Basic Day Trading Techniques

Basic Day Trading Techniques

Now that you know some of the ins and outs of day trading, let's review some of the key techniques new day traders can use.

When you've mastered these techniques, developed your own personal trading styles, and determined what your end goals are, you can use a series of strategies to help you in your quest for profits.

Although some of these techniques were mentioned above, they are worth going into again:

• Following the trend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. This is done on the assumption that prices that have been rising or falling steadily will continue to do so.
• Contrarian investing: This strategy assumes a rise in prices will reverse and drop. The contrarian buys during a fall or short sells during a rise, with the express expectation that the trend will change.
• Scalping: This is a style by which a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds.
• Trading the news: Investors using this strategy will buy when good news is announced or short sell when there's bad news. This can lead to greater volatility, which can lead to higher profits or losses.
  

Which Trading Strategy Is Easiest for a Beginner?

Following the trend is probably the easiest trading strategy for a beginner, based on the premise that the trend is your friend. Contrarian investing refers to going against the market herd. You short a stock when the market is rising or buy it when the market is falling. This may be a difficult trading tactic for a beginner. Scalping and trading the news require a presence of mind and rapid decision-making that, again, may pose difficulties for a beginner.

Is Day Trading Good for Beginners?

Most day traders will end up losing money, at least according to the data.6 But, with experience, your chances of succeeding can grow. Beginning traders should trade accounts with "paper money," or fake trades, before they invest their own capital in order to learn the ropes, test out strategies, and employ the tips above.

Is Technical Analysis or Fundamental Analysis More Appropriate for Day Trading?

Technical analysis can be more appropriate for day trading. That's because it can help a trader to identify the short-term trading patterns and trends that are essential for day trading.

Fundamental analysis is better suited for long-term investing, as it focuses on valuation. The difference between an asset's actual price and its intrinsic value as determined by fundamental analysis may last for months, if not years. Market reaction to fundamental data like news or earnings reports is also quite unpredictable in the short term.

That said, market reaction to such fundamental data should be monitored by day traders for trading opportunities that can be exploited using technical analysis.

Why Is It Difficult to Make Money Consistently From Day Trading?

Making money consistently from day trading requires a combination of many skills and attributes—knowledge, experience, discipline, mental fortitude, and trading acumen.

It's not always easy for beginners to implement basic strategies like cutting losses or letting profits run. What's more, it's difficult to stick to one's trading discipline in the face of challenges such as market volatility or significant losses.

Finally, day trading involves pitting wits with millions of market pros who have access to cutting-edge technology, a wealth of experience and expertise, and very deep pockets. That's no easy task when everyone is trying to exploit inefficiencies in efficient markets.

Should a Day Trading Position Be Held Overnight?

A day trader may wish to hold a trading position overnight either to reduce losses on a poor trade or to increase profits on a winning trade. Generally, this is not a good idea if the trader simply wants to avoid booking a loss on a bad trade.

Risks involved in holding a day trading position overnight may include having to meet margin requirements, additional borrowing costs, and the potential impact of negative news. The risk involved in holding a position overnight could outweigh the possibility of a favorable outcome.