What Is the Difference Between a Full-Service and a Discount Broker?
Full-service brokers provide a broad array of financial services, including financial advice for retirement, healthcare, education, and more. They can also offer a host of investment products and educational resources. They have traditionally catered to high-net-worth individuals and often require significant investments. Discount brokers have much lower thresholds for access, but tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades. They also offer educational tools.
What Are the Risks of Investing?
Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. All investing comes with some degree of risk. It is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether these goals are short- or long-term.
How Do Commissions and Fees Work?
Most brokers charge customers a commission for every trade. These fees can go up to about $10 per trade. Due to commission costs, investors generally find it prudent to limit the total number of trades that they make to avoid spending extra money on fees. Certain other types of investments, such as exchange-traded funds, carry fees in order to cover the costs of fund management.
The Bottom Line
If you're just starting out as an investor, it's possible to invest in stocks with a relatively small amount of money. You'll have to do your homework to determine your investment goals, your risk tolerance, and the costs associated with investing in stocks and mutual funds. You should also investigate various brokers to clarify the particular requirements of each and which may best fit your needs.
Once you do, you’ll be well positioned to take advantage of the substantial potential that stocks have to reward you financially throughout the years.
Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price moves can be a lucrative game if it is played correctly. Yet, it can be dangerous for beginners and anyone else who doesn't adhere to a well-thought-out strategy.
Not all brokers are suited for the high volume of trades day trading generates. On the other hand, some fit perfectly with day traders. Check out our list of the best brokers for day trading for those that accommodate individuals who would like to day trade.
The online brokers on our list, Interactive Brokers and Webull, have professional or advanced versions of their platforms that feature real-time streaming quotes, advanced charting tools, and the ability to enter and modify complex orders in quick succession.
Below, we'll take a look at ten day trading strategies for beginners. Then, we'll consider when to buy and sell, basic charts and patterns, and how to limit losses.
Day trading is only profitable in the long run when traders take it seriously and do their research.
Day traders must be diligent, focused, objective, and unemotional in their work.
Interactive Brokers and Webull are two recommended online brokers for day traders.
Day traders often look at liquidity, volatility, and volume when deciding what stocks to buy.
Some tools that day traders use to pinpoint buying points include candlestick chart patterns, trendlines and triangles, and volume.
Fundamental Analysis TrainingIn addition to knowledge of day trading procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This can include the Federal Reserve System's interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you'd like to trade. Keep yourself informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
Assess and commit to the amount of capital you're willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000).
Earmark a surplus amount of funds you can trade with and are prepared to lose.
Day trading requires your time and attention. In fact, you'll need to give up most of your day. Don’t consider it if you have limited time to spare.
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon shares are trading at $3,400, many brokers will now let you purchase a fractional share for an amount that can be as low as $25, or less than 1% of a full Amazon share.
You're probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these.
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, which contributes to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, though, it may be better to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile. Then movement begins to pick up again toward the closing bell. Though the rush hours offer opportunities, it’s safer for beginners to avoid them at first.
Decide what type of orders you'll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available at the time, with no price guarantee. It's useful when you just want in or out of the market and don't care about getting filled at a specific price.
A limit order guarantees price but not the execution.
Limit orders can help you trade with more precision and confidence because you set the price at which your order should be executed. A limit order can cut your loss on reversals. However, if the market doesn't reach your price, your order won't be filled and you'll maintain your position.
More sophisticated and experienced day traders may employ the use of options strategies to hedge their positions as well.
ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book. The Nasdaq order book has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.
Intraday candlestick charts: Candlesticks provide a raw analysis of price action. More on these later.
Define and write down the specific conditions in which you'll enter a position. For instance, buy during uptrend isn't specific enough. Instead, try something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.
Once you have a specific set of entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.
Next, you'll need to determine how to exit your trades.
There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Some common profit target strategies are:
In many cases, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop-loss is $0.05 away from your entry price, your target should be more than $0.05 away.
Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.
Day Trading Charts and Patterns
Three common tools day traders use to help them determine opportune buying points are:
Candlestick chart patterns, including engulfing candles and dojis
Other technical analysis, including trendlines and triangles
There are many candlestick setups a day trader can look for to find an entry point. If followed properly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable ones.
A volume spike on the doji candle or the candles immediately following it, which can indicate that traders are supporting the price at this level
Prior support at this price level such as the prior low of day (LOD) or high of day (HOD)
Level 2 activity, which will show all the open orders and order sizes
If you use these three confirmation steps, you may determine whether or not the doji is signaling an actual turnaround and a potential entry point.
Chart patterns also provide profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.
It's important to define exactly how you'll limit your trade risk. A stop-loss order is designed to limit losses on a position in a security.
Technical Analysis TrainingFor long positions, a stop-loss can be placed below a recent low and for short positions, above a recent high. It can also be based on volatility.
For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.
In the case of a triangle pattern, a stop-loss order can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern.
You could also set two stop-loss orders:
Place an actual stop-loss order at a price level that suits your risk tolerance. Essentially, this level would represent the most money that you can stand to lose.
Set a mental stop-loss order at the point where your entry criteria would be violated. If the trade takes an unexpected turn, you'll immediately exit your position.
However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.
However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.
Set a Financial Loss Limit
It's smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day.
You've defined how you enter trades and where you'll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.
If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.
If your strategy works, proceed to trading in a demo account in real time. If you take profits over the course of two months or more in a simulated environment, proceed with day trading with real capital. If the strategy isn't profitable, start over.
Finally, keep in mind that if you trade on margin, you can be far more vulnerable to sharp price movements. Trading on margin means borrowing your investment funds from a brokerage firm. It requires you to add funds to your account at the end of the day if your trade goes against you. Therefore, using stop-loss orders is crucial when day trading on margin.
Now that you know some of the ins and outs of day trading, let's review some of the key techniques new day traders can use.
When you've mastered these techniques, developed your own personal trading styles, and determined what your end goals are, you can use a series of strategies to help you in your quest for profits.
Although some of these techniques were mentioned above, they are worth going into again: