To begin with, the stock market is similar to eBay, which is the 21st century’s version of a garage sale. We have things which we don’t need, but are still of value, and we like to get money for them. Stock markets are pretty much the same thing, the only difference being that these are companies who need money (capital) in order to continue growing. Once a person makes an investment in a company by buying stocks, they become part owner of the company. For instance, a stock market deals in shares of stocks, so if there are one hundred shares of a company, and you buy yourself one share, you own one percent of said company. The number of stocks are relative, since certain companies have millions of shares of stock.
Much like categories on eBay, companies on the stock market are placed in their own stock indexes. For example, if you wanted to purchase a new bed on eBay, you’d go to the furniture section, and if you were looking for a new laptop, you’d to the electronics section. While the categories on eBay are different than stock indexes, to the beginner it’s a good way of getting the gist of the stock market. For example, the NASDAQ composite index is more commonly known for trading tech stocks, while the S&P 500 index is a listing of the 500 largest public companies in the U.S.
So, when a company goes public, investors begin to invest in them, and the value of the leftover shares are then determined by the public, based on the stock market. This is why the stock market exists and how professional day traders and investors are able to make money in the stock market.
Most day traders look at the market with a strictly technical analysis approach. These day traders are classified in three different types: scalpers, intraday traders, and swing traders. And, while all three types of these day traders do pretty much the same thing, which is to make a profit based on a difference in value, the only difference between the three types of day traders is the amount of time they dedicate to day trading. The following is a breakdown of the three types of day traders.
Day traders who make money in the stock market with high frequency and lower profit are known as scalpers. A scalper’s role is to take advantage of the minute inconsistencies in the market, which sometimes means having to make decisions in a matter of seconds. A scalper is mostly in an advantageous position for a few seconds, which is why they tend to place a higher frequency of trades, since their profits are lower per trade. In order to make higher profits, a higher frequency of entering and exiting trades is needed for scalp traders.
These are those day traders who make money by opening and closing their position(s) during the same trading day. An Intraday trader never holds on to a position overnight, giving them the name intraday traders. These traders are normally in a position from a few minutes to a few hours and their trades are typically not as high frequency as those of scalpers.
Unlike scalpers or intraday traders, swing traders have the luxury of time. These traders hold their position(s) overnight or longer. So, it’s normal for a swing trader to use technical analysis to stay in a trade for days or even weeks.
A simple search on Google will reveal why there is so much controversy surrounding the term “day trader.” The profit potential of day trading is one of the most debated topics on Wall Street, which is why countless online scammers have capitalized on the misinformation of day trading, by promising people enormous and unrealistic returns for their investments. This is worsened further by the media, which is constantly promoting day trading as a formula to “get-rich-quick” with minimum investment.
The short-term nature of day trading reduces the amount of risks involved in trading, since there is only a very small chance that something will happen overnight which will cause the trader big losses. The truth of a beginner trader's success lies somewhere in the middle, since there are day traders who are able to make a successful living, while others fail. The following are going to be some beginner tips for those who want to get started into the world of day trading.
Most day traders are conditioned to base many decisions on news. And, while there is nothing wrong with that, you need to be able to read price action and understand technical analysis with a niche. For example, supply and demand zones for trading mid-cap stocks. Here you will need to keep a keen eye on the quotes, watch them change, and look for the highest probability entry point. A trading system should assist in reducing emotions and controlling the risk involved. Having a system while day trading is essentially having a set of rules for the stocks you would follow, buy, and sell. Whether it’s a short term momentum play, or undervalued large caps, having a defined system always works to add probability.
There are countless strategies and methodologies for traders (Example: Trend Following, Rreversals, Momentum, Scalping, Supply and Demand Zones, Support and Resistance, Fibonacci ratios etc…). The purpose of a trading strategy is to identify when to buy and when to sell, know when and where to exit, also how to control the amount of risk involved. There are three types of price direction: Uptrend, Downtrend and Sideways. While many traders prefer trading with the trend, or trading for reversals, having a robust trading strategy should dictate what to do in a sideways market as well. It is very important to choose a trading strategy that will suit your personality and goals without compromising your risk tolerance. Choosing a strategy should coincide with your strengths and weaknesses and be thoroughly tested before live trading.
As a day trader, it is your responsibility to minimize your losses. This means knowing when you’re wrong, and trying to exit with the least amount of damage to your portfolio. It is important to remember that no day trader is able to make money all the time. If you make a mistake, find a way to accept it, and then move on. As a trader, just make sure that your winners are at least twice as large as your losers and preferably larger which will allow for longevity and capital preservation. It is important to remember that there is always a tomorrow, provided you don’t blow all your capital … otherwise you’re done.
While you think that you might know what’s best, the truth is that the market always knows best. So, if you try to fight it, you will end up losing a lot of money—gobs of it, if your ego takes control. After a stock plummets, you’ll always hear the familiar, “but the stock had good news.” What you need to remember is that good news doesn’t always mean positive expectancy, any more than bad news is always negative.
The stock market is very similar to real life, as in: whenever supply nears exhaustion, but there are still willing buyers, there is a good chance that the price will go higher. On the other hand, if there is an excess of supply, but no willing buyers, the price will usually decline. While professional day traders are taught to identify specific turning points on price charts, independent day traders can do the same by studying historical supply and demand imbalance examples.
Some day traders are gamblers at heart. And, to a gambler, nothing is more appealing than trying to guess when a stock has hit rock bottom. While you can make a lot of money from the quick and violent upside move, you may also loose time and time again. Picking the bottom is never easy, and trying to catch the bounce by purchasing more shares could lead to some major losses in the end. The trick here is to never fight momentum without exhaustion.
It is easy for a trader to get greedy when holding on to a position that has proven to be successful. You start to think, “Well, I’m already in the money, and this could go higher.” So, what do you do? You hold on to those stocks long after the signs have started to indicate a change in momentum. And then what happens? Your gains begin to dissipate and can even turn into a massive loss. This is the reason why there is nothing really wrong with taking some of your gains off the table by selling into strength or buying into weakness.
Horror stories about good-trades-gone-bad are commonplace among day traders. So, let’s just say a trader bought 200 shares of a particular stock and was in the money, but the stock was halted due to some irregularities in the accounting and reopened down about 20 points, and, guess what? That particular trader lost $4,000.
While this is a more extreme example, it does teach us an important lesson. In the stock market, events are occurring all the time that we have no control over. Attempts of a takeover going public, earnings are preannounced, or a CEO dies in a car accident. There are a number of things that can happen. But, it is important for you to remember that you should control only what is within your ability—and leave the rest behind.
If you consider yourself a fundamental trader, chances are you don’t care much for technical analysis. It could also mean that you don’t really understand how most of it works. While it is never a good idea to base your trading decision(s) solely on one factor, having a quick look at the technical analysis contributed online never hurt anyone. Besides, contrary to popular belief, online technical analysis is easy to understand, and more importantly, it does matter.
Some analysis indicators that are easy to read are those of resistance and support. “Resistance” occurs on the upside whenever the stock reaches a point from where it can’t go any higher. “Support,” on the other hand, is the level at which a stock will not trade below. These are probably two of the easiest-to-read indicators, and, when a stock price breaks, keep a close eye on them, because all the other traders are. While a move is never guaranteed, volatility is likely to occur.
BUY LOW, SELL HIGH
While many of the more experienced day traders have probably heard of this one, forgetting it is one of the biggest mistakes that a trader can make. For those traders who are dollar cost averaging, timing will not be of value, but for those who are trading, price will always matter. For instance, a particular stock starts to move, but you wait to buy. It starts moving a bit more, but you find yourself confused, so you let it go. Then it really starts to fly, and you decide that it’s time to place an order. What you’ve done is bought a stock from someone who was holding it since the very beginning. They made a profit, while you take home a significant loss.
If you have got one hundred shares of a particular company, and the stock moves a single point, you end up making $100. But, with 1,000 shares, you could end up making $100 on a 10 cent move. So, it’s obvious that you are able to make more with a larger position, but, along with it, you would also have to deal with the risks involved. This is where balancing both the risk and the reward with the help of a pyramid comes in handy.
It isn’t unheard of for the more experienced traders to start their position anywhere from 500 to 1,000 shares. While adding more shares along the way as the stock goes up may sometimes be a good idea, you could do so in smaller increments, keeping the base of your position larger than the following purchases. In this way, your reward would be greater than buying larger quantities of shares than your base amount along the way up.
Back when the dot-com bubble popped, it took many traders along with it. Why did that happen? Because most of them did not have any sort of exit strategy. For example, whenever a stock would fall, the traders would buy the dip, waiting for it to bounce. And, while the stocks did eventually, they weren’t so lucky. Regardless of the time frame, it is important for a trader to know when to get out so that a small loss does not turn into a big one they won’t be able to recover from.
In the end, anyone can make money in a trade, but with the proper system and strategy in place it can help produce repeatable and consistent growth results. Hopefully these tips will help you make better choices for when to buy or sell a stock while day trading.