Thanks to new accessible platforms, pretty much anyone can get involved in day trading. At its most simplistic, traders make money by buying stocks and then selling them for more than they bought them for. Of course, this becomes more complex once you factor in all the different financial products available.
Day trading is not necessarily for everyone. It takes a certain type of personality and a specific set of skills. Quick online assessments can help you to see if you have what it takes and if you have the right personality traits. New traders should also always keep in mind that their investments can go down as well as up. But once you get started, there are a range of effective strategies you can take to make money on the markets. Here are six that every day trader should know.
Follow the momentum of the market
The market is constantly changing, with stocks moving up and down in price. In this strategy, traders jump onto stocks as their prices begin to increase. Essentially, traders are following the movement of the market already in progress and, by buying in, are helping to build momentum for the stock.
In this case traders are betting on the price continuing to increase and for other traders to be making similar moves. There are usually just a small number of stocks that truly fall into this category each day so you need to look closely. In this case, you might want to hold onto your positions overnight, but this can come with its own risks.
Many traders however will take the opposite approach and bet against the current movement of prices. This contrarian position essentially assumes that rises or falls will be coming to an end very soon and start to reverse.
Traders buy during the fall, or short sell during the rise, with the expectation that changes are about to happen. Whether or not you expect this to take place could depend on the past behavior of the stock or current world events.
Scalp small price gaps
This is a more advanced strategy that day traders can take and involves moving quickly, making trades within minutes or even seconds. It essentially involves exploiting small price gaps in the bid-ask spread.
Although each individual trade will create very little return, the idea is that a very large number of these can be made quickly and really add up. Beware though, you need to move with lightning speed. It’s not a strategy for anyone only keeping half an eye on the markets.
Take your cue from the news
Some traders do not let the current market affect their decisions and instead rely on the news. Essentially this means buying when there’s good news for a company and then selling when there’s bad news. For example, if a company announces a new CEO, or is involved in a major court case, this will be in the news and affect the market.
To make this work, traders need to be monitoring the news around the clock and be ready to react quickly. It also requires monitoring a diverse set of business specific news to cover a fast-paced 24-hour news cycle.
A stock becomes breakout when the stock price rises above its former top resistance price. This isn’t always easy to spot at first and so, before getting started, traders should familiarize themselves on how to spot a breakout stock.
Decisions on whether or not to buy or sell then depend on the volume of shares trading hands. If the volume is high, the breakout price is much more likely to be sustainable and, therefore, profits are more likely.
Use pullback strategies
This strategy takes a little more time and reflection to make work and works well for those who prefer to take their time to understand markets before jumping in. It involves finding a stock with an established trend, and then monitoring this over time. When there’s a price decline from the trend, then the downward price movement — or pullback — is where to buy for the best possibility of profit.
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Day trading can be both exciting and financially rewarding. Success, however, depends on having a properly thought-out strategy in place. Different strategies lend themselves differently to certain personality types, so it’s worth taking the time to understand yourself as a trader before picking the approach that’s right for you.