By day trading, what we generally mean is the system of buying and selling of stocks within a single day, and thereby making profits or going through losses. The basic difference that day trading has with other trades that all you have is a single day- you need to start and close your deal within the very day; you cannot prolong it over the night. Day trading involves a lot of commitment, patience and planning. There are a few techniques that successful day traders use in order to make profits. Sometimes, they even use reverse strategies, commonly seen in algorithmic trading so as to trade against the irrational behavior of other day traders using those approaches. For beginners, it is very important to keep a note on the different things that you need to keep an eye on before choosing a particular stock for the day. There are certain stocks that can be perfect for day trading. There are basically two things that a day trader needs to look for in a stock: • •
Liquidity: This helps the day trader to enter and exit a stock at a good price. Volatility: This is what can be considered as a measure of the expected price range, i.e., the range in which a day trader operates. The more the volatility, the greater is the profit or loss.
Having understood the kind of stocks that you were looking for, the next step is to understand the possible entry points. • • •
Candlestick charts, which provide details and analysis of price action. Level II and ECN (Electronic Communication Network) helps you look at orders. Real Time News Service provides you with news about stocks.
Also learn to look for the various patterns in the candlestick charts, like, technical analysis, volume, etc. There are some common strategies/techniques that will be of great help in day trading: •
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Trend following is a strategy which assumes that the financial instruments which have been rising will keep doing so and will keep falling in case it was already doing so. This helps a trader to understand how the trend is going to be and hence in the decision making process of whether to sell falling stocks. Scalping is one of the most popular strategies, commonly used. It is often referred to as spread trading. It is a process which involves selling the stock immediately after it gains
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profit, i.e., establishing and liquidating a position as fast as possible, usually within minutes and sometimes even seconds. Fading is yet another strategy which involves the process of shorting stocks after rapid rise. It is a risky process but can be extremely profitable. Daily Pivots is a strategy that involves earning profits from a stock’s daily volatility. This strategy includes buying stocks at the low of the day (LOD) and selling at the high of the day (HOD). News Playing is another strategy that day traders often use. It involves buying stocks which has just announced good news and selling them on bad news. Good or bad news should be determined by the price action of the stock, as market reaction may often differ from the news.
These were some among the various strategies that a day trader can keep in mind if he/she wants to learn more about day trading as well as earn profits. Day trading is a risky process but can be a very rewarding one as well.