Day trading refers to purchase and sale of stocks in same day and trying to make profits with small fluctuations in the stock prices. Generally day traders make use of leveraging to multiply their returns and trade highly volatile stocks to capitalize on small price movements. Day trading is very risky for beginners who are not aware of the market trends and technical indicators. There are several day-trading strategies available such as Scalping, Fading, Momentum based strategy, Daily pivots etc. Some day traders also make use of leveraging to increase their returns and trade on huge positions with less capital. But leveraging can be very risky for beginners and there are chances of losing a lot of money. Some of the important things to be considered by a successful day trader are efficient money management, selecting the right trading strategy, technical indicators and choosing the right entry and exit points.
If you are a beginner, you should focus on minimizing risk by investing in small amounts and avoid taking huge positions till you get comfortable with the market trends. You should not get excited with profits and use leveraging to trade high volumes which can be risky and result in significant losses. Scalping is a popular day trading strategy among beginners which involves making profits based on small price movements in the market. Day traders who follow scalping strategy will try to sell their stocks immediately after the trade becomes profitable. Scalpers perform multiple trades within a single day with each making a small amount of profit by exploiting the bid-ask spread. Scaling is a very fast-paced strategy and requires careful execution with precise timing which can be difficult for inexperienced traders. Also the holding time of the stock is very short in scalping and most traders use 4:1 margins to increase their profits.
Another effective day trading method is based on momentum which involves spotting the stocks with strong trending moves in one direction supported by huge volume. It requires the traders to search for stocks which are trending heavily based on the earnings or recommendations of market experts. These trending moves are usually seen after the quarterly earnings report of that particular company is released or soon after important financial announcements like US Jobs report, Interest rate hike etc. Momentum traders will buy stocks which are hot based on the news releases and follow the trends till it shows signs of reversal. Some momentum traders will look for bearish stocks which are about to decline after a strong upward movement. Beginners should always trade with higher time frames and avoid scalping techniques because it requires more precision and can be risky.
Momentum traders will make use of price action charts and technical indicators to analyze the stocks with strong trends. The momentum indicator will provide clear information about a stock’s accrued net change over certain time period. You should carefully monitor the daily charts and look for stocks which are close to their ninety day breakouts, since they have better chances of winning trades. If you are trading on margins, you should always use stop-losses to minimize the loss in each trade. Since leveraging is risky and any sharp movements in the price can result in huge losses, you should always place a stop-loss order at certain price level based on your risk tolerance. Determining the suitable entry and exit points for each trade is very important for momentum day traders.
Steps to Execute a Momentum Strategy:
In order to successfully implement a momentum strategy, you can need to follow these 3 simple steps one-by-one.
- First you should figure out the stocks which are having strong upward/downward trend supported by high volume. These are stocks which are trading close to their 90-day or yearly highs. You can get this information by analyzing the price charts of interested stocks. Once you have selected the stocks with strong trends, you should order them based on their performance.
- Decide the entry position for the trade. You can accomplish this by using various tools such as Intra-day candlestick charts, real-time news feeds, ECN or Level II. You should either enter when the charts are showing a strong upward trend or wait for downfall and purchase the stocks during bearish trend.
- You should clearly determine the exit strategy for the trade and decide at which position you will make profit and exit the trade. You should also decide at which position you will exit if there is a loss. You should always set a stop-loss limit for each trade to minimize your losses.
Some of the common mistakes made by day traders are jumping too quickly into a position before confirming the strong trend and closing positions too late after the stock has reached its saturation point. You can also use the momentum day trading strategy with binary options if you have good knowledge about the market trends of the underlying asset.
Categories: Stock Market