Understand why liquidity is important
When the market is characterized by high-liquidity, it will be easy for your to quickly open and close positions. When you want to buy shares in Company A for $25.00 there is a sufficient amount of shares in Company A available for sale at $25.00. When you want to close the position, other traders snap up those shares in no time.
Day trading typically involves exploiting tiny price movements, so being able to enter and exit positions at exactly the right moment is very important. That is why day traders normally seek out markets characterized by very high liquidity.
High-liquidity tends to go hand-in-hand with tight spreads, meaning there is no big difference between the bid price and the ask price for an asset. This in turn means no or very little slippage. Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed.
Learn the patterns of volatility
Volatility is sought after by many day traders, but is also dangerous since volatile markets are notoriously difficult to predict.
Generally speaking, the price of an asset will be more volatile when the market has just opened and we are early in the trading day. A lot of highly skilled and experienced day traders flock to reap the profits of this high volatility. The mid-time of the trading day is usually marked by less volatility, and can be easier to navigate for the inexperienced day trader. Then, we can expect a new period of high volatility toward the end of the trading day, when the market is near closing.
Keep an eye on the trading volume
Trading volume is a measure of how many times a stock is bought and sold in a given period of time. Day traders typically want to know about the average daily trading volume for assets they are interested in.
If the trading volume increases, that typically signifies an increased interest in the asset and a price jump might be imminent Just a word of caution: Sometimes increased trading volume is the harbinger of a significant price drop rather than a price jump.
Learn about various strategies for day trading
We do not suggest that you spread yourself (and you bankroll) thin trying out a multitude of different trading strategies at once. What we do advice is that novice day traders learn about the various strategies for day trading and then make an informed decisions about which one to explore deeper.
You can set up a demo account with an online broker and try out all the trading strategies for free using play-money. That will give you some insights into which styles that work best for you and your preferences. Of course, risking real money always feels different than romping around with play-money, but demo account trading can still give you some glimpses into to the strengths and weaknesses of these various strategies and how they suit you.
A few examples of strategies employed by day traders
- Daily pivots
This strategy has a focus on an asset´s daily volatility. The idea is to buy at the lower end of the day and sell at the higher end of the day.
- Trading on news
This strategy involves knowing when news are to be released (e.g. corporate earnings or a new governmental policy) and benefit from the short-term volatility that news often create on the market.
The scalper is fast even by day trading standards. The scalper aims to profit from exceptionally tiny price movements by opening a large number of positions and then closing them again very quickly, as soon as there is a profit to be made even if it is diminutive. Typically, positions are held open for just seconds or minutes. The scalper doesn´t earn much from each individual profitable trade, but the accumulated value can be large.
Fading is a rather complex strategy that involves shorting assets that have gone through rapid price moves upwards. The assumption is that such assets are overbought, that early buyers will now start taking profits (i.e. selling) and that quite a few existing but not-early buyers will be scared out (i.e. selling).
The momentum trader is looking for a strong move supported by high volume. Momentum trading can be combined with certain other methods, such as news trading or fading.