that is going to give you the highest probability of making you money, nothing’s 100% certain in this game.
SMA Indicator
So you want to have the highest probability of a successful trade. The second indicator we like to use is the SME (Simple Moving Average) line. Now a lot of people use the SMA line in different ways. And like many of the studies I’m talking about, you’re going to want to adapt your use of them to fit your own trading style and strategy. But the SME line essentially calculates the moving average of the stock price. And I’ve set up my platform to place it on price action so I can give you an idea of where the price would be if there wasn’t any volatility. This means if the stock price dips below the SMA line, then that could be an early warning sign that the price is heading towards a reversal.
If you are seeing the stock price rise above the SMA line, that could be a sign that the price is going to begin to shoot up. This obviously, like the RSI is not a all encompassing solution. It forms part of the big picture and helps figuring out when it’s time to place a trade rather than be a nailed on 100% buy signal. Like life, I. The stock market you have to operate in the grey areas, nothing is black and white.
Volume and MACD Indicators
By now you have a basic understanding of support and resistance levels, as well as the movements of the other indicators we’ve mentioned. Now you need to use all of the indicators in conjunction to make successful trades. Using just one indicator like the RSI indicating that the stock is oversold is not enough! One other thing you also need to take into account when trading stocks is the volume of the stock. The volume is basically the amount of shares traded. And if you have low volume, that means that may not be able to get into or out of your position very easily. Likewise, it might take longer to buy in at that price. Or you may even end up having to pay more for the stock because there’s not that many shares available.
Think about it in terms of basic shopping, like buying a PS5. If there’s a limited amount available and loads of people want one, how are you going to get that item quickly? Especially when up against people who have priority tickets (Hedge Funds). If there aren’t any available, you simply won’t get one. So, for liquidity purposes, you want to trade stocks that have at least 500K or more in volume (that’s 500k available shares). Those are pretty much the basics of what you need to know about the volume indicators.
There are 1000s of different indicators that you can use. But you really don’t want to overdo it. Later on, you may want to fine tune your strategies by using other indicators, but it’s not necessary. And we have only really added one or two different indicators as we got better trading. Now one of the ones we do use is the MACD, which is a momentum indicator. This indicator pretty much measures measures the upward or downward momentum of a stock, you don’t need to use this to begin trading or even to be successful in trading. So I don’t really want to go too much into depth about it, but I’ll cover it in more detail in a future blog post if you are intrigued.
Have a plan!
Like we always say, you need to have a plan! For example, your plan could be “I’m going to buy Tesla when it dips to its multi day support level, the RSI is indicating that it is oversold and when the trading volume increases”. And “I’m going to get out when the price action is close to multi day resistance level”.
As well as plan for success, you also have to have a plan for a situation in which the price doesn’t do what you want. The key to this is making a plan that protects your capital, but places minimal limits on your upward potential. So have a plan that if the stock price shows signs of a reversal, that you’ll cut losses quickly if it dips below 10% or so. And now this is an arbitrary number, you’ll have to choose what number works best for you. But for us, we find the 10% mark works just fine, losing more than 10% is just not practical or sustainable we feel. After 10% if there’s a reversal, then so be it we’d rather protect our capital than blow up our account. 10% is pretty much the safe level for us.
Aside from stop levels, signs of a reversal would be where you would need to cut losses quickly. Things like the stock price consistently dipping lower under the SME line that we talked about earlier, or downward momentum of price, the price basically consistently going downwards, or an overall consistent failure to make higher highs and failed breakouts are all signs you should cut and run.
Know your onions
And last but not least, with trading, you should have at least a fundamental idea of what it is that you’re trading and the general headlines regarding the company. This is opposite to investing where you need to know a lot about a company everything from their balance sheets to their future prospects, so that you can decide if it’s a good idea to invest in it or not. But with trading, you just need to know a few very basic things. First, you should know what the company does. You should know what industry it’s in. If there’s earnings, or a major event that’s coming up that could influence the stock price.
You also need to know the geographic location of a company like UK stocks are going to trade differently than American stocks based on different political events, geopolitical climate, whatever plays into that industry. The reason it’s important to know the industry it’s in is because oftentimes companies will be dragged down by other industry players, and it’s a good idea to check similar companies and see how your company is performing relative to them in that particular sector.
It’s the same thing with geographic location, you can apply that the same way, major instability or events in certain countries can impact your stocks performance. Unless if you’re day trading, for example, UK companies and they’re all getting consistently hammered, it might not be a good idea to buy it even if it dips intraday, you also need to know the basics of industry specific events that could trigger massive changes in the stock price. So what do I mean by this, for example, if you have a pharma company that you’re buying, you need to be aware of certain new trial announcements, like for instance, to have a successful trial for a new drug, that means they’re probably gonna be making a lot of money in the future, or they get FDA approval.
And likewise, if they get rejected, or they don’t have a successful trial, the stock price is gonna go down so you can maybe, possibly short it. I mean, there’s just so many different options. At the same time. However, with trading news, it’s only important as far as it influences the stock’s price. If you have a great piece of news, but the stock price isn’t showing movement, then it’s not going to be a good stock to day trade based off the news alone. Price action is key to day trading. So focus on price action, and use fundamentals to either validate the price action or to protect yourself from being left holding the bag if you missed a key detail.
And last but not least, the most important part of trading. You can’t learn to drive a car by simply watching videos of people driving cars, so it’s not any different with day trading. You need to learn by practising yourself if you don’t practice yourself and you don’t get real world experience doing it. You won’t be able to be successful trading no matter how many things you read, no matter how many people you watch, and no matter how often you watch the stock market. I recommend trading with fake money using a paper trading account like we discussed earlier until you can prove to yourself that you can make money.
Now go get yours
Now that you have the skills in place to grow your account, and once you’ve proven yourself that you can trade with fake money, start trading with real money, but use small positions and work your way up. Write down on a notepad what works and what doesn’t work for you and adjust your strategies accordingly.
Do your trades, watch more videos, read more about the stocks, learn about different trends in different industries, and consistently take notes. That’s the secret to being consistently profitable in the long run and winning in the long run. Don’t expect to make consistent profits anytime soon. But aim and hone your strategies until you achieve what you are looking for. It could take months it could take years. It’s all about how much you practice how much effort you put into it. And at the end of the day, it’s about how consistent you are.
Anyways, that’s pretty much all you need to know in order to start trading in the stock market. So if you found this video helpful, feel free to like and share this post, follow us on here, Instagram, YouTube or TikTok. We’ll be updating nearly every day with more content on how to trade the stock market. This post was by far our longest and the reason is because this is a pretty big concept to break into. Just starting trading is not the easiest thing to dive into. So I did have to make it a little bit bigger, my bad. Good luck to the traders.
