Day Trading is a serious business. When anyone wants to flourish in stock day trading career, he has to learn about day trading basics, strategies, tools, guidelines, buying and selling time, trend trading, price sensitive dates, trading mistakes, price manipulation, surviving rule and disadvantages of day trading.
This is a large article. Financial Ask has included all necessary information about day trading. If you have shortage of time, you should save the page for future reading.
Table Of Contents
1. Day Trading Basics
2. Day trading Strategies
3. Day Trading Tools
4. Wonderful day trading guidelines
5. Day Trading Buying and Selling Time
6. Day Trading in Downtrend Market
7. Price Sensitive Dates
8. Day Trading Mistakes
9. Benefits from Price Manipulation
10. Day Traders’ surviving rule
11. Disadvantages of Day Trading
1. Day Trading Basics
Why does day trading risky?
Day trading is highly risky because it is trend reverse trading style. When a trade goes against, a trader had to count huge loss. Moreover, day traders prefer to close trade in intraday.
Hence, they have to follow stop loss rule if they make any trading mistakes to save trading capital. As a day trader can’t 100% predict the trend, he makes much loss when a trade goes down.
How much capital do I need for day trading?
Generally, day trading needs large capital. As they want to earn enough capital gain in a single trade to cover the loss of previous losing trades, they have big trading account. If you are a beginner, you can start day trading with small capital. However, you can start with 10000 dollars!
How much experience do I need to succeed in day trading?
You need enough trading knowledge, skill and experience in order to succeed in day trading. Day trading is a game for intelligent traders. Successful day traders always try to gather experience. Moreover, they persistently learn new strategies and apply learnt strategies in trading.
Therefore, you need at least one year’s active involvement in stock market to gather sufficient experience. Later, you can involve in day trading. Initially, you should start with stock market basics.
Is day trading allowed to all countries?
Day trading doesn’t allow to all countries. Before opening beneficiary ownership (BO) account, you should check whether your trading exchange allows day trading opportunity.
Many stock exchanges don’t allow day trading in order to control the stock market mechanism. As day trading has many demerits, some countries don’t permit day trading.
What is the day trading success rate?
Day trading success rate is comparatively small. No one can exactly say the success rate. But day trading success rate may not be greater 10% to 5%. You need to keep your position within 5% success rate!
Why should I become day trader?
Day trading is a serious business. If you master on day trading, you can trade for a living. You can get out of rate race. You will have enough time to roaming. Moreover, you will become a become wealthy man.
What is the best book on day trading?
A number of books you can get on day trading. “How to Day trade for a living” is a good book on day trading. You should read as many books as possible to flourish your skill.
What are the best technical tool for day trading?
The best technical tool for day trading is candlestick chart. Moreover, you can follow the minutes chart. However, candlestick chart is the perfect tool for day trading and swing trading.
Why do many day traders lose all trading capital?
Day trading success rate is lower than failure rate. If a trader doesn’t follow stop loss rule strictly, he has to lose money. Gradually, an unexperienced day trader will kill maximum trading capital.
Thus, a day trader may lose all trading capital in case if he fails to take right decision at right time.
What is the best strategy for day trading?
Trade the time is the best day trading strategy. When a day trader makes any trading mistake, he should correct this mistake buy following stop loss rule.
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2. Day trading Strategies
Day trading indicates buying and selling of financial instruments in a trading day. Stock day trading is an act of buying and selling of stocks in intraday. Day traders buy stock at downtrend reversal and sell stock at uptrend reversal point. They make profit when trades go to upward and make lose when trades go to down. Clearly, day trading is an active trend reverse trading to win the trades.
Some Day Trading Strategies
Trading skill
First of all, you have to develop trading skill. Knowledge is power. You can develop trading skill by reading books and following blogs like “The Financial Ask”. You can start your journey by designing a list of topics. Then, you need to master on these topics.
You can divide your agendum into three parts–basic information about stock market, technical indicators and fundamental indicators. In order to beat the market, you should always learn new strategies and try to implement these new strategies.
Study the market
The more you study the market, the more you can learn about the companies and market behavior. Day traders try to understand the trend of a stock. Hence, they are the top opportunists. To get the best opportunity, a day trader has to study the market each day.
You should find out free time to study the market. Many traders study the market after trading hours. As day traders have to select some stocks for next day, they like to study the market after closing the market.
Trade the rumors
Rumors are the best friend for day traders. But a day trader needs to careful about rumors. If he fails to trade rumors, he has to count lose. I read a story about trading rumors from a famous day trading book. The summary of the story is cited here.
This was a Canadian gold mining company. A rumor was circulated that this company got a gold mine in South Africa. After publishing this rumor, the company’s 15 dollars share raised to 300 dollars or more. Sorry to say, I can’t remember the exact figures.
But its stock price was 20 to 25 times higher than market value. Later, the company announced that they didn’t get any gold mine. Getting gold mine is a fake news.
What about the traders who bought this company’s stocks at 300 dollars or more? Within a few hours, this company’s stock price reached at the beginning price. So, be careful about rumor.
You should not trade rumors at the last moment. If you can, you should trade rumors at the beginning. Otherwise, you will get husk. Grain will be taken by early rumors traders.
Collecting News
Generally, a trader collects news at two times: before opening the market and after closing the market. He wants to find out the trending news. News may be fake or real. That’s not a big deal. You should understand the trend of other traders. A news has two aspects: positive and negative.
Buy this stock if it has positive news and short sell this stock if it has negative news. So, trade a news in your favor. Be cautious about the news of record date and dividend declaration date.
Understanding trend
Trend is the golden opportunity for day traders. Intelligent traders have enough knowledge how to trade trend reversal. A trend brings two opportunities: one is buying at the beginning of uptrend another is short sell at the outset of downtrend. You need to understand the actual movement of a trend.
Selecting Right Stock
Right stock at right time is the perfect batting for a big six. Mismatch a suitable ball can bold a striker. Similarly, a wrong stock can reward you a big loss. Timing is another killer factor. Wrong timing means a diamond stock can bring a coal mine. So, try to match timing and right stock to win a trade.
Stick to Plan
Stick to plan is easy to say but difficult to do. Trading has both risk and reward. In many cases, traders fail to execute plan. They may have a plan for stop loss. But can’t follow this rule because of situation. In each and every situation, you have to execute your plan. Moreover, try to stick to the plan by any cost. Don’t let you plan swim in the sea when it needs to dry up in the sun.
Watch the minutes chart
Minutes chart provides information about the price reaction of a stock in every minute. This chart is very useful for day traders. They want to know each minute price movement to understand the trend. Since you are going to become a prudential day trader, you need to find out the best platform for minutes chart. Watch the price movement and put buy or sale order.
Candlestick Chart
Candlestick chart is the best technical indicator for day trading and swing trading. You can get bear market or bull market candles to watch the price movement. This chart is easy to read and easy to apply. It has two eyes catching colors. Green color candles indicate the bull market and red color candles indicate the bear market for a stock. Take buy or sell decision by considering bear or bull candles.
Diversify Risk
Don’t Put all balance in a single stock. You shouldn’t risk more than 5% trading capital in a single stock. Try to trade 2 to 3 stocks at a time. Suppose, your capital is 30000 dollars. You should put 25000 dollars in 3 companies and keep 5000 dollars for emergency fund.
If you make loss in 2 trades, you can cover your loss by third stock. Keep in mind that you must preserve your trading capital for future trade. So, diversify risk by selecting more than one stock and buying more than one sector.
Control Greed and Emotion
Human being has greed and emotion. More surprisingly, greed has no limit. Hence, a day trader may not follow the golden rule of stop loss at the outset of trading mistakes.
They wait for better time without accepting small loss. At last, they have to lose more for this greed. On the other hand, there is no place for emotion in day trading. Utilize your brain instead of emotion.
Perfect Time to Entry
When you need to entry for a trade is a crucial point for day trading. Right timing varies from one exchange to another exchange. You need to find out entry point.
For example: my trading exchange has a suitable time for entry. At the last moment or middle of the trading hours, many stock’s prices start to fall. I wait for this time to put buy order.
I studied the market for a long time to find out the perfect buying time. You should study the market movement to get the perfect entry time.
Proper Time to Hold
First task is buying a right stock at right time. Then, they you should decide to hold or sell out. You should hold, when the share price is in uptrend. Never sell an uptrend stock until you confirm the downtrend.
You need to know how to trade trend reversal so that you can trade in both uptrend and downtrend market. But, sell out as soon as possible when price starts to down.
Right Time to Exit
I think every stock exchange has right time to exit like perfect time to entry. For example, I want to sell stocks at the beginning of trading hours. I have learnt from my stock exchange that first few hours have uptrend market.
Hence, I have divided the trading hours into three parts. First 2 hours are suitable for exit trade, middle 2 hours for waiting to take a decision and last 2 days for entry to buy.
Remember that day traders can sell stock within a moment and can buy stock within a few seconds. So, every minute brings equal chance of buying or selling.
If you trade like my trading exchange, you can short sell in last two hours and can buy back at the last moment. Apply buying or selling order considering perfect time. Be careful about short sell. Follow stock selling styles.
Take Profit
Try to take profit when you have a chance. Day trading is highly risky. As day traders are trend traders, they have equal chance of loss and profit. So, if you have a chance to take profit, never late. Otherwise, your profit may turn into loss within a moment.
Follow Stop Loss Rule
In my writing, I said many times about the golden rule of stock trading: stop loss rule. Never hesitate to apply stop loss at the outset of downtrend. Swing traders may wait for few weeks to reverse the downtrend. But day traders always like to close the trade in intraday.
So, follow stop loss to correct your trading mistakes. If you can safeguard your capital, you can earn money in future. Losing maximum capital means you are going to shut down trading career.
Cautious about Margin Loan
Margin loan is dangerous policy for traders. If you are a beginner, margin loan is more dangerous. Margin loan has two serious problems. First problem: when share price starts to fall, your broker will force you to sell at loss.
You have no choice to wait or convert day trading into swing trading. Second problem: margin loan can kill all of your business capital if you make any serious mistake. Hence, it is better to trade with your own capital.
Don’t Short Sale
Don’t short sell until you have enough confident on your decision. Perhaps, your decision may wrong. You have to count loss. Since you have to buy back the exact stock, you have to fall in puzzle when stock price reaches high. A short seller has to buy back at high price. Hence, think twice before sell short.
Stay Calm
Stay calm when you make profit. Even stay calm when you make lose. Appropriate thinking helps you to take good decision. A day trader takes decision in a few minutes. So, he needs to stay calm about any decision.
Wait for Next Opportunity
If you make mistakes after following above 19 strategies, you should wait for next opportunity. Market has unlimited opportunities. Missing one chance doesn’t mean you have no chance to win. A successful day trader never wins all trades. They win more than losing amount.
That means they are successful. So, wait for your happy moment. Firstly, you need to learn about day trading. Secondly, you should understand day trading strategies. Thirdly, you should apply strategies. Finally, if you fail, wait for next chance.
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3. Day Trading Tools
Technical analysis tools are the main indicators for selecting stocks for day trading and swing trading. As technical indicators help to get the instant information about price movement, almost all stock day traders always try to follow these below technical tools.
Candlestick Chart for day trading
Candlestick chart is a powerful technical analysis tool for traders to take immediate decision. This is one of the best technical analysis tools for traders.
Candlestick chart’s patterns are easy to read and easy to apply. To know right time to buy or sell stock, you just need to know the application of candlestick chart.
Understanding Candlestick Chart
Firstly, you have to understand bull candles and bear candles. Red color candles indicate as bear candles and green color candles as bull candles.
Bear Candles
When open price starts to decrease, bear candle starts to create. That means, price is downtrend. Bear market also indicates downtrend market. In many charting platforms, bear market candles are shown as red color to highlight.
Bull candles
When open price starts to increase, bull candle starts to develop. Bull candle indicates increasing price. Candles are formed by using today’s open price, today’s closing price and today’s highest price or today’s lowest price.
Suppose, opening price of R.M company is $ 60. Then price is rising to $62. Closing price is $65.That indicates bull market. At the end of the trading day, if price remains at $65, it creates a bull candle with opening price at $60, closing price at $65 and tail height at $65.
The body of this candle remains between $60 to $62. This candle’s solid color is green. On the other hand, If R.M company’s opening price starts at $ 60, it has decreased toward $55 and closed at $58, it creates a bear candle. This bear candle body is formed between $60 to $58 and downward tail height is at $55.
What does body indicate?
Body of candlestick chart is formed between opening and closing price. Difference of the opening and closing price indicates height of the body. Body also indicates how much price has increased or decreased.
What does tail say?
Another factor is tail. Tail indicates highest or lowest price of trading day. Generally, stock doesn’t close at day’s highest or lowest market price. Hence, tail cannot create body. If you have understood the above discussion, you have learnt the formation of each candle.
What is stock volume?
Volume is the number of shares trade in a trading day. A bear or bull candle has formed with a number of shares. Generally, volume shows as million. What does it happen to a candle if opening and closing price remains the same?
When a candle’s opening price and closing price are same, it creates a neutral candle. This candle doesn’t have body but it may have tail. In some cases, it may not tail or even body.
How to apply candlestick chart for buying or selling decision
Candlestick chart is easy to understand and easy to apply for making buying and selling decision. Generally, day traders use charting techniques. They have to take quick decision. So, candlestick chart becomes a favorite chart for them.
1. Entry Point in candlestick chart
When candle starts to uptrend from downtrend, day traders wait to take buying position. Entry techniques vary from traders to traders. Day traders may put buying order when candle starts to green and exit before another candle starts to red.
Day traders also sell short when candle becomes green and buy when candle becomes red. On the contrary, swing trading strategies are different from day trading. Swing traders observe the stock carefully. They wait for right time.
When trend is reverse from downtrend to uptrend and if this trend is confirmed to continue, then they will entry to buy. You can wait to trade trend reversal. Moreover, you can convert trading into short term investment by confirming the trend.
2. Exit Point in candlestick chart
Exit point is the opposite of entry point. When should a stock sell? At first, you should make up your mind for the golden rule of stop loss. You should not sell an uptrend stock. On the contrary, you should not increase loss.
Right time to sell a stock when its uptrend price reverse or cross your stop loss level. When a stock price is soaring up, you should wait until this stock turns opposite direction. When opposite direction starts, you should sell.
But, before putting selling order, make sure that it is the right time to sell. If a stock changes its uptrend direction with a huge volume, you should exit the trade. When your trade goes wrong direction, sell as early as possible. Never make mistakes to hold a downtrend stock.
Moreover, record date effect can negatively impact the market. In some cases, dividend declaration effect is also responsible for stock price falling.
3. Neutral Point in candlestick chart
Neutral point happens when candlestick chart shows candles without body. In this point, buyers and sellers remain undecided position. In the bear candle, the stock is in sellers’ control. Buyers have to increase price to buy the stock. As demand increases, stock price goes up trend.
On the other hand, bear candles occur when the stock is in buyers’ control. As supply increases, buyers decrease price to buy stock. This stock price starts to move downward. But in neutral condition, neither buyers nor sellers can control the market.
In this situation, you should wait to watch the next movement. Because, stock price may move up or down at any time. Just confirm the market trend and take your buying or selling decision.
Candlestick chart is a powerful technical indicator for traders to take immediate decision. Before applying this important indicator, you should learn about the best technical indicator-RSI.
2. Minutes Chart
Minute charts show the price movement for one minute to any extended minutes. It represents bar to indicate price movement. This chart somehow similar to candlestick chart.
But many day traders prefer candlestick chart to minutes chart. As the application is somehow similar, you can follow one of them or both in together. So, I suggest that you follow both chart or candlestick chart alone.
3. RSI (Relative Strength Index) for day trading
RSI is another one of the best technical analysis tools. Its values remain between zero to hundred. But it has three important parts.
1. Below 30 :- Indicates over-sold
2. Above 70 :- Indicates over-bought and
3. Between 30 to 70 :- Indicates neutral
RSI’s calculation formula is difficult to memorize and hard to calculate. Fortunately, you don’t need to learn the formula at all. Because all the trading platforms do this calculation by their software. You just need to know the application of the calculation. If you have less ideas about stock market, you should learn basics for stock market.
RSI Application
1. RSI Values Below 30 means oversold
It is the golden sign to buy a stock when its RSI less than 30. As sell pressure is excessive for a stock, this stock price has decreased price or downtrend price.
But, before putting buying order, you need to think the reverse trend. By nature, a stock price falls down from 52 week high if its RSI below 30. This is demand and supply mechanism. If you know day trading strategies, you can trade trend reversal.
As demand for this stock increased, supply also increased. At one point, supply exceeds the demand and price begins to fall. When supply starts to increase for any stock, this stock price falls undoubtedly. Hence, you should wait for a perfect time.
When downtrend begins to uptrend with large volume, you should buy as early as possible. RSI 20 Indicates oversold and price begins to fall. You should wait to buy when it starts to begin uptrend again. This stock going to provide buy signal when it starts to reverse trend.
RSI Indicator Above 30 indicates overbought
You should not buy any stock when RSI cross over 70 unless any other suitable factors hint to buy. Other factors mean any good news, economic condition, uptrend market, healthy financial condition of the company.
Generally, stock price starts to reverse if it reaches near 100. You may day trade this stock but for short term investing, you need to avoid this stock.
Wait for some time, this stock price will downtrend in near future and you can decide to buy when it starts to uptrend again. High RSI indicates high Value at Risk (VaR).
RSI Indicator Between 30 to 70 is neutral
Uptrend or downtrend stock has huge opportunity for day trading and swing trading to make profit if you can identify trend at the very beginning. On the other hand, a neutral stock price nature is predictable. Today’s price indicates next day’s price or previous day’s price.
This stock price Increases or decreases in a predictable manner. No opportunity to halt- price increases much in a single day to give the chance of making huge profit. But this prediction has exception. Everything depends on trader’s psychology.
A company, which has minus 700 P/E ratio but is sold at 400.
Although this company has no positive earning rather the company has been making gradually huge loss year after year, traders are buying its stock at high rate.
This company’s price should be minus 750. What is the matter? Trader psychology. Gamblers’ interaction makes price higher high. They are making realized gain. At one stage, general investors start to buy this stock at the top price and cannot sell at the half price.
In this situation, you must keep distance from this stock unless you can identify this uptrend movement at the beginning. You should apply some other indicators to take any action.
MFI (Money Flow Index) for day trading
Money flow index technical analysis tool is similar to RSI indicator. MFI considers value. Moreover, this indicator indicates overbought or oversold condition. MFI below 20 indicates oversold and above 80 indicates overbought.
MFL’s value between 20 to 80 indicates neutral position for a specific stock. To find out the selling and buying time, you need to learn both RSI and MFL indicators.
SMA (Simple Moving Average) for day trading
Simple moving average may consist of any number of days. Generally, SMA may show 20 days, 50 days or 200 days. Just you can learn the average price for a period of time.
Generally, the nearest SMA shows the more recent time average price. Suppose, 20 day’s simple moving average for a stock is 60 dollars.
50 day’s simple moving average is 55 dollars. 200 day’s simple moving average is 50 dollars. Here, 20 day’s moving average is higher than 50 day’s average price.
That means, this stock price is uptrend. You may put buy order if the uptrend is going forward. So, you should buy near the lowest price of 20 days’ or 50 day’s simple moving average
EMA (Exponential Moving Average)
Exponential moving average is similar to other types of moving average. But, EMA technical analysis tool is calculated by using more recent data.
That means, you can put more importance on EMA than SMA. Although SMA, EMA and WMA are the similar indicators, you can put extra weight on EMA and WMA.
WMA (Weighted Moving Average)
Weighted moving average also weights for recent data. Present data are more valuable than past data. You can follow WMA price to understand the difference between the present price and weighted average price.
Suppose 50 day’s weighted moving average for a stock is 70 dollars. But market price of this stock is 65 dollars. If you read the candlestick chart and learn that price starts to uptrend, you should buy near 65 dollars.
Beta technical analysis
Beta coefficient indicates systematic risk of an individual stock in comparison to unsystematic risk of the entire stock market. This technical analysis tool is used to know the volatility of a stock compared to market movement.
A beta value is 1 for a stock indicates its price is highly correlated with market movement. Its value is less than 1 means this stock is less correlated with market movement.
Its value greater than 1 means this stock is highly volatile than market movement. As beta indicates price volatility for a stock, more than 1 beta value is better for traders. They can easily sell this stock.
MACD (Moving Average Convergence Divergence)
Moving average convergence divergence is a trend following momentum technical analysis tool that shows the relationship between two moving averages of a stock price.
Traders may buy a stock at bearish when MACD crosses above its signal line and sell at bull when MACD crosses below the signal line. Generally, traders can follow MACD signal line to take buying or selling decision.
To master on trading strategies, you have to master on technical analysis tools. So, don’t waste your time and hurry up to learn above mentioned technical analysis tools.
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4. Wonderful day trading guidelines
Trend Trade is a wonderful day trading strategy. Trend is a movement of a stock. This movement may create a positive signal or a negative signal for day traders. Moreover, trend can move a stock’s price in upward or downward. Trend also indicates bear market or bull market.
Stock trend reversal indicates changing direction of a specific stock or the whole market. Generally, trend trading is suitable strategy for day traders. Successful day traders follow the trend to take buying or selling decision.
Types of trends
You can get at least three types of trends in stock: uptrend or bull trend, down trend or bear trend and neutral trend or undecided trend.
Bear trend indicates that broad index is negative– whole market is in downtrend or particular stock’s price is negative. Index may positive or negative. But, if a stock price is negative, we call this situation is bear trend.
On the other hand, bull trend for a stock is the opposite of bear trend for a stock. Both bear trend and bull trend are common scenery in stock market.
Let’s see an imaginary example of stock trend trading:
Bata shoes company’s share opening price is 30 dollars. Later, Bata shoes company’s share price reaches at 35 dollars. That indicates that Bata shoes company’s share price is in uptrend. On the contrary, If Bata shoes company’s share price proceeds less than 30 dollars, we say that Bata shoes company’s share price is in downtrend.
How to trade trend in uptrend reversal?
Uptrend is suitable both for holding stock or selling stock. However, day traders prefer to sell in uptrend reversal. That means uptrend reversal is selling signal. Remember that a stock can temporally move in downtrend. Later, it can move uptrend again.
Right moment to sell in uptrend reversal. When a stock moves downtrend by changing its movement from uptrend and this trend is continually rally forward, you should sell this stock as soon as possible. Before putting selling order, you must need to confirm the downtrend rally.
Selling decision in uptrend reversal
1. At first you need to confirm the downtrend.
2. Don’t put sell order for all holding at a time.
3. Put selling order by segmenting your holding in different quantities with different prices.
4. Try to catch best-selling opportunity.
5. While you can make sure that your holding reaches the peak point, you should sell before your holding changes opposite direction.
6. Control your emotion and greed to take right decision.
7. Don’t regret after selling. In many cases, stock price may rise after your selling. Control your greed.
8. Wait for right time to put sell order.
9. Be patient when stock price is continually increasing.
10. Analyze technical and fundamental indicators to take selling decision.
Premature sell may kill your potential profit. But, you have no control over market. So, be patient if you take wrong selling decision. Can’t you make up your mind to take selling decision? You can follow selling styles to take selling decision.
Trend trade in downtrend
Before taking any action, at first, you should understand downtrend. Many traders use down trend to buy stock. Hence, downtrend indicates buying signal. It is right time to buy shares.
Experienced traders can easily find out final moment to buy. On the other hand, newbie traders cannot take right decision. As a newbie trader or little experienced day trader, you should follow some factors to take buying decision.
Buying decision in trend reversal
1. Observe the trend carefully.
2. Find out the reason behind downtrend.
3. Try to understand price correction or price crash.
4. Analyze Relative Strength Index( RSI) and Money Flow Index (MFI). Moreover, Price to earnings ratio (P/E ratio) is another important indicator. If these three indicators’ value are high, wait for some days before putting buy order.
5. RSI below 30 is suitable for buying.
6. MFI between 30 to 40 is suitable for buying.
7. P/E ratio should below 30 for fundamental stock to take buying decision.
8. Buy when downtrend starts to uptrend.
9. Put buying order at the beginning when the stock starts to move upward with large volume.
10. You may put buying order if a stock has continually lost price for some days and it begins to reverse trend.
If you cannot win in buying, you may not win in selling. Perfect time and perfect stock are the main factors to win. But , you should not regret for wrong buying decision. Follow stop loss rule to cut short loss.
Neutral trend?
Neutral trend creates when neither buyers nor sellers can control the market. This trend is compared with undecided trend. Day traders wait to take trade if a stock reach in neutral position.
Neutral trend reversal?
Neutral trend has equal chance both for buyers and sellers. You need to take decision when neutral trend reverse. Put your decision in action when reverse go with you. Like many other traders, you should wait to see the next movement.
If neutral trend proceeds downtrend, you just follow downtrend buying strategies that I described earlier section. On the contrary, if the trend proceeds toward uptrend, you should follow uptrend reversal strategies.
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5. Day Trading Buying and Selling Time
Buying or selling stock depends on right time. Time is the big player in stock business game. You may buy a good stock. But you may not earn nothing from it if you bought the good stock in the bad time. Perfect match of good time and good stock can bring a suitable profit.
“When others are greedy, you should fear and when others are in fear, you should greedy.”
By Warren Buffett
A day trader always looks for better opportunity. When all are busy to buy an uptrend stock, you should sell then. When all are busy to sell, market will go down. Then you should buy at cheap price. Although this is a simple strategy, we may not easily follow the strategy.
There is a reason behind this. We like to follow others. When an uptrend stock is going higher, many day traders are fear of losing a good trade.
So, they are hurry to buy. In next few moments, some traders are busy to sell because of fear. Price again touches the previous point. What is the good strategy to buy day trading stock? In a sentence, you should buy or sell stock at reverse point.
Stock Buying Strategy
Suppose, a stock price has started downtrend movement from $55 and it is going to touch at $38 before changing its direction. Price started to fall from $55 to $48 within few hours. Now the question is when should I buy this stock? You should buy when its downtrend is going to uptrend. Try to buy near $48.
On the other hand, if you buy this stock earlier near at $55, you should follow stop loss rule when its price has gone near $52 so that you can protect your trading capital.
When should you sell stock?
You should buy or sell at reverse point. Suppose, a stock price begins to uptrend from $80 and it has reached at $84.
If a trader bought the stock at $80 and sell at $84, his gain percentage is 5% ((84-80)/80)*100. You should hold until it reverses after $84. Your perfect time to sell near $84. When your holding is gradually reached new high, you should hold .
Be cautious halt holding. Halted stock means no sellers to sell stock but many buyers want to buy at high price. In my experience, when a stock halt for a moment, this stock price begins to drop from the next hours. This downtrend may continue for some time. Trading mistake may turn your unrealized gain into unrealized loss.
What more?
Don’t make premature sell an uptrend stock. But cut short your loss as much as possible. However, right time of buying and selling a stock is its reverses point. When a stock price starts to uptrend, you should buy this stock at the very beginning point.
You should sell the same stock when it starts to reverse from uptrend. Stock trading volume can help you to understand when the stock goes to reverse. If a stock changes its direction with huge volume, you should make up your mind to sell or buy.
You should avoid to buy or sell neutral stock. Neutral position is unpredictable. You cannot predict its movement and may get stuck to find out buyers in some cases. Only uptrend and downtrend stock are better for day trading. Stock market always provide opportunity. If you can catch it at the right time, you can become a gainer.
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6. Day Trading in Downtrend Market
Downtrend stock market is very sensitive to take any trading decision. Day traders can easily make money in uptrend market. But, many day traders lose capital in downtrend market. In stock market, fear is stronger than greed. Hence, panic sell happens in downtrend market.
Understanding Downtrend Market
Broad market index is a major indicator to know the market movement. Think about S&P 500 index. This index consists of top 500 companies.
If these companies’ stock prices are rising, you see that total market movement is in uptrend and vice versa. Another indicator is money flow index. When money injects in a stock market, that market’s stocks price may rise because of buying pressure. If money drain out from market, stocks’ values start to downtrend.
Reasons behind downtrend
1. Overvalued shares in a specific stock market
2. Economic instability of that country
3. Money goes out from the market
4. Return on stock investment is less than other sources of investment
5. Weak regulatory body
Some technical and fundamental indicators can hint you a possible downtrend market.
What are the trading strategies in downtrend market?
Downtrend stock market is not suitable for all traders. Even intelligent and experienced traders have to lose money in downtrend market.
Therefore, if you are a newbie, you should stay aside from downtrend market. You have to learn about trade trend reversal to win in downtrend market.
Day trading strategies in downtrend market
1. At first, try to find out downtrend as early as possible. Waiting is better than making any trading mistake. On the contrary, late trend finders have to lose capital in downtrend market.
2. Secondly, get out of trade early in case you have bought overvalued stock. Even it is better to get out trade with 5% to 10% loss.
Real Example
Some days ago, my trading stock exchange started downtrend movement. Then, I thought it was correction. So, I was waiting for uptrend. Downtrend has been continued. I decided to wait for uptrend. Later, my portfolio reached at 15% loss. From then, broad market index was reducing drastically.
After that, I sold my shares at 14.5% loss. Moreover, On the 5th day, this stock was also losing price faster. If I sold holding earlier, I only had accepted 5% loss.
3. Thirdly, make quick decision to cut off your loss. Make sure that stop loss is the golden rule of stock trading. If you have reserved your capital, you will get better opportunity in future. Try to develop your own day trading strategies.
4. Fourthly, wait for market reverse trend. Uptrend or downtrend may occur for short time or long time. In this paradoxical situation, you should not take any trade until you understand the reverse trend.
5. Fifth, preserve your capital for next opportunity. When the market climbs uptrend, try to trade fundamental stock.
Although fundamental stocks are less attractive for traders, in downtrend market, traders can buy fundamental stock to observe the trend.
Later, if the uptrend is confirmed, day traders can choose trading stocks.
6. Sixth, every downtrend creates a better opportunity for all. Just you need to identify trend. Remember that market is always right. Just follow the market.
7. Be cautious about short selling. If you can understand the trend, you can sell short. Otherwise, you should take rest. After your short sell, if the trend goes upward, you have to face huge loss.
8. Preserving trading capital is the golden rule of stock trading. If you take trade in downtrend market, you must follow stop loss rule in case you make trading mistakes.
9.Finally, study the previous trend. Try to understand the previous pattern of trend. Apply past experience to take quick decision.
In downtrend market, you should preserve your capital by any cost. If you want to take any trade, think carefully. Correct your trading mistakes by following stop loss rule.
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7. Price Sensitive Dates
A price sensitive date is a date which influences stock price to go up or down. In stock market, an announcement directly impacts on stock price. Price sensitive date seriously affects the share price in day trading. So, day traders need to put extra care on price sensitive dates.
Moreover, day traders should learn these dates earlier in order to prevent probable losses or catch opportunities.
Let’s learn the impacts of price sensitive dates
1. AGM/EGM Date
Annual General Meeting (AGM) or Extra-ordinary General Meeting has both positive and negative impact on share price. A public limited company has to call AGM at the end of financial year.
AGM is mandatory for a listed company to remain A or B category status. On the other hand, EGM is not mandatory for a company.
Generally, a company circulates AGM date in stock exchange’s news portal. When investors and traders learn about the AGM date, they want to guess the probable agenda of the meeting.
Almost all companies have a common agendum in AGM that is dividend issue. If investors expect that company will announce standard dividend, they want to hold stock. Otherwise, they like to sell stock. Many traders want to position trade. They like to entry or exist from this company.
As a trader or an investor, you should care early about AGM date so that you can take right decision. Many traders and investors make mistakes as they trade without knowing the AGM date impact.
2. Dividend Declaration Date
Dividend declaration date is a reason to decrease or increase a stock price. If a company announces low dividend, its share price will decrease from next moment.
On the other hand, if a company announces high dividend, its share price will increase. However, investors never satisfy how much dividend a company provides. Hence, share price starts to fall because of dividend declaration effect.
As you can’t predict the market reaction accurately, you should keep distance from dividend declaration effect. Otherwise, you may commit trading mistakes.
3. Spot Date
Spot date is the previous continuous two days of record date. But, Spot date is not applicable to all stock exchanges. But ex-dividend date is common in most stock exchanges.
Security exchange law allows spot date so that transactions can be settled without waiting for T+2 or T+3. Generally, share price goes down in spot market.
Many investors and traders want to exit from trade in spot date as share price drastically fall after record date. There is an advantage of spot date.
If you hold stock in spot date, you will get next dividend. That means, you will entitle to get dividend even you buy stock a day before the record date (in the spot market). If you are a trader, you should avoid spot date negative effect.
4. Record Date
Record date is assigned by exchange law to determine actual shareholders. On this date, trading is halt. So, if you want to get dividend, you should buy at least in spot date or ex-dividend date.
Otherwise, you will not entitle to get dividend. You should learn about record date effect to decide whether you take dividend or not. Because share price will fall more than your dividend gain after record date.
You may get 8% dividend yield. But your holding may lose 20% to 30%. Hence, you should take any action carefully.
5. Quarterly Performance Announcement Date
All listed companies publish quarterly financial statement. From this statement, you can learn EPS and some other financial information.
If a company announces negative EPS, its stock price starts to fall and vice versa. After the end of a quarter, companies have to show the actual financial performance. This is a serious price sensitive information.
You should analysis the quarterly performance date. Best strategy to avoid trading before confirming the quarterly financial performance effect.
Let’s cite an example.
A company has announced AGM date on the 13th November. Share price of this company before announcing AGM was $24.
After declaring AGM date, share price reached at $23. On AGM date, this company announced 10% cash dividend and 5% stock dividend.
After this announcement, share price circulated between $23 to $22. Later, company disclosed quarterly financial statement. EPS was minus 0.57. Next day, share priced reached at $21.1 in a single trading day.
After that, spot date started from the 16th November. In first spot date, its price reached at $20. After record date, its price touched at $18.2. What is loss the percentage after 5 price sensitive dates effect?
Here, Cash dividend per share was $1 (10 face value*10%). Stock dividend per share was $1 (100*5%*20)/100. As Market value per share was calculated $20. Total dividend yield at $24 per share market price was 8.33%(2/24)*100. Transaction Effect percentage was 24.17% (24-18.2)/24*100. Ultimate Loss percentage was 15.84% (24.17%-8.33%)
I want to warn you about these sensitive dates. If you have care about these 5 dates, you will avoid trading mistakes.
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8. Day Trading Mistakes
Generally, day traders make some common mistakes in trading. In many cases, traders commit mistakes in stock trading because they cannot control over emotion, greed, fear and psychology.
Therefore, not only newbies but also experienced day traders commit trading mistakes. Moreover, every day, a stock market is to face hundreds of thousands of sentiments. Hence, an experienced trader also fails to stick to his strategies let alone a newbie.
Let’s discuss some day trading mistakes in details
Uncontrolled greed
Naturally, human being has greed. Sometimes, people are so greedy that they even enter the stock market without knowing basic knowledge about stock market.
Although greed is a nature of human beings- as a day trader- you must learn how to control greed. You have to acquire skill to know the right time of buying or selling stock.
Sometimes, stock touches your targeted level, but you are waiting for further increase. Later, stock price reverses its trend and your gaining stock turns into losing stock.
That is happened because of your excessive greed. Control your greed.
Uncontrolled Emotion
Your second mistake is uncontrolled emotion. Market starts to behave unpredictably, but you are waiting without taking right decision.
Because of your emotion, you have failed to execute right decision. As a result, you have to lose your trade. Avoid emotion and follow the market movement. Remember that market is always right.
Fear of losing money
Your holding has started to proceed downward. This downtrend has been continued unpredictably. But you are waiting for uptrend. Later, price breaks another support level. Yet you are waiting for reverse.
Thus, fear of losing small amount of money, you have to close your position off by doubling your losing amount. To avoid trading mistakes, you should follow stop loss rule strictly, when downtrend price breaks one support level.
Waiting for Reverse Trend
You are waiting for turning your loss into profit. Even you may wait for cut short your losing position. You should carefully observe the market and take prompt decision to sell of your stock. It is deadly mistake to hold a down trend stock.
Wrong stock selection
You have selected a wrong stock, but you are waiting to see the positive movement. I made this mistake many times. Unintentionally, I picked a wrong stock, but I expected positive result. Finally, I had to calculate huge loss for my stupidity. Get out a wrong stock within a short time.
Lack of understanding market movement
Market is always right. You may blame market, but market follows its own behavior. When market is going up, and your stock price is increasing, you should hold your stock.
On the contrary, when market is going down and you can predict the future of downtrend, you should buy at lower price. If you don’t follow this rule, you are welcoming to trading mistakes.
Previous volume analysis
Low trade volume stock means few buyers for this stock. Few buyers and sellers in this stock indicate less volatility. You should choose high trading volume stock.
If you bought a low trading volume stock, you should more careful. Otherwise, you may not get buyers when down trend starts.
Failure to understand major indicators
Some major market indicators are RSI, MFI, EPS and P/E ratio and market index. We sometimes become so excited that we forget the major indicators of market movement.
As a result, we make mistake and lose money. Actually, uptrend market has high RSI and P/R ratio. High RSI and P/E ratio indicate that market will start correction any time. Hence, you should wait for buying decision until correction trend reverse.
Failure of catching day traders’ psychology
Can’t you understand the day traders’ psychology? Day traders are real hero. They are major players of market movement. Most of the daily transactions are performed by day traders.
Failure of reading psychology of day traders, you may not follow the trend. Find out market trend as early possible to earn huge money.
Buying in uptrend market
Another mistake I made many times. I chased to catch a running stock in bull market. As a result, I bought this stock at high price.
Next day, price started to fall and I counted loss. So, never chase for a running stock. Wait for perfect time. If you can buy a good stock at right time, you have high chance to succeed.
Lack of patient
Do you have patient? If your answer is “YES”, you are already an experienced trader or are going to become an experienced trader. Why did I say so?
Because, trading is a game. To win the game, you need to be hurry in some cases and patient in many cases. All are greedy? Be patient. All are fear? Be patient. Take your buying or selling decision with patient.
Wrong Sector Selection
Did you make wrong sector selection mistake? I did many times. Later, I corrected my mistake. When traders were busy with insurance section, I was busy with fuel and power section.
Why did I do so? Because, insurance sector was already over valued for excessive buying pressure. I didn’t make mistake to buy high rate and wait for huge loss.
So, I took fuel and power stock and made realized gain. So be careful choosing a right sector.
Failure to apply stop loss
Oh!! No. This mistake is a part and parcel in my trading career. Whenever I took a wrong stock, I made huge loss without following the golden rule of stop loss.
I expected that market may correct and my holding would rise. But, emotion doesn’t work in stock market. My request to you, use stop-loss rule strictly. If you have capital, you may make money later. But, if you lose capital, you cannot search for better opportunity.
Timing mistake
Timing mistake? Stock market is T-twenty cricket game. When a player misses a ball, he has missed a point to win. In stock market, timing is the main culprit, which has full power to turn a gaining stock into a losing stock within a few moments. Timing mistake means you lose the battle. Hence, be careful about timing mistake.
Failure to execute strategies
Last but not the least. As a trader, you have own strategies. You may not follow your strategies because of greed or emotion. This mistake is known mistake. Always strict to right strategies in every situation.
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9. Benefits from Price Manipulation
Simply, price manipulation is related to artificial increase or decrease of stock price. More specifically, manipulation is the application of tactics which are not illegal by laws.
Price manipulation is techniques which are applied by some day traders to create artificial trends.
In order to get benefit from trends, you should capture the trends early. In many cases, price manipulation harms the general traders. However, winners are the ultimate survivor in trading.
Moreover, general traders cannot easily understand the trends and they are the ultimate sufferer of price manipulation impact.
Price Manipulation Types
Price manipulation can be performed in two ways-increasing price or decreasing price. Suppose, a day trader intentionally put buying order at $40. later, he tried to understand the other traders’ price movement.
At one point, he put sell orders for 200 shares at $40. At the outset, he has put his buying order at $40, he has high chance to buy his own shares.
But his motive was not to buy at $40. His motive was to buy less than $40. He put many orders from $40 to $42. Since price fall dramatically, sellers cancel sell orders and put sell orders below at $40.
Buyers also cancel their orders because they now want to buy at cheap rate. In the meantime, this tricky trader has collected his targeted shares. In this way, he could buy at cheap rate. This tactic also applicable for selling high rate. Just think reverse trade.
This manipulation tactic doesn’t work all time. Because all the time general traders do not fall in their trap. As these traders have huge capital, they can easily control a company’s stock price. They are very active in low cap companies.
Your day trading Benefits
Just watch the volume. In many cases, tricky traders want to make other fool by putting order of small quantity. If you have already victimized of their trap, you should use stop loss rule.
Otherwise, you can act like them, you can gain. If they are buying side, you can gain by buying with them. On the contrary, if they are sellers, you can gain by selling. But you have to lose if you go against them. I always try to give real examples in my writing.
Let’s share an example
Within a few minutes, my share price dropped from $41.8 to $40.50 without any reason. Some traders and broker houses manipulated uptrend market to downtrend market within a few minutes.
100 points plus index turned into 100 points minus index because of their price manipulation. When this manipulated price was executed, top buyer’s buying price was at $41.60 and top seller’s selling price was at $41.80. All on a sudden, a trade was executed at $40.50.
How did it happen might miracle to many traders? This was a trap and many traders fell in this trap and lost money. As I was in selling side, I lost my 6% trading capital within few minutes. Fear is stronger than greed in stock market. Hence, panic sell kills money from all traders.
another way to manipulate price
That manipulation occurs in pre-market opening. Some day traders put irrelevant orders in pre-market opening to divert others to follow their trap.
Pre-market is not for trading shares. Just you can see the demand and supply of a company’s shares. Moreover, you can understand who are going to control the market -buyers or sellers.
As buyers see the high price list in buying side, they may fall trap by thinking that this share is going to high price. When the market open, they try to buy at high price.
But, exactly before the market open, this tricky trader has already canceled the buying orders. Sometimes it works very well. But an intelligent trader never put his feet in this trap.
Day Traders Action
Just wait and never hurry to take any decision. Wait for your moment. Take your trade on the basis of actual market movement. Try to avoid such type of abnormal trade.
Fake news
Fake news can divert your goal and can oblige you to take wrong decision. Try to find out technical and fundamental analysis before taking any trade.
Try to use fake news in your favor. Every day, a stock market faces thousands of sentiments. No analyst is 100% right all the time. Even, no prediction works in some cases. One trader is gainer means another trader is loser.
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10. Day Traders’ surviving rule
Day trader can survive by following stop loss. Preserving the trading capital is the utmost duty for a day trader.
If a trader has capital, he can trade in near future. By losing more than 5% of capital in a single trade, a day trader will bring devastating result for his trading career.
Therefore, in order to survive in day trading career, day traders have no alternative except taking care of trading capital.
If a trade goes against you, you should correct trading mistakes as early as possible. Alternatively, protecting trading capital is similar to making profit.
You may lose your whole capital unless you follow stop loss rule. Trading is a game. If a trader wants to win the race, he should control over emotion and greed.
Suppose you have bought a share at $60. Later, your share starts to downtrend, but you didn’t follow the stop loss rule. Now share price is at $50. You have already loss your 16.67% capital. Hence, your remaining capital is 83.33%.
If you make the same mistake in next trade, you may kill your whole capital. In this way, you are on the verge of market out.
Traders reluctant to follow this rule because of greed and emotion. So, they want to wait for some more time to see the opposite reverse. In this case, they may right. In many cases, they have to lose money for this mistake.
How to apply stop loss rule?
You should observe the buying and selling signal. Then, take your decision. Suppose, your buying price of share is $40. Your first stop loss should $1.
And your second stop Loss should $2. So, your selling price is at $38/39. Stop loss percentage in two cases are 2.5% and 5%. Although risk tolerance varies from person to person, you should habituate to take risk if you want to become a good day trader.
As a result, you may tolerate 2.5% loss or 5% loss. Even your loss tolerance may 10%. But, your loss in a single trade should not exceed 5%.
Naturally, human being has greed and emotion. Emotion prevents a trader to sell at loss. Excessive greed is dangerous in day trading career.
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11. Disadvantages of Day Trading
Day trading is highly risky, costly and time consuming. So you should learn about disadvantages of day trading.
High commission rate in day trading
Day trading is really costly. High commission rate is the real culprit to trade frequently. But, remember that commission rate varies from country to country.
Let’s say my trading commission. I have to pay 0.4% commission both for buying and selling shares. If I buy 2000 shares at $50 for each share, total cost is $100000 (2000*50).
My commission is $400 (100000*0.4%). Per share cost with commission is $50.2 (100400/2000). If I sell per share at $50.50, my selling amount is $101000 (2000*50.5).
Thus, commission is $404 (101000*0.4%). Profit is $196 (101000-100400-404). Profit percentage is 0.19%(196/100000)*100. 0.4% commission is the minimum commission rate.
On the contrary, if your broker house’s commission is 0.6% or more, you will lose capital for that trading.
On the other hand, if you sell at $49.5, you will lose both commission and capital. So, day trading is not suitable for all. Day trading is suitable for highly sophisticated traders.
Risky
Day trading is highly risky. Almost 95% of day traders unable to preserve their trading capital. But, they don’t leave the market for hope and desire. They are always persistent to regain their capital. In some cases, they even no capital to continue trading.
Time consuming
Moreover, day trading is time consuming. A day trader has to watch the trade screen during trading hour. Moreover, day traders are active in the market.
Need more study for day trading
A successful day trader always studies the market condition. Day traders need to catch the trend. Moreover, they are trend trade reversal. They analysis trending sector to entry.
Greed and emotion
Human being has greed and emotion. There is no place for greed and emotion in day trading. You have to take decision immediately.
Less profitable
To be honest, day trading is less profitable than swing trading or investing. You may hear the name of some successful day traders. But you don’t know about 95% unsuccessful day traders who have lost all trading capital in day trading.
Day Trading needs huge capital
Day trading needs huge capital. Successful trading rate is very low in day trading. So, traders want to earn more in single trading to cover the loss of wrong trades.
More intelligent
Undoubtedly, day traders are more intelligent than general investors. Some people may call them stock gamblers. Simply, they can control a company’s stock.
Low success rate
Many writers and traders accept that the success rate of day trading may not more than 5%. I think, success rate may below 5%. There is no statistical data to tell you. Are you ready to enter into 5%? Think carefully.
High Tax
In some countries, capital gain is taxable. This rate for day trading is high. In this situation, you should think about your country’s tax rate.
Calculate commission and tax rate. There is no reason to lose money continuously in stock market. Rather you should invest in strong fundamental stock.
Mental Pressure in day trading
Don’t you control your mental pressure? Avoid day trading to keep your mind fresh. Generally, a stock price fluctuates from time to time. Basically, investors hold stock for long time.
Trading Mistakes in day trading
Trading mistakes frequently happen in trading. Traders want to earn more profit. They apply only technical analysis and trade penny stock. Their mission to gain more in less time. As a result, they can commonly make trading mistakes.
Technical analyst
Day traders are technical analyst. They have enough knowledge on candlestick chart and some other technical indicators. You need to learn how to apply candlestick chart in trading. So, avoid day trading if you don’t like to learn chart analysis.
Highly Volatile
Trading stocks and investing stocks are not similar. Traders choose highly volatile stock so that they can sell easily. But, highly volatile stock has a serious problem.
As price is highly volatile, you can’t exactly predict the price movement. In stock market, fear is stronger than greed. So, if your trade goes against you, you will need to calculate more loss than probable gain.
Stock selection
Day trading stock selection is somehow difficult. You have to fulfill some criteria before picking a stock. For example, you should consider volatility, risk, trend and traders’ interest to select a stock.
Uncertainty in day trading
Although stock market investing consists of uncertainty, day trading is the top risky trading. Continuously, you will face uncertainty in trading.
Quick Rich
Want to quick rich from day trading? Avoid day trading if you want to get rich overnight. In order to learn trading techniques, you need to spend two to three years. But, your learning may not guarantee your success.
Gambling
Gamblers use high sophisticated technology to gamble stock. They even manipulate stock price. You need to compete with them. If you can trade along with them, you may earn more. Otherwise, your money will go to their hands.
Margin Loan
Traders always use margin loan. Margin loan can vanish your trading capital. Moreover, your broker will give you pressure when market goes down to sell your holding.
Sell short mistakes in day trading
At downtrend market, traders prefer to sell short. Sell short is better option if you can understand the trend. But, if your trade goes against, you have to buy back at high price. So, short sell is riskier to buy back at high price.
If have read the whole article attentively, you have definitely learnt something. Financial Ask always try to help you. So, stay connected with Financial Ask to learn new skill about stock market.
If you want to learn more about stock market, personal finance and investing, you should read All in One Section.
Founder of The Financial Ask
