Trading Introduction
Trading is the process of exchanging goods and services between two different people. In this particular case, the exchange takes place amongst the traders, exchanging stocks of different companies. Stock trading takes place in the stock market, commonly known as 'stock exchanges. In Australia, it is called the Australian Securities Exchange (ASX).
As of 2020, the Australian stock market has grown to become the 13th largest share market in the world, with a domestic equity market of circa $2.47 trillion, as per the World Bank report earlier.
What is day trading?
In general day trade involves buying and selling stocks in a same day. The frequency of trading is higher in this case. A trader involved in such a trade needs to close his or her transaction within the same day. Day trading requires proficiency in market matters, a thorough understanding of market volatility, and the accuracy of market predictions regarding ups and downs in stock values. Therefore, it is mostly performed by experienced traders.
Why is day trading controversial?
Day trading involves the buying and selling of financial instruments within the same trading day, often taking advantage of small price movements. This high-frequency trading strategy in general is very risky and might lead to financial losses. Day trading can be addictive due to its potential for quick profits. Traders normally involve emotional attachment in their trades, leading to impulsive decision-making and irrational behavior. This emotional stress can adversely impact mental health and financial stability. However, there are proponents who strongly believe that with a proper risk-reward ratio, proper knowledge, and disciplined trading strategies; it can be a profitable venture.
Day trading strategies for beginners in Australia
For newly-enrolled participants in the Australian stock market who are interested in day trading, it is highly important to first educate themselves before starting day trading, understanding the financial markets and their principles, and performing technical analysis. There are several knowledge bases for developing self-skills in technical and fundamental studies. Initial days for someone to self-assess paper trading help develop confidence without risking real money. Traders first need to develop a proper strategy that outlines their goals, risk tolerance, and preferred trading style. Therefore, it is necessary for a trader to follow a certain rule to avoid making any impulsive decisions based on emotions. It is often recommended for beginners to concentrate on specific companies that have been thoroughly researched and understood well, which allows deeper analysis and more informed trading decisions. A combination of fundamental and technical analysis may increase the accuracy percentage. Proper risk management techniques, such as using pre-decisive stop losses, would reduce the risk of incurring potential losses. Overall, to conclude, day trading involves serious risks and requires excellent proficiency to manage it on a daily basis.
Types of trading
In Australia traders practice share trading in different ways and the reason why there are different types of trading styles.
Day trading: When buying and selling stocks take place within the same day, the frequency of transactions is higher. A trader involved in such a trade needs to close his or her transaction within the same day. Day trading requires proficiency in market matters, a thorough understanding of market volatility, and the accuracy of market predictions regarding ups and downs in stock values.
Scalping is also known as micro-trading. Scalping and day trading are the same category that falls under intraday trading. Scalping involves making a small profit that’s said to be 'sparrows bite’ with repeatedly, where the frequency of loading and offloading the position is mostly random. However, every transaction will not result in profits, and sometimes gross losses might exceed the gains.
Swing: Trading: This type of stock market trading is used to capitalize on short-term stock trends and patterns. Swing trading is generally used to earn capital gains from stock within one to seven days. Traders in general practice analyze technically to gauge the movement patterns.
Momentum: Trading: In the following style, traders exploit a stock’s momentum, which is a substantial value movement of the stock, either upwards or downwards. A trader tends to capitalize on such momentum by recognizing shares that are either breaking out or expected to break out soon.
Let’s make an assumption:
A trader buys 7000 shares of XYZ Limited at $50 per share on September 1, 2023. When the price goes up to $60, the trader plans to sell 3000 shares at a share price of $60. Later, when the price reaches $65, the trader sells the remaining holding quantity of 4000 shares at a share price of $65.
Therefore, the overall profit from the transaction involves a gain of
$((3000*60) + (4000*65))-(7000*50) =90000.
Position trading: Traders hold the shares for months, with the goal of capitalizing on the long-term potential of the stocks rather than short-term price movements.
Frequently Asked Questions (F.A.Q)
What strategy is best for day trading?
It’s absolutely true that trading can be highly risky, and strategies should be tailored to individual risk tolerance, trading experience, and market conditions. It is advisable that before one’s involved in trading, do thorough research and practice strategies that are suitable based on individual risk appetite.
What is the 1% rule for day trading?
It is basically a risk management rule that helps to protect trading capital from incurring huge losses. It is the practice of risking no more than 1% of trading capital on a single day. This rule is based on the concept of preserving capital and managing risk in order to protect against potential capital losses and achieve long-term profitability.
What do I need to start day trading?
Traders first of all need to have knowledge regarding the market trend and stock selection strategies for the position to be initiated. Analyze stocks that have momentum. It is more important to realize when to lock in profit because volatility may disrupt the potential gain.
Can I make money trading?
First of all, trading is a very risky venture due to market volatility and stock fluctuations. Traders need to be very careful and should have tremendous potential for having expertise in 360 degrees when actively trading.
What are the costs associated with day trading?
The costs associated with day trading in Australia can vary depending on various factors, such as brokerage and the financial instrument that is commonly preferred. Some common costs are, for example, brokerage fees, account maintenance fees, exchange fees, taxes, etc.
Veye Pty Ltd(ABN 58 623 120 865), holds (AFSL No. 523157 ). All information provided by Veye Pty Ltd through its website, reports, and newsletters is general financial product advice only and should not be considered a personal recommendation to buy or sell any asset or security. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation, or needs. You should look at the Product Disclosure Statement or other offer document associated with the security or product before making a decision on acquiring the security or product. You can refer to our Terms & Conditions and Financial Services Guide for more information. Any recommendation contained herein may not be suitable for all investors as it does not take into account your personal financial needs or investment objectives. Although Veye takes the utmost care to ensure accuracy of the content and that the information is gathered and processed from reliable resources, we strongly recommend that you seek professional advice from your financial advisor or stockbroker before making any investment decision based on any of our recommendations. All the information we share represents our views on the date of publishing as stocks are subject to real time changes and therefore may change without notice. Please remember that investments can go up and down and past performance is not necessarily indicative of future returns. We request our readers not to interpret our reports as direct recommendations. To the extent permitted by law, Veye Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss, or data corruption) (as mentioned on the website www.veye.com.au), and confirms that the employees and/or associates of Veye Pty Ltd do not hold positions in any of the financial products covered on the website on the date of publishing this report. Veye Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services.