Wednesday, September 28, 2005

When to Adopt a Day Trading Strategy

Now that you have considered which stock trading strategy suits your personality and timeframe, let’s look a closer look at day trading. What is it? Is it risky? What’s with the bad reputation? Why would I want to day trade?

First, let’s just clarify that day trading by definition is simply entering and exiting a trade in the same day – a day trade. The phrase day trading became popular several years ago as people made and lost fortunes in the highly volatile market by stubbornly trading on margin when they were already losing large sums of money. This has tainted the image of day trading, which is actually a trading style designed to limit risk!

Day trading may be your choice of trading style if you have another job and cannot manage positions all day, or just cannot sit in front of your computer for hours on end. You may have a short attention span and enjoy a faster pace in your life, uninterested in patiently waiting for bigger moves to develop. If this sounds like you, then maybe a day trading strategy is what you need. Day trading is all about capturing small, incremental profits numerous times throughout the day rather than catching one lasting move. After all, you can turn a profit in the market by taking a small position and looking for a big gain, or you can take a bigger position and look for a small gain. The latter is what day trading is all about.

Because day trading timeframes are so brief, traders who day trade often pay lower commission rates due to the volume they generate with numerous trades. Brokerages like to be able to boast about the volume their traders generate, so they entice day traders with extremely low commission costs. This helps the day trader to overcome the cost of trading when looking for smaller moves many times each day.

Day traders will generally trade more shares per trade than they would if they were holding a position. This is not necessarily risky, as the day trader is immune from overnight gaps which may haunt the dreams of a position or swing trader. A day trader may be more willing to use margin buying power when the trade is only expected to last a short time and the sell button is right at their fingertips. This advantage helps a day trader achieve the same profit objective that a swing trading strategy can attain without requiring several days to capture it or taking on overnight risk. A lot can happen in the world between the hours when the market closes and the following morning’s opening bell, and day trading eliminates that exposure.

Knowing when to day trade is important, and market conditions should be favorable to such a timeframe in order to maximize your profit potential. Generally, when the market is spending many days in narrow ranges and volume is lacking, it is a better time to day trade. The tendency of the stocks during such periods is to make quick initial moves but then fizzle out because they lack the volume required to fuel a bigger move. The summer months are often this way, with many traders on vacation and stocks not moving much with the light volume the summer months often produce. Holiday weeks are often the same way, and day trading initial moves to capture quick profits can be a good way to continue pulling money out of the market during the times when long lasting moves are basically nonexistent. At times, the overall market may be range-bound while awaiting a decision on interest rates or a big economic number to be released. Day trading during these times is also usually a more favorable approach.

While there are day trading strategies which may work under many market conditions, the adaptive trader who is willing to shift trading timeframes can day trade when market conditions warrant such a mode of operation.

In part 3, we’ll take a closer look at swing trading and which conditions are suitable for a longer trading timeframe.

The Stock Bandit

Monday, September 26, 2005

Trading Strategies - What's Right for You?

It’s the age-old question that so many traders ask themselves and each other: which stock trading strategy should I follow? Does day trading offer better rewards than swing trading? Should I scalp or hold positions? How can I best limit my risk, yet still generate the returns I want?

Like others, I have often wondered whether I should be day trading or swing trading. I have found ways to do both, and each style has its advantages and disadvantages. Ultimately, I think it’s a question traders should continually ask themselves, rather than just once early in their trading careers. Isn’t adaptation the key to successful trading over time?

The adaptive trader is always evaluating current conditions. Always be asking yourself questions. Is the market in an uptrend? Is the market in a downtrend? Is the market trending at all? Are the intraday moves smooth with good volume, or are they narrow, choppy and drifting on light volume? By staying aware of current conditions, a trader is able to determine which trading style will suit him best in the near term, allowing him to limit risk and maximize the rewards of profitable trades.

As you consider the best way for you to trade, be sure to evaluate your own personality traits. By employing a trading style that corresponds with your personality, you are essentially being your own best friend (a cheesy phrase but a necessity for traders). If you’re patient, consider a longer timeframe. Your personality will help you to stay in positions while you wait for the outcome to develop. If you are hyper-active with lots of energy and a short attention span, you may be better of day trading smaller incremental moves on a short term basis. Take stock of your personality when contemplating the best trading strategy for you, and soon you’ll be on the right path toward claiming the profits that have your name on them.

In Part 2, we will take a look at day trading strategies, the pro’s and con’s of that approach, and what market conditions are best suited for that style of trading.

The Stock Bandit