“Day trading” is the term used for buying and selling securities like stocks, currency, commodities and futures within the same day. Day traders seek to make a profit by leveraging large amounts of capital to take advantage of small price movements in highly liquid securities or indexes. Most experienced and professional day traders usually follow a plan involving four main strategies: security selection, determining entry points, finding a price target and determining placement of a stop-loss.
Security selection: A typical day trader looking to trade stocks usually searches for two main characteristics: liquidity and volatility. Liquidity allows the trader to enter and exit a stock at a desired price, based on the stock's market trading activity. Volatility is a measure of the expected daily price range. The more volatile the stock, the greater the possibility the stock will have drastic price changes in a short period of time.
Entry points: Once you know what kind of stock you’re looking for, you need to identify the possible entry points. One approach is analyzing the intra-day candlestick charts of the respective stocks. Some of the most common entry points include placing buy and sell orders when the price reaches floors and resistance levels, as well as identifying swing point highs and lows, pullbacks or increases in price momentum and trading volume.
Finding a price target: This involves the trader deciding where to take profits. Identifying a price target depends largely on your personal trading style. Four popular styles include:
1. Scalping, where the main goal is buying (or selling) a number of shares at the bid (or ask) price, then quickly selling them a few cents higher (or lower) for a profit.
2. Fading, a risky but potentially rewarding contrarian investment style used to trade against the prevailing trend.
3. Trading daily pivots, which involves buying at the low of the day and selling at the high of the day..
4. Momentum trading, where traders look for stocks moving significantly in one direction on high volume, and try to ride the momentum to a desired profit.
The last strategy many day traders implement is determining where to place a stop-loss order. A stop-loss order is placed to buy or sell a stock at a certain price. Stop-loss orders help day traders set how much they are willing to lose if the stock moves against their desired outcome. While useful for many types of trades, stop-loss orders are especially helpful for those trading on margin, as they are far more vulnerable than regular traders to sharp price movements.
Day-trading is not an easy skill to master. By using the techniques just described, you can potentially create a profitable strategy, and with enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds.