Beginner’s Guide to Day Trading – From Penny Stocks to Blue Chips

We all want to be the masters of our fate. But, in the traditional 9-5 workforce, this is often impossible. You see, when you have a job, your priorities are often aligned with those of your boss. This means working late, obscene workloads, and a pay grade far lower than you’d like.

But, when you are self-employed, you are free to write your own story. You make your own schedule, set your own rate, and do as much work as you can handle.

Now, there are a million and one ways to accomplish this. But, for many money-minded individuals, day trading has a particularly strong appeal. In today’s connected world, markets are always open somewhere, and with one brilliant trade, you can make all the money you need.

However, like anything worthwhile, things aren’t as simple as they seem. Whilst you can book a significant profit by executing a single trade, you can also lose a lot.

For every successful day trader, markets send many more broke. So, before you get started, ensure you understand how trading works.


Rule #1 of Day Trading (Never Violate this Rule)


As a new trader, you’ll likely lose money at first. Even if you have an intuitive grasp of stocks, your lack of experience will eventually cause you to make a rookie mistake.

Knowing this, you mustn’t trade with money you CANNOT afford to lose. After all, it’s difficult to perform optimally when you’re hungry, or when you don’t have a roof over your head.

As such, separate your trading money from life money when you start trading for real. Life money is for groceries, utilities, paying the rent, and other essentials. Trading money is for investing, regardless of your risk profile.

 Keep these sums separate, and you’ll never truly lose your shirt.


How is Day Trading Different Than Other Forms of Trading?


Some folks use the terms “day trading” and “investing” interchangeably as if they were the same term. This notion is false – day trading departs dramatically from value investing, the dominant form of trading these days.

Unlike value investors, the day trader seeks to enter and exit an investment within the same day – hence the name. In fact, they’ll often get in and out of a position within seconds. But how can anyone do this consistently and profitably?

To achieve sustainable long-term results, day traders must learn how to perform technical analysis. Technical analysis is the study of trading activity, from price movements to trading volumes.

Lastly, day traders intentionally seek out volatile markets. Without significant short-term price movements, opportunities for profit are limited. This approach runs contrary to the ethos of most value investors – buying stocks with the potential for consistent, long-term growth. But, if you want to make money fast, you need to embrace equities that move up and down like a roller coaster.


What is a Penny Stock?


If you want to make significant amounts of money day trading, you must embrace riskier assets. In global markets, no equity is more volatile than the penny stock. Officially defined by the SEC as any stock that sells for less than $5/share, most consider penny stocks to be any equity worth less than $1/share.

Most exchanges delist companies whose stocks fall below $1/share. So, to buy them, you’ll need to trade in the OTC market. To be clear, the OTC market is NOT an exchange – it is a platform where you can buy equities directly from brokers.

Unlike the exchanges, the OTC has fewer rules and regulations. Because of this, risks are higher, and as a result, stocks are much more volatile. Whilst this is exactly what day traders look for, OTC penny stocks can be quite hazardous. In addition, because OTC trading volumes are much lower than on exchanges, you may experience significant lag time whilst entering and exiting a trade.

If you conduct these transactions during a surge or plunge, delays can be quite costly. Unlike exchanges, the brokers ARE the market makers. So, during heavy volumes, securing capital to process trades can take far longer.

The moral of the story: if you’re starting out, stay on the exchanges until you’ve gained enough experience. Then, once you’ve developed a taste for greater risks (and have a bankroll to match), give the OTC market a go.


Fortify Your Portfolio with Blue Chip Stocks


Day traders thrive on short-term volatility. But, ultimately, you’ll want to build wealth. So, once you’ve made some quick cash, funnel a portion of that into some solid blue-chip stocks.

What are blue-chip stocks? In short, they are equities issued by well-established companies. For example, General Electric, Proctor & Gamble, and Apple are all stable, mature firms. Because of this, their stock prices don’t fluctuate as much as penny stocks.


By investing in these companies, you’ll take cash off the high-risk table and slide it into a safety deposit box. In there, it’ll grow, slowly but surely, into a nest egg that’ll give you a firmer financial foundation.


Paper Trade for Your First Month


Now, you may be eager to get on with it. But, we advise you to be patient – one wrong move is all it takes to torch your hard-earned money. So, start paper trading whilst you get your head around financial jargon like technical analysis and bid-ask spreads.

But, what exactly is paper trading? In essence, paper trading is “investing” with play money. Whilst it lacks the emotion (and the consequences) of making/losing real money, it’ll help you learn the mechanics of trading. This way, you’ll be able to teach yourself basic techniques and strategies in a stress-free environment.

But, once a month has passed, take off the training wheels. Paper trading is great for learning the basics, but you’ll only develop solid risk management skills when actual cash is at stake. 


It Takes Time to Become a Successful Day Trader


We all want to emulate Warren Buffet. But most fail to realise that it took him years to develop his trading acumen. And so it will be with you. There are no shortcuts to wealth with this day trader financial opportunity – only a long path of learning and self-improvement.

But, if you commit to the process, you’ll be miles ahead of those with a lottery mentality. Put in the work, and the results will eventually follow.