Day Trading Overview
June 22, 2009
Day trading by individual investors became really popular when online brokerage accounts came onto the scene. You probably remember the late 1990’s, when the market was running faster than Olympic sprinters, people were re-financing their homes and taking withdrawals from their 401ks to dive into the day trading pool. Unfortunately, many of these people lost a lot of their money when the technology bubble popped.
Day Trading Strategies
Day trading is not for the timid or emotional, but it can produce positive results. The key is to have a well-defined strategy; one that you must stick to. This strategy must be specific in when to buy and sell a stock. Every step must be clear and in place before you make your first move. This helps remove the emotion from the decision making process.
Day trading is not a hobby. It’s not a game and certainly not something you “play” with. Day trading is a business and must be treated as such. Without the proper planning and/or experience in place, you will fail before you even start. Your trading strategy should define two things:
- Buy/Sell Signals
- Risk Management
All day trading strategies start with where you will buy into and sell out of a position. These signals must be as objective and as specific as possible. They must be quantifiable and measurable. Choosing a stock based on whether it is “trending up” is too subjective and general.
Once a “Buy” trade has been placed, this investor needs to know exactly when they will get out or “Sell that position. The exit signal could be a specific percentage profit or a maximum loss. These “Sell” signals must be followed. Discretion can be very dangerous when playing with your profits. Using that same philosophy, a pre-set price must be followed in which you would realize your loss.
In the world of day trading, the use of a “stop-loss” is extremely important. All traders must know before entering into a position, where they will be getting out if the market goes against them.
Traders must be as disciplined in the use of stop-losses as they are in protecting their gains. All emotion must be removed and replaced with your strategy. An effective strategy will have very clear steps on where and how they will be exiting a position.
Day trading is all about capital. Every penny must be protected to fight another day if the market turns against you. Yes, you can hold off to see if the market turns around, but the danger of more losses will become more prevalent with each minute you leave yourself exposed.
Day Trading vs Long Term Investing
When you compare day trading to long term investing, please remember that in some day trading strategies, all you need to succeed is a stock price movement as little as $.25. The idea is to take advantage of these little spikes and move on.
Long term investing looks at building a portfolio that can stand the test of time, where you don’t even blink at tiny moves in price of a stock.
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