How to Maximize Profit in Day Trading
If you are looking to turn day trading into a lucrative career, you are in the right place. There is a common belief that day trading is not for beginners, which is not completely wrong. But, if you have sound knowledge about the market, it is also not impossible to participate in day trading and earn profits.
The high risks associated with day trading necessitate a strategy that involves careful consideration, constant monitoring, and a deep understanding of the market dynamics. However, with the help of trading platforms for day trading, even a novice trader with sound financial knowledge can earn substantial gains. Many trading platforms offer tools and analysis reports that make day trading easier. Moreover, the following article discusses some crucial strategies if you are looking for ways to maximize profit in day trading.
Fundamentals of Day Trading
Day trading is a fast-paced strategy where traders buy and sell their stocks on the same day. Successful day trading requires a lot of research and analysis, which involves analysis of past price movements, trading patterns, and momentum. Day trading is governed by one fundamental principle: making profits on short-term price movements of stocks, futures, options, and other financial instruments.
Even though day trading is a great instrument for making a quick profit, it also has significant risks. Therefore, traders must constantly update themselves with the latest news, headlines, market developments, and fluctuations.
Ways to Maximize Profit Through Day Trading
The following section discusses some of the ways you can make profits and mitigate risks in day trading with the help of examples:
- Use Leverage to Amplify Returns:
Leverage is a strategy in which the trader borrows money to make money. But where do traders borrow this money from? They most commonly borrow money from a brokerage firm using a margin account, increasing the trader’s purchasing power.
Example: If a trader decides to trade $1000 in a stock promising a 10% return, the profit he will gain is $100. But if the same trader borrows $1000 from the brokerage firm and invests $2000, his returns will double. Leverage amplifies the returns of the trader but, at the same time, exposes them to greater risks.
- Selling Short:
In this strategy, traders sell borrowed securities from the brokerage firm, expecting the prices to fall. When the stock price falls, they buy back the securities and pay the borrowed amount to the firm. Here, profits are made when the prices of the stocks decrease, and losses occur when the price of the stock rises.
Example: Suppose the shares of company A are priced at $50 per share. You plan to borrow 100 shares of the company from your broker and sell them in the marketing. This makes you gain a total of $5000. Now, according to your prediction, the share prices will fall further to $40. When the prices fall, you buy them back by spending $4000, leaving you with a profit of $1000.
- Setting Stop-Loss Order:
Setting a stop-loss order means that you have placed an order with your brokers to sell the stock when it reaches a particular price.
Example: You buy shares from a company at $100, predicting that the prices will rise. But to be safe, you set a stop loss order of 10%. Now, if the stock price falls to $90, the order will be triggered, limiting your loss to the predetermined 10%.
- Diversifying Your Portfolio:
Experts suggest that you shouldn’t put more than 1% of your investment in one single trade. So, even if you have one or two bad trades, you are not completely wiped up.
Example: If your portfolio is worth $10,000, you shouldn’t place more than $100 in one trade. This way, if a particular trade doesn’t work in your favor, you lose only $100.
Conclusion
There is no denying that day trading is a risky strategy but also has great potential for high returns in a short time. To maximize profit and mitigate risk, most experts recommend following the strategies mentioned above. However, before implementing any of these strategies, you must conduct thorough research because it is the only way to succeed.