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Are you a novice day trader? This guide provides you with everything you need to know about day trading. Internalize these insights and apply them during your sessions.
Common Mistakes Novice Day Traders Make Over and Over Again
The retail trading arena is a huge market in the US, estimated at $4.9 trillion in 2020 according to IBISWorld. This industry powers thousands of companies (SMBs), both public and private. These in turn fuel economic growth in a capitalist economy. While the growth rate slowed appreciably in 2020, owing to the novel coronavirus, many peripheral industries have sprouted.
Foremost among them are retail stocks trading and institutional stocks trading. Thanks largely to the widespread democratization of online trading activity, it is possible to power up your PC, Mac, or mobile and trade stocks online like a pro.
We begin with a look at some of the common mishaps that novice day traders experience.
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Novice Traders and the Fallacy of Accessibility
The first problem is the fallacy of accessibility. Many novice traders wrongly assume that all that’s required to become a successful day trader is access to an online brokerage and a trading platform. Of course it is absolutely imperative to carefully select the right brokerage and trading platform. However, in and of itself, this decision will not necessarily yield profitable returns. The fallacy of accessibility wrongly assumes that by having access to a stocks trading platform, you automatically enjoy the attendant benefits such as profitability.
Careful selection of a stocks trading platform is one of the most important decisions you can make as a trader. This is especially true if you’re a novice trader. However, the viability of the trading platform only becomes evident once you have conducted a critical assessment of its components. Among the many features, functions, and resources necessary in a top-tier day trading platform are:
- Access to real-time prices to make accurate buy and sell decisions.
- Rapid executions of trades, to prevent the obliteration of highly sensitive stock options like penny stocks.
- Feature-filled trading resources. For example, look for features such as economic data releases, webinars, seminars, trading videos, trading guides, trading tutorials, stock trading blogs, stock trading forums, company financial reports, paper trading options, FAQ, glossary, support, and so on.
- Wide range of financial instruments to trade, including everything from penny stocks to blue-chip stocks.
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Access to Penny Stocks: OTC, Pink Sheets, or Listed Exchanges?
Novice Traders and the Price Appreciation Trap
If you consider day trading seriously, it is critical that you understand precisely how to pick your stocks, time your trades, and call them correctly. When it comes to traditional stocks trading, the rationale behind the trade relies on stock appreciation for profit-earning potential. Conversely, in day trading, it is possible to profit off stock movements regardless of rising or falling prices. However, you as the day trader must pick the right direction. Many novice traders fall into the price appreciation trap. That is, they falsely believe that price appreciation is the only way to make money as a day trader.
You can learn to profit from stock price movements, irrespective of bullish or bearish trends. The trend is your friend in stocks trading. If prices are falling, it is possible to adopt a bearish perspective on that stock and collect on the way down.
By the same token, it is possible to profit off appreciating stocks since the future price may be greater than the present price. In this case, the difference is the profit. But traders can easily profit from downward markets and plunging prices, too. They do this by adopting winning strategies. In a bear market, which is a market that declines by 20% or more from previous highs, you can short-sell.
This advanced trading strategy requires borrowing the underlying equity from the broker and selling it at the prevailing market price. For example, if the share costs $5 right now and will be $4 in the future, short-selling the option is a good idea. This is because the $1 per share is your profit.
On the other hand, if perchance the share price appreciates the $6, and you short sold that option, you would be in the red to the tune of $1 per share. Obviously, then, short-selling is inherently risky. There are no safeguards in terms of price movements. Nonetheless, this form of derivatives trading is widely employed at a large number of trading brokerages. Short-selling is typically conducted with the CFDs (contracts for difference) market and spread betting activity. In short, what many novice traders don’t understand is that you don’t need to own the underlying asset to short-sell it.
Choosing a Brokerage
In terms of where to trade penny stocks, it’s best to pick a brokerage with a fully supported trading platform. The virtual trading realm is festooned with world-class trading platforms and brokers. For example, these include E*TRADE, StocksToTrade, Interactive Brokers, Charles Schwab, Fidelity, and scores of others. Pick one that best satisfies your trading requirements, budget, and portfolio preferences.
The Best Time to Day Trade Penny Stocks
There are two key ingredients necessary for trading penny stocks: volatility and liquidity. It comes as no surprise to seasoned professionals that these two core components are largely available during the morning trading sessions, Monday through Friday. As a rule, you can expect the highest levels of volatility and liquidity during the opening session of trading, and then again during the closing session of the day.
Penny stocks tend to get a massive boost from press releases, financial statements, company news, and market-related phenomena. When this news breaks, you can expect wide-ranging movements in pricing.
Besides timing your trades to coincide with the busiest periods of day-to-day trading activity, another important component of day trading penny stocks is the number of trades you manage per day. A novice trader is foolhardy to take on too many trades. Instead, start small and grow incrementally.
Much the same thinking goes into the profits generated from your trades. As your knowledge of the financial markets grows, and your understanding of penny stocks trading develops, you can incrementally increase the number of trades you conduct each day to coincide with your skills, abilities, and preferences.
How to Mitigate Risk When Trading Penny Stocks Online
All forms of trading activity are inherently risky, some more so than others. Penny stocks trading is extremely volatile. Therefore, traders, especially novice traders, are cautioned against allocating too much weight in their financial portfolio toward this category. It is sensible to limit your exposure to risk in penny stocks to less than 10% of your overall financial portfolio. This number may be adjusted based on your appetite for risk and your understanding of the financial markets. The old axiom, “Don’t put all your eggs in one basket,” holds true for penny stocks trading. (As an aside, it is true for other forms of trading, too.)
Risk management is best conducted by way of strategic decision-making processes. Since it is impossible to manually monitor dozens of trades simultaneously, you will likely be using tools and resources to assist you. These include stocks screeners, pre-set take profit and stop loss orders, and more. Nonetheless, the markets have an uncanny ability to confound traders at the best of times. They rise and fall at their leisure, and many traders desperately try to play catch up and ride the wave before it breaks.
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That’s why it is important to set trailing stop loss percentages and trailing stop loss orders to mitigate risk on the downside. On the upside, set yourself a target—say 10-20%—and allow the trade to close out once your profit mark has been hit. It’s entirely possible for a stock to keep on rising well beyond your set figure. However, if a sudden reversal takes place, it may miss your safety point on the way down, and you could be out of luck!
So keep the tips we offer here in mind as you trade. As you gain experience as a day trader you will also gain confidence. In time, you’ll begin to reap the rewards of carefully applying the techniques you are learning now.