It used to be that only those who actively traded in the stock market were those working in brokerages, trading houses and big financial institutions. Thankfully, the internet has changed all of that and average individuals can nowadays get in on the action. In this article, we’re going to delve into the world of day trading and explain what it is and what kinds of strategies are used.
What Makes this Strategy Different?
It is defined as the buying and selling of a stock in a single trading day. The forex and stock markets are the most common playing grounds as buyers can leverage their strategies to capitalize on the slight movements of prices in liquid stocks and currencies. If an individual executes four or more-day transactions during a five-day period, he/she is called a pattern day trader. There are specific pattern day trader rules attached to this strategy. They include having a minimum of $25,000 in a margin account and the number of transactions must amount to more than 6% of the account’s total activity during that five-day period.
Essential Strategy Components
If you’re trying to make money on tiny movements within a market, choosing the right stock is vital. To do that, you must consider three things:
- Liquidity – This is important as you’ll be able to enter and exit trades at a stable and good price. There will be small spreads between the bid and offer and action normally has little effect on the overall stock price. Crude oil, natural gas, and gold are all good examples of highly liquid markets.
- Volatility – Volatility may sound like a bad thing but it’s important when choosing a strategy, as it will determine your potential profit range. The more vigorous and unpredictable a market is, the bigger profits or losses you can make. Cryptocurrency is a good example of a volatile market.
- Volume – If you want to know the number of times a stock has been traded within a specific timeframe, this is the indicator you’ll be looking at. Volume is important, as it will tell you how much interest there is in that market and you’ll be able to make more informed decisions.
Different Kinds of Day Trading
You’ll find lots of strategies that fall under this umbrella and which one(s) you choose to apply will depend on a number of different factors including how much risk you want to take and how much time you have to spend in front of a screen watching the market. Some of the different kinds of strategies include scalping, momentum, breakout, reversal and using pivot points.
Characteristics Needed to Use This Strategy
Not everyone can be successful using this strategy as it’s risky but there are certain characteristics that can help improve your chances of making a good profit. These include having knowledge of and experience in the marketplace, having sufficient capital, practicing discipline, and being able to formulate a strategy that works. Day trading is not a get-rich-quick scheme. However, there are profits to be made in the right markets so it’s an area worth exploring if you have all of the characteristics that we’ve just outlined above.
