Day Trading: Basics and Strategies for Beginners

Jun 27, 2022 Written by LAT Staff

Day trading stocks can provide an opportunity to make money by profiting off small, intraday price swings in the financial markets. This can be stocks, indices, forex, commodities or even crypto markets. By learning a few rules and strategies, many people are able to make a living, or earn at least a little extra pocket money by day trading.

It is not without risk though, as every trader will inevitably suffer losses at some point. If you are interested in day trading, learning some basic strategies before you get started is crucial.

Psychology of Winning and Losing

The good news is that anyone with a brokerage account and some extra money can get started. But before diving in, first determine how much money you are willing to risk. This number needs to be based not just on your financial situation, although that is important, but also on your own psychology and feelings about winning and losing.

Psychologists have done many experiments and have consistently concluded that people feel worse about losing a certain amount of money than they feel happy about winning that same amount. In other words, winning a thousand pounds may feel good, but the bad feelings associated with losing a thousand pounds will be much stronger. It’s best to understand that first before it happens.

What is Day Trading?

Day trading can be thought of as a style of investing where you begin and end each day with an all cash position. During the day, you will buy and sell stocks with the intent making generally small gains in each trade.

There are many different strategies that traders can employ, and learning them all will literally take a lifetime. But by the time you finish this article, you will be armed with enough knowledge to get started.

For a beginner, it’s easiest to think of the strategies as being in one of two main categories: fundamental analysis and technical analysis.

First, What are the Bulls and the Bears?

If you spend any time reading or listening to the financial press, you will hear them talk about the bulls and the bears. These are simply terms for assets (usually stock markets) moving up or down. Bullish means that a stock is moving up and bearish means the stock is moving down. The terms come from how the animals attack.

Think of a bull charging a matador. He runs with his head down and then strikes by thrusting his horns upwards. A bear does the opposite, when it attacks, it rears up on its hind legs and then attacks downwards. When you hear these terms, just know they are euphemisms for markets moving up and down.


Trading off fundamentals is generally used by long term, buy-and-hold investors, but day traders, especially beginner day traders, can also have success with this type of trading.

Fundamental analysis is using the news, or macroeconomic data (such as interest rates, employment or inflation) to make trading decisions. For equity markets, fundamental investors will analyse company financial statements and quarterly earnings reports to learn about the underlying health and profitability of a company – and hence the potential movement of its share price.

Your One Big Advantage Over the Hedge Funds

Now I know what you are thinking. How can one person with a laptop and a smartphone outsmart a professional hedge fund manager with a team of analysts and a slew of expensive proprietary software?

It’s actually quite possible because you have one enormous advantage over them. You are dealing with much smaller amounts of money than they are, that makes you much more nimble when placing a trade order.

Let’s say you and a hedge fund manager both want to quickly buy stock in a company after hours after their CEO just reported a huge increase in profits during a quarterly earnings call. You can place your order and have it executed almost immediately.

The hedge fund manager has a big problem though. In order for it to be a worthwhile trade, they may have to buy many thousands of shares, or even more. Placing an order that large will result in a huge and instant price spike, and they will end up buying the stock at a much higher price, possibly too high to make the trade worthwhile.

Many day traders can use their small size to their advantage and make outsized profits, on a percentage basis, by studying the fundamentals.

Technical analysis

Technical traders do not concern themselves with the fundamentals, but only look at the price action of the asset and try to predict the future by looking at the past. Certain price patterns repeat over and over again in financial markets, and by identifying them and using a structured rule-based approach, day traders can make consistent profits.

Volumes of books have been written about technical analysis, but to start off one should learn a few of the basics. Support and resistance levels identify price levels where there is strong buying demand or selling supply. Trend lines can be useful in identifying trend direction but also where to enter the market to take advantage of a directional trend. Price patterns can be used to predict future price moves and potential price targets.

There are also many other technical indicators, such as moving averages, relative strength index, etc. which can be used to generate buy or sell signals but can also provide additional evidence of a potential future move in the market. Combining these technical tools and indicators into a structured trade plan is an excellent way to maintain trading discipline and eliminate emotional stress when trading.

Get to Know a Few Assets Really Well

Instead of looking at dozens of assets across multiple asset classes trying to find one that fits your criteria, it is recommended that you pick a relatively small number of assets, maybe between five to fifteen or so, and learn as much as you can about how they trade on a daily basis.

For example, if you follow certain assets for a while, you may notice patterns that emerge based on news events or macro data announcements. A common time for these patterns to emerge is during US earnings season (when US stocks can be very volatile), but they can happen at any time and in any market.

In equity markets, you may notice that every time a certain company announces its earnings report after hours, the stock plummets, only to come right back up again during the earnings call later that afternoon or when normal hours trading begins the next morning.

By taking advantage of these patterns, a day trader can potentially make a tidy sum of money within a few minutes.

You may notice patterns in the technical charts as well. You may notice how the price fluctuates but always bounces off the same price point near its bottom (support zone). Basing trades on a few assets you watch very closely (and know well) may garner much more success than trying to trade them all.

Types of Orders

There are various different types of orders you can place to enter a trade. The easiest is a market order. This is simply an order to execute the trade now at the current market price.

A limit order has a limit associated with it and will execute only at that price (chosen by you) or better. If you place a limit order to buy an asset, it will execute the trade at your price or lower. If you place a limit order to sell, it will only execute the trade at your price or higher. One common strategy is to buy a stock, and then immediately place a limit order to sell at a small amount higher. Once it hits that price, if it hits, it will automatically sell resulting in a profit.

There is another type or order called a stop loss that many day traders use to limit the risk on their trades. It you’ve bought an asset and you have a long position, a stop loss order will automatically sell if the price dips below a certain level. Initially, this would be a loss, but it is a common strategy to “trail” your stop loss towards the price (as it moves in your desired direction) to minimise your loss and then lock in a guaranteed profit. Placing stop losses prevents small losses from becoming large losses, but you need to be aware of slippage or gaps. If the price drops quickly on bad news for example, an asset can blow right past its stop loss price, resulting in a larger than expected loss.

Use Margin With Caution

When you open a day trading account with a broker, you will likely be able to use margin on the account. Margin is a type of a loan that enables you to take bigger positions than you could with just your own money. Effectively, you pay a deposit (or margin) to gain exposure to a much bigger position.

Let’s say you have a stock trading account and deposit fifty thousand pounds of cash. Many brokerages will start out by giving you two to one margin (or two times leverage), meaning they will lend you up to another fifty thousand pounds to buy stocks with. Of course, you can earn double the profits, but you could also generate twice the losses. The other catch is that you may be thinking if your stock goes down, you can just wait for it to come back up, but with margin trading you cannot always do that.

If the stock drops too much, the margin can be called, meaning the brokerage will automatically sell your stocks, usually at a very cheap price, in order to pay back the loan. They do it to protect both themselves and you from further losses.

Margin can be a great tool to use to your advantage but be extra careful because it can also cause you to lose huge amounts of money very quickly. be extra careful because it can also cause you to lose huge amounts of money very quickly.

Getting Started

Before you get started, make sure you understand that profits are not guaranteed, and it won’t be easy to find a consistently profitable strategy. To be successful you will have to commit to constantly learning and upgrading your skills.

Ready to get started? Discover how one of our accredited trading courses can help you to build a profitable trading strategy today.