Finance

Day Trading Stocks - harder than it looks, and even harder to master

Day trading is not for the faint of heart. It takes an ability to make split-second, unemotional decisions based on information that is often incomplete, contradictory, and changing by the second.  It also takes the courage and discipline to admit when you’ve made a mistake and immediately cut your losses.  Ego has no place in this arena. If a trade is going the wrong way, hope and intuition will not help you turn it around. Logic and sound trading strategies are crucial to maintaining control of your emotions that can otherwise turn good trades into bad ones.

Some people think that day trading is something that anyone with a computer can easily do.  Not so. To be a successful trader, you need to understand more than just the market fundamentals.  Buy and sell signals must be developed based on your individual trading style, goals, and objectives. This often involves technical analysis and indicators that are used to determine how a particular stock is trending. Some of the most popular are Bollinger Bands, moving average convergence/divergence (MACD), resistance/support levels, and price oscillators. To understand how to use such indicators takes extensive independent study or training with a professional.

The biggest advantage to day trading is that you have the capability to quickly exit a losing trade, while staying with the winners for as long as they are profitable. This may involve executing many trades in one day, sometimes moving in and out of one stock several times over.  Most professional traders are in a 100% cash position by the end of the trading day, which eliminates any exposure to overnight news events that could drive the market one way or the other. You want to avoid being stuck in a stock that is news driven without the ability to take advantage of that news as soon as it breaks.

A day trader must be extremely disciplined and process oriented in order to succeed. Randomly selecting stocks doesn’t work except when you are lucky, but luck alone will make you very little money.  Experienced traders define in advance what constitutes a trading setup and what kind of pattern and indicator combination it will take for them to pull the trigger. Such a decision requires timing and focus, allowing entries and exits without hesitation and second-guessing.  The old proverb “he who hesitates is lost” definitely applies here.

While risk is somewhat minimized by the capacity to get out of losing trades, the potential reward is limited by the fact that day trading inherently prevents you from profiting from long-term trends.  Additionally, the added commissions that are incurred from making large numbers of transactions must be factored into the profit equation. Due to the relative ease of placing trades, it’s easy to fall into the trap of overtrading.  This can be avoided by doing your research before the trading day starts in order to compile a short list of stocks that show potential setups.

Day trading requires a computer platform that provides all of the technical indicators, charting options, and level-2 real-time data feeds that are used to provide instant analysis of stock movements.  Various software platforms are offered by companies like MasterTrader and TradeStation. These platforms allow you to customize your screen layout to display the precise information you need to fit your trading style.  This should include specific charts portraying the timeframes that you want, overlaid with the technical indicators that you plan to use for buy and sell signals.

Day trading can be fun as well as profitable, but it takes a certain mindset to make it all work.  There is a sense of accomplishment associated with making money by profiting from other people’s losses. Essentially that is what you are doing since your income is created at the expense of other traders who are on the wrong side of your trades.  Great discipline, diligent research, excellent trading skills, and the ability to focus are all keys to success.

Freelance Writing by Michael Sanibel ^SM —  Freelance Writer