I am often approached by new traders or simply people that are interested in learning to day trade, and they usually ask very similar type questions. Most of these questions are about how to learn to day trade, or how difficult is learning to day trade. This article is going to serve the purpose of a simple day trading introduction for those of you that know very little about trading and it will simply discuss a few of the basic terms and so forth. While the article I’m quoting talks mostly about stocks, all of the strategies and terms will carry over to futures or Forex if that is your preferred market.
As a long term day trading, I actually prefer trading futures and I suggest that most day traders consider futures over stocks and certainly over Forex. I have written other articles explaining this reasoning, so be sure to follow the links and read those articles too if you would like to know and understand why I suggest and prefer futures. In addition, I believe that the only way anyone will ever consistently make money as a day trader is to learn to read a price chart. This is not something most people can master over night, but if you can learn to read a price action chart properly, you will be one step closer to making a living day trading.
Justin Kuepper of www.investopedia.com had the following to say in a recent article:
When people use the term “day trading”, they mean the act of buying and selling a stock within the same day. Day traders seek to make profits by leveraging large amounts of capital to take advantage of small price movements in highly liquid stocks or indexes. Here we look at some common day trading strategies that can be used by retail traders.
Tutorial: An Introduction To Technical Analysis
Certain stocks are ideal candidates for day trading. A typical day trader looks for two things in a stock: liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads and low slippage). Volatility is simply a measure of the expected daily price range – the range in which a day trader operates. More volatility means greater profit or loss. (To learn more, see Day Trading: An Introduction or Forex Trading Walkthrough.)
Once you know what kinds of stocks you are looking for, you need to learn how to identify possible entry points. There are three tools you can use to do this:
Intraday Candlestick Charts – Candles provide a raw analysis of price action.
Level II Quotes/ECN – Level II and ECN provide a look at orders as they happen. (Not necessary when trading future.s)
Real-Time News Service – News moves stocks. This tells you when news comes out. (This is a very important service when trading futures, but you can get this for free.)
We will look at the intraday candlestick charts and focus on the following three factors:
Candlestick Patterns – Engulfings and dojis
Technical Analysis – Trendlines and triangles
Volume – Increasing or decreasing volume
Typically, we will look for a pattern like this with several confirmations:
First, we look for a volume spike, which will show us whether traders are supporting the price at this level. Note that this can be either on the doji candle, or on the candles immediately following it.
Second, we look for prior support at this price level. For example, the prior low of day (LOD) or high of day (HOD).
Finally, we look at the Level II situation, which will show us all the open orders and order sizes. (This is not necessary when trading futures.)
If we follow these three steps, we can determine whether the doji is likely to produce an actual turnaround, and we can take a position if the conditions are favorable. Typically, entry points are found using a combination of these three tools. (For more see the Charting Section of the Forex Walkthrough.) You can read the entire original article here.
Remember that we are not suggesting that you use any of this information for learning to trade, but rather we are offering the information so that you understand some of the basics of trading and some of the basic terminology that you will hear. Also, remember that we prefer to trade futures, so don’t forget to read the additional articles we pointed you towards with the links earlier in this article.
We like using candlestick charts for the simple reason that they make it much easier to quickly see what is going on in the price action chart you are trading. We do not believe in using any type of indicators, because they are built from lagging price action. If you learn to read the price action in real time, there will be no need for all of the clutter and confusion that you will find when relying on indicators.
Learning to day trade is not something most people can do quickly. Like anything worth pursuing in life, it will take hard work and a lot of study time and effort. However, if you learn how to trade properly the first time, and you are willing to put in the necessary time and effort, the results can be very rewarding. Once you learn to read a price action chart, you can transfer that skill to any market on any time frame and it will work the same. It’s much like learning to ride a bike, in that once you learn it, you will always be able to rely on it. Obviously the more you practice and use it, the better your skills will be, so don’t over look the importance of that fact!
If you are interested in a day trading introduction learning price action and how to read a price action chart, we suggest that you take a look at PATs Price Action Trading Manual and it’s located at https://priceactiontradingsystem.com/pats-price-action-trading-manual/.