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Most financial markets are open between certain hours on a daily basis.
Wall Street, for example, officially the New York Stock Exchange, is
open Monday to Friday from 9am to 5pm Eastern Standard Time. Between
those hours, Monday to Friday, hundreds of people trade units, buying
and selling in accordance with the shifts and trends of individual
markets. People trade everything from stocks to currencies, stock
options to future contracts. Some markets are open around the clock,
but day trading refers specifically to the practice of buying and
selling financial units on a market on a single day.
If you’re a day trader, you might buy stock from the Coco Cola at, say,
9.30am. You buy 100 units at $5.00. You’ve seen the value of the stock
is on an upward trend. When the market for Coco Cola – the market for
beverages – opened that morning, the value of Coco Cola’s stock was
$4.95. You buy at $5.00. You’ve watched the stock value carefully
during the day. It goes up to $7.00 by 1pm. But then, after lunch, the
stock begins to loose value. It goes down from $7.00 per unit to $6.90
and so you decide to sell the units of stock you bought this morning.
In the morning you bought 100 units of Coco Cola stock for $5.00. When
you sell the 100 units in the afternoon for $6.90, you’ve made a cool
profit of $190 as a day trader.
Types of Trades
This section will arm you with the basic knowledge you need
to conduct trades as a day trader. As there are many different types of
traders and, whether you realize it or not, you’ll encounter most of
them. We’re going to start by looking at what it means to be a day
trader and compare that role to that of most other traders so the
different habits are highlighted.
Day Traders
Day traders basically buy and sell stocks throughout the day in the
hope that the price of the stocks will fluctuate. Most traders want the
prices of a stock to rise so they can make a profit, but some have
arrangements to profit when a stock value falls - buying shorts, it’s
called.
Anyway, a day trader will hold stock anywhere from a few seconds to a
few hours in the day. At the end of the day, however, they will always
have sold the stock before the close. The day trader specifically
controls their activity to avoid being at risk outside of office hours.
If they held on to stock overnight, for example, they would be at risk
of losing out on their gains. The objective of day trading is to get in
and out of any particular stock for a profit as fast as you can.
There are two main types of day traders: scalpers and momentum traders.
Scalpers: This group trades like their playing hot potatoes. Their
activities are limited to the rapid and repeated buying and selling of
a large volume of stocks during a very short period of time, anywhere
from a few seconds or a few minutes at a time. The objective is to earn
a small per share profit on each transaction at a minimum risk.
Momentum Traders: These types of day traders identify and trade stocks
that are in a moving pattern during the day. Their objective is to buy
stock at the bottom and sell it at the top.
Swing Traders
Swing trading is quite similar to day trading except that swing traders
will normally have a longer working day; swing traders generally hold
stock for longer. Swing traders are similar to day traders, in that
they also attempt to predict how the stock price will act over the
short term. Unlike day traders, however, they will hold stocks for more
than one day, if necessary, to give the stock price some time to move.
Although swing traders have the opportunity to earn higher returns than
day trading, primarily due to the extended hours they work on trading,
swing traders also assume greater risks. Where day traders liquidate
their stock at the end of the day, swing traders take on overnight risk.
Although the term, ‘overnight risk’ doesn’t sound too scary, many of
the overnight risks assumed by swing traders are quite substantial. For
example, developing news events and earnings warnings that are not
announced until trading closes could affect the price of the stock.
Swing trading is not for the faint hearted.
Position Trading
Similar to swing trading, position trading involves working within a
longer time frame. Position Traders have been known to hold onto their
stocks for weeks or months at a time, trying to analyze trends to get a
larger movement on the price. Positions traders absorb the risk that
trends may not be fully played out for several weeks or months.
Trading Lingo: Some Key Terms for Day Traders
While there are plenty of terms you’ll pick up as you go, it’s useful
to have an understanding of some of the most basic terms used in
trading. If for no other reason, knowing these terms will allow you to
save time reading more about day trading as you look to improve.
Electronic Communication Networks (also called ECNs): these are
electronic trading systems that automatically match, buy and sell
orders at specified prices. Traders, institutional investors,
broker-dealers, and market-makers trades directly
with an ECN; if a subscriber wants to buy a stock through an ECN, their
order is matched to a sell order.
Horizons: Important to your investment strategies, the term horizon
refers to the length of time a sum of money is expected to be invested.
The terms investment horizon and time horizon refer to the same thing.
Market Makers: These are generally brokerages or banks that buy or sell
stocks at publicly quoted prices. These firms display bid and offer
prices for specific numbers of specific securities (another word for
stocks), and if these prices are met, they will immediately buy for, or
sell from their own accounts. The work of market makers is very
important for maintaining the value and status of a particular stock.
Spreads: The difference between the current bid and the current ask or
offered of a given security.
Tick: The smallest possible movement in the price of a security. Also
called minimum fluctuation.
Waves and Troughs: This basically refers to the shifts and changes of a
stock’s value.
Volatility: The relative rate at which the price of a security moves up
and down. Volatility is found by calculating the annualized standard
deviation of daily change in price. If the price of a stock moves up
and down over dramatically short time periods, it has high volatility.
If the price rarely changes, the stock has low volatility.
continued on How
To Day Trade
Note:
After you sign up for this package, you
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The information
in this guide and on this
site should not be construed as financial advice and are for
information purposes only. The authors and publishers are not financial
advisers. You should rely on your advisers and lawyers for financial
advice.
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