Guide to Day Trading
Day trading is absolutely the riskiest form of investing, and it not for the faint of heart. What is day trading? Instead of buying stocks for long periods of time like traditional investing, day traders buy and sell stocks within the stock market day, even in as little as a few seconds. Day trading requires commitment, knowledge, and a disposable sum of money for success. These investments, especially in the beginning, shouldn’t be considered a main income, nor should you invest money that is needed for day to day or even emergency bills. With dedication and research, however, day trading can be a very desirable way to make a lot of money.
As with any investments, there are pros and cons associated with day trading. First, let’s have a look at why other investors choose this style of investing.
Pro’s of Day Trading:
- Probably the largest reason is the sense of control one has with day trading. You choose when to buy, you choose when to sell. The power is entirely in your hands.
- Short term commitment. Some investors may seem a little uneasy putting their money in something that will be tied up for a long time, years even.
- Instant gratification. Most, if not all, trades are done within a working day; you never go to bed worrying about where your money is, and where it is headed.
- With such quick turnover, your money can increase rapidly.
Now let’s have a look at the risks, or cons of day trading:
- You can lose some or all of your investments in minutes. Since buy and sells are made so quickly, money can be lost that quickly, too.
- It requires knowledge. Day trading isn’t something you can jump into and be great at it. It takes practice, skill, and time to become great at it.
- Most lose a lot in the beginning. This is why it’s important to use a disposable income. Until you are well versed about when to buy and sell, it is easy to lose your investments.
Not only does day trading require more research and time than other methods of investments, it also requires more equipment. The correct computer programs, along with a high speed computer and internet connection are essential in the day trading business. You also would probably want to stay away from options if you are day trading. Unlike other investments which require a broker or adviser to make or help you make decisions, you conduct your own business, and earn your own money.
There are many different methods day traders use. Here are a few:
- Scalping has the quickest turnover of all trading. Buys and sells are made as little as within seconds of each other. This is the most popular method of day trading. The stocks are generally sold as soon as they become profitable. This requires agility and precision, as quickly as a stock becomes profitable, it can start to go downhill again.
- Trend trading is keeping a stock for as long as it continues to follow a trend, and selling as soon as that trend changes. This requires you to keep a close watch on your selected stock, watching minute by minute, if not by seconds.
- News and rumor trading entails watching for changes in exactly what it says: in the news and through rumors. When you hear or see a turn of luck for your particular stocks, you sell before you start to lose money.
- Range (or channel) trading is done almost exactly opposite trend trading. With range trading, you assume the new trend will continue. Stocks are purchased at near-low prices, and sell at high prices.
- Swing trading isn’t quite day trading, because it can last for more than a day, but it still substantially shorter than other methods of buying and selling stocks. Those who swing trade may wait a day or so for the perfect time to trade. This can sometimes have greater returns, but holds a higher risk, as what happens overnight in the stock market can have a great effect.
These aren’t all the methods traders use, only some of the more popular ones. It can be beneficial, however, to stick with one (or a couple) styles of trading. The most successful traders gain the most knowledge about a few things, rather than spreading their knowledge around. Get to know specific companies, and stick to trading with what you know. The more you learn about your desired companies, the easier it will be to predict trends, and learn when to buy, and when to sell. That being said, sticking to certain types of trading can really benefit as well. Instead of learning a little about each style, getting to know one or two tried and true methods will teach you quickly the best times to buy and sell.