When it comes to day trading strategies, I’m not going to deny that some people possess a natural talent. They can observe patterns in the stock market, hear information about a particular industry, and make a startlingly accurate assessment of the stock price’s future movements.
However, that doesn’t mean that you should base your day trading strategies on your instincts. Even if you have a gift for securities, you need hard, reliable data to avoid making huge mistakes.
That’s the bottom line.
Even those who are naturally gifted at trading stocks read charts, pay attention to the fundamentals, and hedge their bets. They might listen to their gut when it tells them to investigate a specific stock further, but they aren’t going to put all their money on one play just because their gut says, “Go for it!”
Let’s look at day trading strategies and how your instincts and the data can help you become a better trader.
What Is Day Trading?
Day trading refers to a stock market strategy in which the trader buys and sells stocks within the same day. A day trader doesn’t want to invest money in the stock market for long-term profit. Instead, he or she uses day trading strategies to take advantage of small, brief fluctuations in stock prices.
Common day trading strategies include buying and selling based on stock chart patterns, short-selling stocks based on forecasted dips, trading options and futures, and trading penny stocks. Although some day traders occasionally hold onto shares overnight, most sell before the close of the market.
Day trading is common in the foreign exchange — or FOREX — and stock markets. If you buy in high volume and hold for a short period, even small fluctuations can result in huge profits because of the number of shares involved.
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Why Should You Learn Day Trading Strategies?
There are two basic ways to make money in the stock market:
- Day trading
- Long-term investing
It’s more complicated than that, but we’ll stick with those two options for the purposes of this article.
Long-term investing often involves investing in blue-chip stocks that you might hold onto for months or years — sometimes even decades. The goal is to cash out when you need money for something big, such as for a child’s college expenses or for retirement.
There’s nothing wrong with long-term investing, but day trading strategies are built to help you amass wealth quickly. Instead of waiting for your investment to slowly accrue gains over years, you take your profits quickly and move on to the next trade.
While day trading strategies can prove extremely profitable, they’re also inherently dangerous. If you act based on your gut, you’re more likely to be wrong because you haven’t considered the fundamentals or technicals.
What’s the Difference Between Your Gut and Data?
Your gut can lead you astray. Data rarely does.
Imagine that someone approaches you about a business deal. He’s a friend of a friend, and he’s opening a restaurant — an inherently risky industry in which to operate. You have coffee or drinks and discuss the idea, and you think it sounds brilliant. You like the guy and want to do business with him, so you cut him a check on the spot.
That’s a decision based on your gut feeling. You didn’t run any comps, investigate the market, read a business plan, or even run a background check on your newfound partner. Instead, you invested in the business because it felt like the right thing to do.
Maybe the business takes off and you earn tremendous profits from this gut-based decision. It’s equally — if not more — likely that the restaurant will fail and you’ll lose your investment entirely.
In case of the latter scenario, let’s take a step back. What if you’d thanked your potential business partner for the opportunity, and then conducted some market research? You might have found that the restaurant isn’t unique to the area, that the location doesn’t get much foot traffic, and that 10 other restaurants had gone belly-up on the same block in the last year.
After scouring the data, you probably wouldn’t have gone through with the deal. The same applies to the stock market.
How Can You Use the Pinhole Strategy to Improve Day Trading?
The word “data” sounds exhausting, doesn’t it? It conjures up images of you poring over spreadsheets, financial statements, stock charts, and other complex documents. But it doesn’t have to be that hard.
I recommend using my pinhole strategy. I named it after pinhole cameras — poking a hole in a sheet or wall on a bright day to cast the outdoor reflection on an interior wall. The point is to focus on the smallest point to get the most amount of information possible.
The pinhole strategy is simple. Rather than going through a company’s entire range of fundamentals, focus exclusively on the cash flow report. This is the most specific and the least malleable of the financial reports. It tends to reflect a company’s true health.
Yes, data introduces more work into day trading strategies, but it’s fundamental if you want to profit. You can ease the burden by focusing on one critical piece of data to forecast how a specific stock will behave in the future.
How Can Emotions Interfere With Profits?
Many traders get attached to certain stocks. They might like the company’s corporate social responsibility initiatives or the fact that it pays its workers really well. The reason behind the affection doesn’t matter.
What matters is that emotion can interfere with profits. If you’re attached to a stock because of how you feel about the company behind it, you’ll trade based on your gut rather than on empirical evidence. And that’s dangerous.
What Can You Do to Prevent Instinct-Based Trades?
We all have emotions, of course, so how do you prevent those emotions from interfering with your day trading strategies? It’s pretty simple: Stick to a set of rules.
I recommend creating your own trading rules before you ever execute a single trade. Your rules should incorporate your risk tolerance level, amount of money available for trading, what data you’ll consult before you execute a trade, and more.
If you always have those rules nearby, you can refer to them often. When your mouse is hovering over the “buy” button in your trading account, ask yourself, “Does this trade align with my rules?”
If it doesn’t, you’re probably trading based on your gut rather than data.
Don’t make fast trades. You might want to act as soon as you see a potential profit, but resist the urge. Do your research, check out the cash flow report, and make your decision based on the data you dig up.
How Does Risk Tolerance Affect Day Trading Strategies?
Risk tolerance is something you should consider before you make a single trade. You might feel strongly about a stock’s future activity — based on your gut, data, or both — but if you violate your own risk tolerance, you might create a problem.
Maybe the data indicates a big spike for a stock you really love. You like the company, its management approach, and everything else.
But you might have a rule that prohibits you from spending more than 2 percent of your brokerage account balance on one play. If you decide to invest 5 percent in the aforementioned stock, you’re acting on emotion and instinct.
Never hesitate to take a step back and further consider your decisions during day trading. I’d rather miss a potentially hot stock than act too quickly and regret the decision later.
I wasn’t always a stock market trader or teacher. In fact, I come from a chemical engineering background.
That background makes me meticulous. I don’t take unnecessary risks no matter how large my bank account grows, and I recommend following that same mantra.
If your day trading strategies boil down to your gut feelings, you’re going to lose more than you profit. It’s that simple. A company that looks healthy and prosperous on the outside might be rotting from the inside — and you don’t want to be wrong about this.
That’s why I started The 10-Minute Millionaire Pro. It’s my opportunity to teach what I’ve learned and help other people succeed. Join today to take advantage of my experience, expertise, and willingness to pass on my day trading strategies.