Day Trading Principles: Trading on a Small Scale
High volumes, fast action, and volatility define Day Trading in the stock market. Because the potential gains are often small in percentage, the practice is generally dominated by investors with more capital to invest, who can realize smaller gains for more money. At the same time, day trading is not exclusive to larger investors. Day trading strategies and forex trading strategies for small investors are equally relevant and dependent on the same basic principles.
When examining a potential stock, two criteria are all important when looking at intra-day performance: “liquidity” and “volatility.”
The liquidity of a stock is defined by its trading volume as well as its supply. This is influenced primarily by high levels of investor interest in the stock on a daily basis. These conditions minimize the chance of the spread, the difference between the asking price and the bid, widening and causing slippage. (Slippage occurs when market interest does not match the asking price, and can often cause a stock to become negatively volatile.)
Volatility is the expected range of trading on the intra-day scale. A greater volatility creates more opportunity for gain as well as for loss. Within these criteria, stocks can be traded for more significant gains on a daily level, while negative risk is minimized.
Examining and trading a stock that meets these requirements involves the use of a definitive strategy. Many different day trading strategies can be effective and lucrative simply due to the volatility of the daily market.
Scalping is a common practice that means buying into a stock and selling out of it immediately when it becomes profitable. This strategy minimizes gains, but more significantly, risk. This is often more difficult with less capital to invest, but not entirely out of the question.
Fading is a practice that bets against a stock when it has risen rapidly in value. Traders who fade stocks believe in the reactionary nature of the market, meaning if a stock changes rapidly in value; it will quickly be corrected to a more reasonable value.
Trending a stock is betting that the course of its movement will continue – if the value is falling, it will continue to fall, and if it is rising, it will continue to do so. This often bets that a stock’s range of trading will increase, rather than remain stagnantly in a set trading range. This strategy can be the most potentially lucrative for smaller scale investors.
Channeling a stock is betting that the range of its value will stay in relatively the same position over the course of the day. This entails buying at the lower end of a stock’s range and selling at the peaks over the course of the day.
What makes day trading exciting for many investors is that all of these strategies can secure significant gains as well as significant losses. The best day traders have a strong feel of the market, being able to sense when a stock is reaching a relative maximum or minimum within its range. When considering entering the intra-day market, it is advisable to watch particular stocks and practice without risking money.
More reading:
- day trading for a living
- Currency trading for dummies
- Forex investing
- Forex trading secrets
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