When people hear the phrase day trading, the first thing that the phrase conjures is the problems associated with it. Also, most people think that most traders fail miserably. If you want to become an online investment guru, there are many books to read on the topic and you must become extremely aware about all the strategies used by abundantly successful traders. You may believe that the main reason why many traders end up in financial ruin is due to improper training This article is meant to be a simple guide to break down the steps needed to become a day trading guru.
The main problem of day traders is that they don’t have the tenacity needed to fully study the subject. There are thousands of people out there willing to help new traders but there’s no such thing as the concept of “easy money” in day trading, but there’s diligence and tenacity. Money probably won’t grow on trees and you will need to focus on studying the basic concepts. Remember, most traders who destroy their financial lives don’t have the right financial foundation. If you want to become a financially secure individual you need to start learning the basics.
The main rule of thumb is not to get greedy. Just when you think you have it pinned, the market will swiftly change for no apparent reason. Why? Because dilettante traders are taking small positions on the market. Now, they do not really affect the longterm market, however, they DO affect Forex somewhat. Many people are enthralled with day trading because of the excitement that comes along with it and its potential for big money, but patience is key to being successful with this risky endeavor.
As a novice, you should first start out by reading forum posts. This can help you have an idea of what it really takes to succeed in this business. Feel free to question professional day traders and ask for advice, but be discriminating, because some people are just out to harm your success. So, use your head and common sense when dealing with strangers. Don’t just rush into day trading, prepare beforehand or you may regret it.
Few days ago, I got a request from one of the reader of this site. Here’s the screen shot of his request:
Before going into the details on How to Play the Dividends, here are the definitions that you need to know. More explanation can be read in my previous blog.
Declaration Date – Board of Directors announces the payment of Dividend
Ex-Dividend Date – The Stock starts to trade without the dividend
Record Date – Current shareholders on the record book will receive the dividend
Payment Date – Company issue the dividend payments
The dividend timeline below illustrates the four dates investors(traders) must understand and monitor in order to effectively implement their dividend play strategies.
Figure 1. Dividend Timeline
Maybe, you are already aware that dividends are one of the many factors that influence the stock price, though not really a big impact compared to other variables such as company earnings, arbitration’s issue like what happened recently with MWC and MPI.
In this article, I’m going to take a look on the common ways to trade around the dividends.
PHILIPPINE STOCK DIVIDEND HISTORY
As a Dividend Investor, Most of the time I am looking into stocks known as blue chips since these stocks are considered stable. I reviewed my database and filter the stocks that distributes dividends for the last five years, below is the top 5 blue chips dividend stocks ranked base on the dividend yield.
LAST PRICE YR2009
TOTAL DIVIDEND YR2010 – 2014
LAST PRICE YR2014
PRICE %CH YR2009-2014
The following screen shots shows the stock prices movement around the dividend dates:
ACCUMULATE BEFORE THE DECLARATION DATE
It seems the idea of accumulating before the declaration date is good. If you notice, almost all of the five stocks shown above, the stock price started increasing prior to the declaration date. For Dividend Investor this may not really matter. I will elaborate this further in my future post. For Short term trader taking advantage of the upcoming dividend, this strategy might be good to implement. However, two important things is a MUST to be known. First, The expected Dividend distribution month MUST be known so you can schedule the timing when you will start accumulating. I have a compilation of this anyway to help you shorten your time of your research, just check the DIVIDEND CALENDAR page of this site. Secondly, You MUST be aware of the previous quarter earnings of the stocks of your interest. You have to ensure that the company has a positive earnings otherwise the probability of distributing dividends is very less.
BUY ON DECLARATION DAY
Most of the time, the stock price rises from the declaration day up to the day prior to Ex-dividend date. For short term trader taking advantage of the upcoming dividend, this day may be the BEST time to enter. However, not all stocks rises as shown in the screen shots above.
SELL ON OR BEFORE THE EX-DATE
For short term trader, selling before the Ex-Date is always preferred as long as the profit is almost equal or more than the dividend yield since on the Ex-Date, stock price will most likely drops to almost same amount of the dividend. Let’s take a look on DMC. On May 16, 2014, DMC declares a dividend with a 4.11% yield. Let’s assume you bought a shares of DMC during closing on May 16, 2014. On May 20, 2014 (two trading days after dividend was declared), the stock price raises as high as 7.68% from May 16 closing. During this time, you may consider to SELL your position reaping a 7.68% return better than the 4.11% return from the dividend. However, If you really wanted to collect the dividend income but not planning to hold the stock for a long time, you may SELL on the Ex-Date (most likely with a loss but dividend income may compensate this loss anyway). If you could wait a little longer, I recommend to SELL your stocks few days (or weeks) after the Ex-date since the stock price will recover from a loss due to the dividends (you may check again the screen shots above and observe how the stock price recovers after the Ex-date).
Not all stocks have the same behavior/reaction to dividends. Nonetheless better to know how the particular stock perform on the dividends and respond accordingly. I recommend that you MUST have always a trading (or investing) plan before you execute in any of your future trading(or investing) decision and stick to the plan all the time. In this way, it is easy to modify and trace what went wrong or which one needs to be improved. Remember, it is your hard earned money. So, be responsible on all your actions.
Thank you for reading. May you have a consistent and profitable trades ahead!
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.