Day trading is the term used for purchasing and selling a stock in the same day. A day trader is someone who profits on the stock market by employing day trading strategies. Often day traders will use “margin”. “Margin” is the borrowing of capital through the traders brokerage which enables the trader to purchase more shares than they could have if they only used the amount of money in their account. Often these trades are very short, the trader will buy a very liquid stock and sell on a small price move. Here are some strategies to use if you plan on day trading for a living.
The Stocks That Day Traders Trade
Day traders are looking for quick price movements that they can profit on. They prefer stocks that are volatile and liquid. The volatile stocks move up and down more often enabling traders to enter and exit on these swings. Liquid stocks allow a trader to enter and exit a stock with ease. Some stocks always fit this category, others may develop volatility and liquidity with exciting news for the company or sector. Also over time some stocks will stabilize and no longer be acceptable for day trading.
Day Trading Strategy: Scalping
Scalping is the most popular day trading strategy employed. The scalper will buy or short a stock depending on the direction of the expected move. They will then sell or buy back that stock as soon as it hits the profit area of the scalper. A scalper who buys a lot of shares may be looking to gain a nickel or dime on each trade. If they can make 10 or 20 of these trades during the day they will have a decent profit before the day is through. Leaving them with no overnight risk.
Day Trading Strategy: Fading
Fading is a contrarian style of trading. When a stock moves up quick and strong the trader shorts it. This can be very dangerous but it is a powerful day trading strategy when used correctly. After a stock runs, the momentum traders sell their shares and the price pulls back. Fading is attempting to make money on that pullback. If you wish to employ this strategy watch a stock for a long time marking exits and entries for these moves. Fading can be used in the opposite direction as well. When a stock gets knocked down in price the trade will be in the bounce from the bottom. These contrarian trades make up most of my day trades.
Day Trading Strategy: Momentum
The momentum strategy is trading on good or bad news. A momentum trader will hear good news and buy the stock. They will then ride the price climb until they feel or see signs of it reversing. As mentioned before, this reversal point is where the traders using the fading strategy enter. Its tough to do both on one stock but some traders have this mastered. Buying a stock and then shorting it at reversal only to re buy it again at the next reversal.
Day Trading: Daily Pivot Points
As with all day trading, pivot points work off of a stocks volatility. This day trade is usually a longer trade. A pivot trader will attempt to buy a stock at the low of the day and sell it at the high of the day. Buying on the reversal off of the bottom and selling at the reversal near the top. A lot of traders besides working off the usual indicators will work off the previous few days of highs and lows as guidelines.
Day Trading: Arbitrage
With arbitrage trading the trader will buy or sell stocks based on the value difference between two markets. If a stock receives good news and is increasing in price on the NASDAQ an arbitrage trader will quickly check the futures for the stock and if they haven’t risen the same percentage in price, the arbitrage trader will buy the future and sell when it catches up with the value of the stock on the NASDAQ
Day Trading: Penny Stocks
Day trading penny stocks is difficult. There is no consistent pattern to trade as in the day trading strategies listed above. Traders who buy penny stocks will often find news that will make a stock run and try to buy before the crowd. Often these traders will promote their purchases on a penny stock forum with hopes that other traders will follow them and drive up the price. Other traders will look for penny stock picks from big groups or promoters and try to scalp the volume and liquidity of the stock.
