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Trading Strategy
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Day Trader
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Day trading 101 - the mind-set of an online day trader
What exactly do day traders do all day? How do day traders make their money? The answer would surprise most people. Most of the time, it is not the high stakes game of poker that people on the outside think it is. Remember, successful day traders are not gamblers. They understand the nature of risk, but that does not mean they blindly throw their trading capital at each and every stock that comes up on the quote screen. Nor do they base trading decisions entirely on hunches, gut feeling, or instinct.
What are the essential requirements for a successful day trader
The first and foremost characteristic that day traders need is trading knowledge and skill. Anyone trading stocks should read as much as possible about stock trading in general.
Day trader versus gambler
My point is that good day traders follow the signals from the trading system they use, and they do not gamble. Bad traders, or soon to be ex-traders, do not have a trading system; they gamble.
Day trader's objective versus investor's objective
There is a clear divergence of objectives between the investor and day trader. The objective of an investor is to earn a long-term capital appreciation or long-term return on the investment with a limited risk. On the other hand, day traders seek to double their trading capital every few months.
Day trading: What should you trade?
There are many instruments suitable for day trading: stocks, futures, options on stocks, options on futures, and options on market indexes. The concern of the day trader should be with whether the particular option or future is sufficiently liquid and has adequate leverage to enable profits to be make on a day trader's time frame. Beyond that, the choice of instruments should be based on the trader's strategy, previous experience, and market conditions.
What makes a good day trading instrument?
The two most important characteristics for profitable day trading are liquidity and volatility. Liquidity is the extent to which transactions can be quickly and easily executed. Liquidity is the lubricant, but volatility is the engine that drives the profit machine.
Is day trading dangerous?
There are other reasons that risk is less for the day trader than for the position trader. Day trading permits a fairly quick response to market behavior. Because of the speed with which the trader can act, the continuing loss of capital caused by a market moving in the wrong direction can quickly be curtailed. And, since positions are not held overnight, the risk incurred from overnight gaps is eliminated.
Day trader Versus Investor
The day trader's ultimate objective is to trade expensive and volatile stocks on the NASDAQ and NYSE markets in in increments of 1,000 shares or more, and profit from the small intra-day price movement. The day trader may make many trades in a single day, holding onto stocks for only a few minutes (or hours), and almost never overnight. Day traders are short-term price speculators. They are not investors, and they are not gamblers.
The advantages of day trading
The key advantage of day trading is its speed. Now the technology is advanced enough to afford day traders the ability to receive and observe real-time price quotes tick by tick and to send electronically an execution order directly to the NASDAQ market maker. Electronic order execution is fast. Confirmations are received in seconds. Exiting trades is as easy and fast as entering the trade positions.
What is day trading?
Day trading consists of the direct opening and closing of stock positions with major stock exchanges, either using a computer on the trading floor of a branch office of a day trading firm, or using one's home or business computer to access an internet broker. The keyword in this definition is direct. In day trading, a trader has direct electronic access to NASDAQ market maker or NYSE specialists.
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