Day trading in stocks, options, currencies, and futures can be profitable for a trader who has substantial experience in the realm of trading. It involves placing numerous buy and sell orders, assuming short and long positions for small intervals, and typically closing out positions within the same trading day with the intention of making quick profits. It's a highly speculative activity that involves gauging the direction of the intraday market, and may result in the trader having to bear substantial losses in the event of incorrect assessment.
Understanding and implementing the strategies that work is not an easy task since these require experience, capital, and other trading resources. People who are interested in it, should have a good understanding of the stock and the forex market. The following strategies may serve as guideposts for aspiring day traders.
Swing trading is a relatively safe strategy for beginners, since it involves capturing gains in a stock within a span of one to four days. Momentum traders buy on news releases and ride the trend till signs of reversal become apparent. Unlike momentum trading, fading involves adopting a contrarian viewpoint, thus buying when there is a dip and selling when the market rallies. Contrarian stock investing involves going against conventional wisdom and is fueled by the belief that the masses are generally wrong.
Traders, who work for large institutions, have direct access to a dealing desk and can thus profit from merger arbitrage. Scalping is a concept that requires quick execution and is not recommended for people who do not have direct access to a dealing desk. It involves profiting on trades within seconds to minutes by buying (selling) a large volume of shares at the bid (ask) price, and shorting (longing) them within minutes at a higher (lower) price, thus becoming richer by a few cents per share.
Picking Highly Liquid Securities
A day trader should focus on buying and selling highly liquid stocks, since it hinges on the ability to buy stocks and sell the same within seconds to minutes. Stocks that have greater liquidity can be longed and shorted at a favorable price. The difference between the bid and the ask price is known as spread and it depends on the level of supply, demand, and trading activity for the stock. Greater liquidity also reduces slippage, which is the difference between the expected price of a trade and the price at which it actually executes.
Picking Volatile Stocks
Stock volatility is another important feature that one must focus on before assuming a long or a short position. Volatility is calculated by finding the annualized standard deviation of the daily change in the price of the security. If the relative rate at which the price of a security moves up or down is high, its volatility is high and it gives the trader an opportunity to buy low and sell high in the same day. In fact, the value of a call and a put option increases if the underlying stock is highly volatile!
Accessing Level II Quotes and Other Real Time Information
Stock quotes are available on almost all websites. However, the information that is relayed is delayed by 15-20 minutes. You should be able to track stocks by the second, since most positions are closed out within a same trading day. Level II quotes provide enormous insight on a stock's near term potential and on traders who are buying or selling the same. Other real time news/information is also necessary for making profitable trades.
Margin Trading and Stop Loss
Pattern day traders only trade on margin accounts, since trading on cash account is limited to trades that do not violate the Federal Reserve Board Regulation T which is the basis for governing cash accounts. Moreover, employing leverage results in increasing the return on investment (ROI). Others can trade on margin, provided they place stop loss orders that are designed to limit the loss on a security position.
Ultimately, people need to figure out successful strategies that work for them and implement the same for best results. At the end of the day, strategies that yield results have to be figured out by trial and error method. Thus, people with limited capital or those who are risk averse may be better off investing rather than speculating.