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Day trading: Techniques
Day trading: Techniques
Authors: TradingDay.com, Psb777, Wai Wai, GraemeL, Smallbones, Triffid
Publisher: TradingDay.com, Version: 1
Techniques
There are six common basic strategies by which day traders attempt to make a profit: Trend following, playing news events, range trading, scalping, technical trading, and covering spreads. In addition to or instead of these, some day traders instead use Contrarian (reverse) strategies (more commonly seen in Algorithmic trading) to trade specifically against irrational behavior from day traders using these approaches. Some of these approaches require shorting stocks instead of buying them normally.
Trend following
Trend following, a strategy used in all trading time frames, assumes that financial instruments which have been rising steadily will continue to rise, and vice versa. The trend follower buys an instrument which has been rising, or short-sells a falling one, in the expectation that the trend will continue.
Range trading
A range trader watches a stock that has been rising off a support price and falling off a resistance price. That is, every time the stock hits a high, it falls back to the low, and vice versa. Such a stock is said to be "trading in a range", which is the opposite of trending. The range trader therefore buys the stock at or near the low price, and sells (and possibly short sells) at the high. A related approach to range trading is looking for moves outside of an established range, called a breakout (price moves up) or a breakdown (price moves down), and assume that once the range has been broken prices will continue in that direction for some time.
Playing news
Playing news is primarily the realm of the day trader. The basic strategy is to buy a stock which has just announced good news, or short sell on bad news. Such events provide enormous volatility in a stock and therefore the greatest chance for quick profits (or losses). Determining whether news is "good" or "bad" must be determined by the price action of the stock, because the market reaction may not match tone of the news itself. The most common cause for this is when rumors or estimates of the event (like those issued by market and industry analysts) were already circulated before the official release, and prices have already moved in anticipation. The news is said to be already "priced-in" to the stock price.
Scalping
Scalping originally referred to spread trading. Scalping is a trading style which arbitrage for small price gaps created by the bid-ask spread. It normally involves establishing and liquidating a position quickly, usually within minutes to even seconds.
Shorting stocks
About 75% of all trades are to the upside. The trader buys it and expect it to rise, because of the stock market's historical tendency to rise and because there are no technical limitations on it.
About 25% of equity trades, however, are short sales. The trader borrows stock from his broker and sells the borrowed stock, hoping that the price will fall and he will be able to purchase the shares at a lower price. There are several technical problems with short sales: the broker may not have shares to lend in a specific issue, some short sales can only be made if the stock price or bid has just risen (known as an uptick), and the broker can call for return of its shares at any time. Some of these restrictions (in particular the uptick rule) don't apply to trades of stocks that are actually shares of an exchange-traded fund (ETF).
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This article uses
material from the Wikipedia article "Day trading" (Version
09:24, 15 September 2006) . It is licensed under
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