The phrase “day trading” refers to buying and selling stocks during the day, a quick and efficient strategy to procure profits while the stock market is in its peak of activity. Day traders focus on making profits by investing large amounts of capital into liquid stocks that present small price increases. Below, you will find some common stock trading techniques that are used by day traders.
Retail day traders find the Sun Microsystems (NASDAQ: SUNW) stock a favorite. The stocks sells at very low prices, is very liquid, and extremely volatile; all characteristics that make a stock perfect for a day trader. Long-term investors are not as concerned about the volatility unless their stocks seem to be hitting an all-time low.
The Techniques for Successful Entry
There are particular stocks that are ideal for day trading. The two characteristics that day traders normally seek in a stock are volatility and liquidity. The volatility is based on the amount of money that a day trader is doing business with; the higher the volatility, the greater loss or profit for the investor. The liquidity is the hope that a trader can slide into and back out of stocks with low slippage and tight spreads.
Once an amateur day trader familiarizes themselves with the stocks and decided which ones they are looking for, it is time to learn how to determine entry points. Taking a look at volumes and volume spikes, which demonstrate if other day traders have bought at that level before and are currently purchasing at that price level; they can take into consideration the high of the day (HOD) and low of the day (LOD) for analysis of the volume. Taking a look at the order sizes and the open orders can help with the choices as well.
Popular Techniques that the Day Trader Can Utilize
Popular techniques to keep in mind for day trading:
- Scalping – This is an extremely popular method of trading. Scalping involves the immediate selling of stocks when it becomes lucrative to obtain the quick profit.
- Daily pivots – Using volatility for profitability, this method pursues a stock in an attempt to purchase while it is as the low of the day (LOD) and sell when it reaches the high of the day (HOD).
- Momentum – This technique involves purchasing stocks based on trends and news releases. The exit strategy of this method is based on selling if the stock shows signs of reversal while riding the trend.
- Fading – This is a risky strategy that includes shorting stocks directly after they increase drastically. For the risk-taker, this technique can be very rewarding.
Trading techniques can start with the same tools used for entry into stocks; the difference in trading styles and techniques show up in the exit part of the trading strategy. For the most part, though, no matter which way trading is done, the investor will want to exit when the stock is showing trends of decreased interest. The stock market can be exciting, but it can also cause stress; therefore, it is crucial to choose a technique and practice it until is consistent and effective in order to be profitable when trading.