Day trading refers to the act of buying and selling securities over the course of a single day. Seasoned day traders make small incremental gains by capitalizing on fluctuations within the market over the course of a one-day period. These small, daily gains can add up to a substantial profit over time.
Although it can sometimes be considered risky to day trade, there are several day trading strategies that traders can take advantage of in order to day trade more successfully. For example, it’s important to have access to real-time quote information, and advanced charting tools to ensure you’re analyzing the most up-to-date information as possible while day trading.
First, it’s important for day traders to understand what they’re looking to buy. Next, they’ll want to implement key day trading strategies in order to be successful. Additionally, it’s important to understand day trading extremes. Lastly, it’s imperative you’re aware of common day trading terms.
What Day Traders Look for When They’re Buying:
In order to win in the day trading field, you must know what you’re looking to buy. Without having a clear understanding of the most lucrative types of stocks, you’re setting yourself up to potentially lose money. There are three common things day traders should look for in order to be successful. Explore the day trading strategies, below.
1. Liquidity: This allows you to more easily enter/exit a stock at a good price.
2. Volatility: Measurement of the expected daily price range. More volatility means greater profit or loss.
3. Trading Volume: Measurement of how frequently a stock is bought and sold within a given time frame. Higher volume indicates a lot of interest in the stock.
Additionally, as a new day trader, consider starting small. Until you learn the ins and outs of day trading strategies and become more efficient at the process, it’s a mistake to focus on more than a few stocks at a time. This way, you’ll be able to remain hyper-focused on finding the best opportunities to buy and sell for 2-3 stocks, without getting overwhelmed. Keep in mind, day trading can potentially take several hours of your day, too.
Four Common Day Trading Strategies When Selling
Seasoned day traders understand and know exactly when to buy and when to sell in order to make a profit. Discover four common selling techniques to begin taking advantage of when selling.
- Scalping: The scalping method of day trading involves two parts. First, day traders hone in on small changes in stock price movement. Then, they gain profits by frequently entering and exiting during the trading session. These trades may take place in a few seconds or minutes.
- Fading: Fading is among the more high-risk day trading strategies, which involves selling a trade when the price is going up and buying it when it’s falling. These are contrarian investments that can result in big short-term wins.
- Daily Pivots: Daily pivot points are points of rotation. Pivot point prices are calculated by using the prior period’s closing, low, and high points for a certain security. Traders use pivot points to see the primary support or resistance level.
- Momentum: Momentum trading is all about taking advantage of short-term price action for big gains. Traders enter and exit positions within the same day and look at factors like stock volume, range, and volatility.
Understanding Extremes When Day Trading
As we’ve previously mentioned, day trading is not without its risks. For new day traders, its key to understand the ‘extremes’ involved in this field of trading stocks. The more informed you are about these factors, the less you’re likely to fail when day trading.
- Extreme Turnarounds: Extreme turnarounds occur when traders invest in securities that are doing poorly but have a much higher value than people think, and will “turnaround” to become highly profitable.
- Extreme Continuations: Extreme continuations/continuation patterns are shapes in the price data that give traders some understanding of price action and where the price is headed. Extreme continuations reflect a sharp change in the pattern.
- Extreme Reversals: Extreme reversals are big reversals in the price trend of a trade.
Key Terms to Know in Day Trading
As you enter the world of day trading, you’ll begin to recognize some of the most commonly used terms. Explore these phrases and keywords used when discussing day trading strategies and techniques.
- Pattern Day Trader Rules: Pattern day trader rules are margin requirements for day traders. For instance, a pattern day trader needs to maintain a minimum equity of $25,000 on any day that they are trading.
- Swing Trading: Swing trading is short-term trading that takes place over the course of a few days or a couple of weeks. Swing traders use short-term price momentum to analyze trends and make gains.
- Bull/Bullish: Bullish means that a stock price or the market, in general, is going to go up.
- Bear/Bearish: Bearish means that a stock price or the market is going to go down.
- Initial Public Offering: Initial Public Offering, or IPO, is the first stock sale available when a private company goes public.
- Blue Chip: Blue-chip companies are well-known, stable, and financially-established. They are safer bets on the stock market and include companies like Amazon, Apple, and Salesforce.
- Pump and Dump: Pump and dump is securities fraud that involves putting out false facts, statement, and stock market advice to get people to buy stock. The goal of pump and dump scammers is to artificially inflate the market to sell cheap, and many times worthless stocks, for a higher price.
- Stock Splits: Stock splits occur when a company’s board of directors decides to dole out more stocks to shareholders and boost the number of outstanding shares.
- Freeriding: Freeriding occurs when a person buys or sells securities without having the money to cover the trade. It is an illegal practice.
- Spread: Spread is the differentiation between the bid and the ask price of any trade.
Understanding Key Day Trading Strategies for Success
Day trading can be a lucrative but risky field for stock market traders. By gaining an understanding of key day trading strategies, terms and ‘extremes,’ you’ll be setting yourself up for success.
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