​Trading Strategies > Intraday Trading​ > Day Trading for Dummies

​Day Trading ​for Dummies

​The ​Beginner's Guide To Day Trading
(20​20 edition)​

​Day trading - ​also called ​intraday trading - ​refers to the opening and closing of trades within the same ​day.

​This ​style of ​trading ​is very ​popular among ​beginners, as it ​is often ​portrayed ​as a quick, easy, and exciting way ​to ​make money.

​​Practically however, ​day ​trading is ​the most ​​challenging form of trading​, and ​those who try it ​typically ​fail.

It also doesn't help that the vast majority of trading "educators" out there are not profitable traders, but ​​savvy​ ​marketers ​pretending​​​ to be​ one.​

day trading for dummies

So before you do ​anything else​...​

​​Check ​Your Learning Sources

​Before ​taking any trading advice, first ​ensure that it's ​coming from someone who ​can demonstrate some level of ​trading competency​ on a ​3rd-party performance tracking platform.

This ​applies to the ​book ​authors you ​follow, ​trading experts you listen to, and online forums​ you visit​.​

In the spirit of transparency, therefore, here's my verified ​track record ​on Myfxbook:

Now with that out of the way, let's get down to business with ​this dummies guide ​to day trading.

Here are the topics we'll cover:

​How Do Day Traders Make Money?

Day traders ​identify ​short-term profit opportunities ​within the small price fluctuations of each day.

​They typically do this ​​with:

  1. ​News ​services,
  2. Technical indicators, and
  3. ​An understanding of ​order flow ​mechanics

1. ​News Services for Dummies

Short-term prices can be heavily​ influenced by political ​or economic news​.​

​Here​ ​are some example​s:

how do day traders make money

​Oct 2019: ​GBP/USD reacts to reports of a Brexit deal ​on Tuesday and Thursday

how day traders make money

​Aug 2019: ​USD/​JPY reacts to ​President Trump's​​ ​trade war escalation ​against China on Friday

day trading for dummies

​Aug 2019: ​​NZD/​USD reacts to ​​a surprise interest rate cut on Wednesday morning

​​To avoid being caught off-guard by such news, and perhaps to even profit from them, ​a day trader ​follows ​news ​websites such as ForexLive and subscribe to ​news ​notification ​services such as Ransquawk.

​The moment some market-moving news occurs, the trader is immediately informed. Then, ​he can quickly ​take steps to ​position his trades to benefit from the situation.

2. Technical Indicators​​​​ for Dummies

Almost all ​traders use ​​technical indicators to aid with trading decisions, and ​intraday traders are no exception.

​The only difference is that ​they tend to ​prefer to ​technical indicators that are more ​sensitive (responsive) to ​the immediate ​price ​moves.

For example, instead of using the ​simple moving average (SMA) indicator, ​they ​tend to prefer using the exponential moving average (EMA) indicator​ as ​it ​is more sensitive ​to the most recent ​fluctuations of the price.

day trading moving averages

​The EMA is more sensitive to price changes and reacts quicker than the SMA.

Intra​day traders also tend to​ prefer using ​shorter period settings ​on their technical indicators.

For example, rather than using the standard RSI period setting of 21, they might use a period ​setting of ​9.

intraday trading rsi

​A ​shorter period setting is more sensitive to price fluctuations

In the chart above, we see that the 9-period RSI is better able to identify ​overbought and oversold ​price levels​, compared to the 21-period RSI.

In this way, ​a ​shorter period setting​ allows ​intraday traders ​look for ​profit opportunities ​within the daily price ​​fluctuations​.

​3. ​Order Flow ​Mechanics for D​ummies

A competent ​day trader​ ​understands the ​subtleties of short-term price action and the ​mechanics of ​how trade orders are filled.

This gives him a perspective ​that goes beyond what is ​ordinarily displayed on a price chart.

intraday trading price action

​A layperson sees just a plain price chart

day trading order flow

​A competent trader also sees the important demand and supply ​areas

In ​observing the how the ​price moves ​according to ​order flow ​dynamics, ​the trader​ builds a ​picture in his ​mind of where ​​the largest clusters of the ​orders​ are​ located on the price chart.

This gives him a good idea of where ​the best short-term trading opportunities are.

How ​Day Traders Make Money

To summarize, ​they first have a mental map ​of where the ​best profit opportunities are on a price chart, based on a ​deep understanding of price action and order flow dynamics.

​Then, ​they ​​think of ways to exploit those profit opportunities by taking as little risk as possible,​ ​and take action ​with the ​assistance of technical indicators.​

Lastly, they subscribe to news notification services to be on the lookout for news ​developments ​that they can ​exploit for profit.​

It's a multi-layered approach that evolves as prices ​fluctuate in real time.​

Should You Consider ​Day Trading?

For the average person, the simple answer is no.

​The fact of the matter is that over a typical 6 month period, more than 8 out of 10 intraday traders end up losing money.

So if you're thinking of being a day trader, you'd better have good reasons to believe you can perform much better than ​average​.

​This being said​, ​how do you know if ​intraday trading is something you ​should consider?

​You ​might want to consider it if you:

  • Don't have ​large financial ​obligations/debts
  • ​Have ​substantial saving​s​
  • ​Are able to comfortably pay your bills​
  • Are an introspective person​ inclined towards rational and logical thinking
  • Are willing to spend years building the relevant mindset and skills

On the flip side, ​you should not​​ be​​​ considering​ it if you:

  • Are heavily in debt - (clear your debts first)
  • Are low on savings - (build up your ​savings first)
  • Need ​quick cash​ - (​the pressure will work ​against you)
  • ​Expect to transition into full-time trading ​within a ​year - (​very un​likely)

Intraday trading ​CAN be very lucrative ​​if you know what ​you're doing.

​The thing is, it will probably take ​at least 2 years of dedicated effort before you ​begin ​​​to get the​ hang of it.

​In the meantime, you​'d be ​bleeding ​capital along the way.

Sounds difficult?

Good. ​That means you're starting to get it.

Can You Make Money Day Trading?

The reality is that the road to profitable ​day trading is full of adversity and struggle. The sooner you ​accept this, the better.

And if you're not willing to go through​ ​the harsh and prolonged ​journey ​of getting there, then it's better that you don't start​ at all.

Profitable intraday traders are like the Navy SEALS of the trading world - ​the elite of the elite.

​If you​ want to count yourself among them​, be prepared to persevere over ​the first few years of training.​

So ​the bad news, is that most people ​fail at day trading.

But the good news, is that a ​minority of people do, and they ​are very successful​ ​at it.

The Best ​Market For ​​Day Trading

​​Since day trading involves taking ​small profits​ within a relatively short period of time (under 24 hours), the quality of daily market conditions ​is especially important.

​​The first ​characteristic ​of a ​conducive environment for ​​day trading ​is high ​liquidity.​

​Liquidity for Dummies

​​In trading, liquidity affects the ease ​at which ​your ​​trade ​orders are executed at the desired price.

A market with high liquidity ​​means that when you enter an order - even ​at ​large volumes - ​the order can be​ ​filled​ ​at (or close to​) the price you see on the trading chart.

For example, if you see ​a stock is trading at ​​$​​30.​1​1​ and you click '​Buy', ​your order should be filled at the price of ​$​30.​1​1, or at worst, ​$​30.​1​3.

If ​the order gets filled at ​$30.​1​​4 or ​more, ​this ​​could ​add anywhere from ​​5% - ​30% of additional cost to ​your ​trading bottom line - which is ​​a HUGE difference.​

​Because of this, ​​day traders are very ​particular about the liquidity conditions​ of the markets they ​operate in.​

Price Volatility for Dummies

The next ​important ​characteristic ​to ​watch for is​ price volatility.

​As intraday traders ​close their trades by the end of each day, they must choose to ​trade ​securities with ​sufficient price movement on most days.

Some stocks, for example, barely move a few cents on a typical day.

Intraday traders tend to stay away from such ​financial ​assets as there isn't sufficient price volatility ​to provide ​regular opportunities.​

Trading ​Hours​​​ for Dummies

Many ​financial markets ​have restricted trading hours.

​In US stock trading (and stock options trading), for example, the market is only open from 9:30am - 4:00pm Eastern ​Time, and is closed on public holidays.

​​Compare this to the ​currency (Forex) or ​Cryptocurrency markets, which ​are open ​24 hours a day, even on public holidays.

While some​ ​people might ​be inclined towards ​the restricted ​stock trading hours, intra​day traders ​tend to prefer the ​flexibility of ​the ​markets that ​don't close​.

​Barriers ​To Entry​ for Dummies

Each ​asset class has its own ​barriers to entry.​

​In the US for example, stock trading ​requires one to hold a minimum of $25,000 in ​the trading account at all times. This rule applies to everyone who fulfills the ​criteria of​ being a pattern day trader.

​In futures ​and options trading, ​one would will need a minimum of $3,500 - $5,000 ​in capital to get going.

​For​ Forex and ​Bitcoin​, ​one can get started with as low as $​200.

So What's The Best Market For ​Day Trading?

As you can ​tell by now, the Forex and ​Bitcoin markets ​have ​several advantages over the others.

​Personally though, I prefer trading​ just one ​these ​markets.

Which one is it?

Let's see.​

​First of all, ​the Forex market​ is much larger than the ​Bitcoin market. At the time of this writing, the former is ​over ​20 times larger than the latter.​

Also, ​while ​all ​good ​Forex brokers are regulated by the financial ​authorities, ​many ​​​Cryptocurrency exchanges are not (yet) ​properly managed and ​regulated. ​This subjects ​Bitcoin traders to a much ​more​ counter-party risk.

On the whole, ​therefore, my view is that the best market for ​day trading is the Forex market.​

Basic Day Trading Strategies

There are are two basic types of ​day trading strategies: "​Momentum" ​and "​Fad​e".

Momentum strategies ​focus on ​trading in the direction of strong price moves, while ​Fade strategies focus on ​trading ​off short-term support/resistance levels.

​Momentum Strategy - Da​y Breakout

The first type of ​strategy is the ​D​ay ​Breakout.

​The ​essence ​of this ​approach is to ​trade the breakout of the previous day's high/low price.

There are two variations ​to this strategy.

In the first variation, we place a buy stop order above the previous day's high price, ​and/or a sell stop order below the previous day's low price.

breakout day trading

This is ​the more aggressive ​variation of the strategy that is best used ​​during​ ​strong market-moving news ​events.

The idea is that if some ​big ​news pushes prices above the previous day's high price, we want to be buying. ​Conversely, if ​the news pushes the market price below the previous day's low price, we want to be selling.

In any case, ​a stop loss order should be ​set relatively close to the ​entry price,​ and the profit target should be placed at the next major resistance level with a ​minimum 1:2 risk-reward ratio.

​The second variation of the strategy is the one that should be used ​in the absence of​ strong​ market-moving news.

In this variation, we first wait for a breakout​ to ​occur, and enter a trade upon a re-test of the breakout ​level.

intraday breakout re-test

​Occasionally, ​prices will come back to re-test the breakout level, and this is where we want to set a limit order to ​trade towards the direction of the breakout.

day trading breakout re-test

​Momentum Strategy - ​News Surge

The next type of momentum strategy is the News Surge​.

The idea behind it is simple: wait for a strong market-moving event to occur, and ​enter in the direction of the price surge.

For example, ​below we see a strong positive surprise of the employment data ​for the Australian economy:​

economic data deviation

​Within the first 15 minutes of this surprise news release, the AUD/USD rallied strongly:

intraday news breakout

​Upon seeing ​BOTH a ​​data surprise and a strong price reaction​, we will enter ​in the ​​direction of the ​price surge. In this case, we want to be buying.

intraday trading news breakout

The trick to this ​strategy is to only trade upon events of with an unambiguous surprise (either positive or ​negative).

If it's not absolutely clear that the news is "​good" or "​bad", no trade should be taken.

​With this strategy, there​​'s a ​good chance of a ​profit.

The downside, however, is that ​unambiguous ​surprise events like these seldom​​ occur.​

​If you can be ​patient ​to wait for the right setups, this is a good trading strategy to add to your trading toolkit.

Fade Strategy - Da​y Breakout Failure

This strategy is the flip side of the ​Day Breakout strategy (first variation).