Basic Day Trading is a skill you need to learn if you want to succeed in the stock market. You will need to know about stocks that have a strong uptrend, how to use quantifiable specifications in your trades, and how to follow a trading plan. In addition, you will need to understand the tax situation for day traders, and how to use Intraday trading rules.
If you are thinking of starting intraday trading, it is important to know some basic intraday trading rules. These rules can help you avoid losses and get more profits.
The first rule is that you should always use a stop loss order. Stop loss orders are placed to prevent large losses on a position. Once the price hits a certain level, a stop loss is triggered and the position is closed. This helps you cut down on losses when predictions go south.
Another rule is that you should only risk 2% of your trading capital in a single transaction. Day trading is a high risk endeavor, but it can be extremely profitable. Day traders often enter and exit positions all day long. They may be tempted to let their rules slip. That is a big mistake! To ensure success, you should stick to your rules and stay disciplined.
It is also important to keep a journal of your daily profits and losses. By doing this,
you will be able to analyze your strategies and make improvements. You should also learn about the fundamentals of technical analysis. A good knowledge of technical analysis will help you to predict price movements. However, it is important to remember that these tools are not foolproof.
Another basic intraday trading rule is to avoid being emotional. Being emotionally attached to your trades is a big mistake. Aside from following the rules, you should also keep a stop loss. This is used to protect your capital. When the price exceeds your limit, the stop loss triggers and your position is closed.
Having a target for every trade is also very important. Having targets gives you a sense of accountability and will help you stay focused.
There are many different types of trading strategies. Some of them are event driven and others focus on the volatility of the market. You should choose your strategies based on your style of trading and risk-return ratio.
In addition, it is important to follow the market's trend. A lot of the time, the market moves in a wave pattern. But that doesn't mean that you should be afraid to enter a trade.
Stocks with a strong uptrend
Finding stocks with a strong uptrend is a key element of basic day trading. Uptrends are characterized by a series of higher highs and lower lows. They are more difficult to find during bear markets, but they are much easier during bull markets. One of the first ways to identify a stock with a strong uptrend is to look at the MACD indicator. This can give you an idea of whether or not the uptrend is about to resume. If the MACD is showing a weaker price move, the uptrend may be short lived.
Another indicator is the Effective Volume. It shows how many shares are being sold by large players. A positive divergence between the Effective Volume and the stock's moving average can indicate early buying.
A common sign that a stock has a strong uptrend is when the MACD indicator is showing a sharp upturn. As the chart below shows, this is an excellent indicator of an uptrend that is about to resume.
A bull flag can also signal an uptrend. In this case, the stock retraces sideways while the momentum indicator continues to strengthen. The bull flag is a technical continuation pattern, and it can be observed in stocks with a strong uptrend. A similar pattern is a descending triangle. In this case, a horizontal line is drawn along the two support points. When the lines converge, a breakout takes place. Another indicator is the 20-Day Moving Average.
This can be helpful for swing traders. If the stock is close to the 20-day EMA, it has good fundamentals. Stocks that have a strong uptrend have a greater potential for profit. For example, TMobile (NYSE:TMUS) has been leading the telecom sector for several months. However, its fiscal year is halfway over. Recently, the stock has been trading particularly well due to a bearish move from Verizon.
When a stock has a strong uptrend, it is usually easier to find long and short opportunities. It is important to monitor the selected stocks closely, as price reversals can occur.
There are some other indicators to consider, too. For example, if the 20-Day Moving Average is within 25% of the previous day's high, that can be an indication of an uptrend.
Tax situation for day traders
One of the more challenging aspects of day trading is calculating the tax situation. Traders may have to pay a portion of their earnings to the IRS, depending on their account size and the nature of their activities. It's important to know how to properly report your trading income and expenses to avoid a tax audit.
Day traders who sell securities have to pay capital gains taxes on the sales. These profits are taxable at ordinary income rates, but can be offset by capital losses. Investors who receive dividends from investments must pay tax on the distribution in the year they received it. However, investors who hold investments for a year or more typically enjoy a favorable long-term capital gains tax rate.
Traders who elect mark-to-market accounting for their securities will avoid the wash sale rule. They will also be able to deduct their losses against their trading income. If you have a large investment account, it's a good idea to speak with a tax professional to help you determine the best way to calculate your tax obligations. You can also make estimated payments to avoid penalties and interest charges.
Some day traders are relying on margin accounts to buy and sell securities. While this can reduce their trading expenses, it can increase the amount of taxes they owe. For example, if you have a portfolio of stocks and you sell a stock at $30, you will have a capital loss of $20 per share.
Investors who rely on brokerage accounts to buy and sell stocks have two options. They can either use mark-to-market rules, which require paper transactions, or they can treat each asset as if it were sold at fair market value on the last business day of the tax year.
When you're filing your tax return, you will need to reconcile your liabilities with the IRS. In addition, you should set aside funds to cover your tax liability. This will prevent you from spending your gains on unplanned expenses.
The IRS has a sophisticated system to determine income. Whether you're a seasoned investor or just beginning your trading career, you need to understand how to correctly report your trading activity.