Day trading timeframes are so brief, traders who day trade often pay lower commission rates due to the volume they generate with numerous trades. Brokerages like to be able to boast about the volume their traders generate, so they entice day traders with extremely low commission costs. This helps the day trader to overcome the cost of trading when looking for smaller moves many times each day.
Day traders will generally trade more shares per trade than they would if they were holding a position. This is not necessarily risky, as the day trader is immune from overnight gaps which may haunt the dreams of a position or swing trader. A day trader may be more willing to use margin buying power when the trade is only expected to last a short time and the sell button is right at their fingertips. This advantage helps a day trader achieve the same profit objective that a swing trading strategy can attain without requiring several days to capture it or taking on overnight risk. A lot can happen in the world between the hours when the market closes and the following morning’s opening bell, and day trading eliminates that exposure.
Knowing when to day trade is important, and market conditions should be favorable to such a timeframe in order to maximize your profit potential. Generally, when the market is spending many days in narrow ranges and volume is lacking, it is a better time to day trade. The tendency of the stocks during such periods is to make quick initial moves but then fizzle out because they lack the volume required to fuel a bigger move. The summer months are often this way, with many traders on vacation and stocks not moving much with the light volume the summer months often produce. Holiday weeks are often the same way, and day trading initial moves to capture quick profits can be a good way to continue pulling money out of the market during the times when long lasting moves are basically nonexistent. At times, the overall market may be range-bound while awaiting a decision on interest rates or a big economic number to be released. Day trading during these times is also usually a more favorable approach.
While there are day trading strategies which may work under many market conditions, the adaptive trader who is willing to shift trading timeframes can day trade when market conditions warrant such a mode of operation.
When to Adopt a Day Trading Strategy
Now that you have considered which stock trading strategy suits your personality and timeframe, let’s look a closer look at day trading. What is it? Is it risky? What’s with the bad reputation? Why would I want to day trade?
First, let’s just clarify that day trading by definition is simply entering and exiting a trade in the same day – a day trade. The phrase day trading became popular several years ago as people made and lost fortunes in the highly volatile market by stubbornly trading on margin when they were already losing large sums of money. This has tainted the image of day trading, which is actually a trading style designed to limit risk!
Day trading may be your choice of trading style if you have another job and cannot manage positions all day, or just cannot sit in front of your computer for hours on end. You may have a short attention span and enjoy a faster pace in your life, uninterested in patiently waiting for bigger moves to develop. If this sounds like you, then maybe a day trading strategy is what you need. Day trading is all about capturing small, incremental profits numerous times throughout the day rather than catching one lasting move. After all, you can turn a profit in the market by taking a small position and looking for a big gain, or you can take a bigger position and look for a small gain. The latter is what day trading is all about.
Trading Strategies – What’s Right for You?
It’s the age-old question that so many traders ask themselves and each other: which stock trading strategy should I follow? Does day trading offer better rewards than swing trading? Should I scalp or hold positions? How can I best limit my risk, yet still generate the returns I want?
Like others, I have often wondered whether I should be day trading or swing trading. I have found ways to do both, and each style has its advantages and disadvantages. Ultimately, I think it’s a question traders should continually ask themselves, rather than just once early in their trading careers. Isn’t adaptation the key to successful trading over time?
The adaptive trader is always evaluating current conditions. Always be asking yourself questions. Is the market in an uptrend? Is the market in a downtrend? Is the market trending at all? Are the intraday moves smooth with good volume, or are they narrow, choppy and drifting on light volume? By staying aware of current conditions, a trader is able to determine which trading style will suit him best in the near term, allowing him to limit risk and maximize the rewards of profitable trades.
As you consider the best way for you to trade, be sure to evaluate your own personality traits. By employing a trading style that corresponds with your personality, you are essentially being your own best friend (a cheesy phrase but a necessity for traders). If you’re patient, consider a longer timeframe. Your personality will help you to stay in positions while you wait for the outcome to develop. If you are hyper-active with lots of energy and a short attention span, you may be better of day trading smaller incremental moves on a short term basis. Take stock of your personality when contemplating the best trading strategy for you, and soon you’ll be on the right path toward claiming the profits that have your name on them.
The Road Map
The cat’s out of the bag. You’re fully aware that it might take some time to become a great trader. Does that mean you just sit back and wait for time to elapse? Of course not! Your job now is to set up your trading plan by implementing a strategy that will suit your needs and serve as your road map, so let’s get to it.
The two most basic active trading strategies are day trading and swing trading. Each one has its own benefits and drawbacks, so we’ll look at them both. When it comes to your own trading plan, consider your own situation and which strategy will cater to your needs best.
A day trading strategy has a number of benefits over other trading styles during certain market conditions. Day trading offers up to 4-to-1 intraday buying power ($25,000 account minimum), which allows the aggressive trader higher leverage in order to generate big profits in short-term price moves. Day trading also requires less homework outside of market hours than other strategies, because a good real time streaming alerts program can generate trading signals for you based on your criteria intraday.
Beginning traders should start slowly and learn the rules of the road from actual experience. Early on, trade with real money in your account (not in “demo” mode). Trade in small lots until you are able to see some progress with your results. Only after you reach that point will it be wise to increase your trade size and exposure to risk by trading more aggressively. Pressing matters too early in your career will lead to underperformance anxiety, which only leads to more poor decisions and painful losses. That in turn will lead to an early exit from your trading career. Not good!
Finally, commit to developing your skills in a progressive fashion. Don’t seek to master every imaginable trade right from the beginning. There’ll be plenty of time and many different market conditions for you to add to your repertoire. Start with simple continuation setups and traditional chart patterns before you toy with reversals, retracements, or trying to buy stocks off support. Trading can be as complicated as you want it to be, and the learning curve is best navigated one step at a time. Remember, you’ve got to learn to walk before you can run.
The Edge of Greatness
Your expectations of success are rising now that you’re going about it systematically. You’re aware of your resources. You’ve decided on a timeframe. You’re even keeping tabs on what’s working on your timeframe (as well as what isn’t).
SO, how much longer until you make that first million?
It’s a question every trader has asked himself, and there’s nothing wrong with that. Anyone with a hint of ambition is in a hurry to reach their goals, whether it’s about weight loss or getting a promotion. So why shouldn’t you be in a rush to reach those trading goals? While it’s perfectly normal to be anxious to succeed, remember that shortcuts can easily lead to short-circuits.
Don’t overlook the fact that The Learning Curve hinges on a few key concepts.
As you begin to build your trading plan and discover the best ways to implement your ideas, don’t forget that few traders become overnight successes. A little luck is certainly involved in the case of the overnight success, whether it boils down to a few fortunate trades or just the right market environment. I know for a fact that 1999 produced a lot of traders who were overnight successes, but 2000-2002 was a completely different story!
Keep your head on straight and be sure to consider the general market environment when you start to plan your success. I’m not saying to set your goals low if the market is choppy…. I’m only suggesting that you stay reasonable. Ultimately, you’ll be happier achieving realistic goals than falling short if the bar is set too high. Reaching goals produces momentum, which is what good trading is all about.