The Basics of Day Trading

Day trading

Day trading involves opening and closing a position in a single day. A day trader does not hold positions overnight, choosing instead to exit his or her positions every evening, and re-enter other positions the following day. Day traders aim to profit from small market fluctuations in stock prices, instead of long term market movements.

Unlike the traditional investing strategy of buying low, holding, and then disposing at a high price, day traders focus on the price action of an asset instead of its long-term potential. As such, day trading strategies require investors to remain up to date with latest news that may result in market fluctuations. On top of that, they have to do vast amounts of technical analysis in order to make a profit.

Day traders speculate on various markets, including forex, futures, stocks, and commodities. Shares in particular are popular, because the risk of markets gapping overnight is removed by exiting positions at the end of each trading day.

Day traders often do their technical analysis based on historical price movement of a stock plotted on a 2-dimensional chart. You have to know how to read charts if you want to be a successful day trader because they are the key behind predicting future movements in stock prices. Here are some of the most effective parameters you can use to analyse market movements:

Pivot Levels

The pivot is the most crucial level in day trading. When the market is underneath the pivot, it’s a bearish signal, and when the market is above the pivot, it’s bullish. Some traders will only take short trades when the market is below the pivot, and only buy when the market is above the pivot.

Although there are various ways of calculating pivot points, the five-point system is the most common. In this system, day traders use the previous day’s close, high, and low, along with two resistance levels and two support levels (adding up to 5 price points) in order to get a pivot point.

Trend Lines

Day traders use trend lines to do their technical analysis because they are important for identifying and confirming trends. A trend line is a straight line connecting two or more price points, and extending into the future to act as a resistance or support line. For a trend line to be considered proper, it has to connect two or more troughs or peaks. Trend lines are categorized as either down trend or uptrend.

A down trend is formed by connecting two or more high points and has a negative slope. For the line to have a negative slope, the second high must be lower than the first. On the other hand, an uptrend line is formed by connecting two of more low points and has a positive slope. For the line to have a positive slope, the second low must be higher than the first. Not only do uptrend lines act as support, they also indicate that net-demand is rising even as the price increases

Moving Averages

Day traders simply plot the 200-day moving average on their charts. If the price of the stock falls below the moving average line, it is a sell signal, but if the price rises above the moving average line, then it is a buy signal. Traders can also make use of the 10-day moving average or 50-day moving average.

Years back, day trading was only done by large investment firms. However, that has changed and it has become more popular in recent years due to the increased prominence of margin trading and rise of trading technology. Day traders are now able to capitalize on markets that are making positive price moves as well as negative ones, thanks to derivative products such as a contract for differences (CFDs).

Nonetheless, it’s important to have in mind that day trading involves a lot of risks and it’s not for everyone. Before giving it a try, you need to have an in-depth understanding of various strategies for making a profit in the short term, and how markets work. Practice is important in the world of day trading since you are putting your hand earned dollars at risk.

Practice methodically in a demo account, trading your strategy again and again, before risking any real money. In addition, consider your capital requirements, as well as your constraints and goals, before starting to day trade. Above all, remember to choose a brokerage firm with competitive fees and great customer service because you will be trusting them with your money.