With the continuing proliferation of the Internet, online stock trading has received a big shot in the arm and it is now possible for investors with modest resources to dabble in stock trading. Moreover, the steep reduction in transaction costs and brokers' commissions has also made it possible for small traders to trade as frequently as they wish. This has created a new category of small investors called day traders. The day trading was previously the preserve of institutional and large investors but today any small investor can practice it.
Day trading essentially means that all positions accumulated during the day's trading squared off or closed out by the end of the trading day. Some traders will let profitable positions run overnight but, by and large, profits and losses are taken by the end of the trading day. Brokers will also allow greater leverage to day traders so that bets can be substantially increased. For instance a deposit of $25,000 will allow buying up to a limit of $100,000 provided the position is reduced or squared by the end of trading hours. This leverage also comes without cost because brokers generally charge interest on overnight balances. There is always of course the danger of margin calls if you are in a losing position during the day.
Have no illusions, day trading is a high risk activity especially if you are trading on leverage. The risk is multiplied if you're trading disciplines is poor or your money management is inadequate or you have an inadequate investment in your trading. Apart from risk or money management, you are trading style and the strategy that you adopt is equally important. Here we will take a look at some of the different trading strategies that you can adopt:
Scalping: also called spread trading, the objective is to take advantage of very small bid offer spreads, very often fractions of a cent, and take profit on a continuous basis. This steady accumulation of profit can be profitable over a long term. Each position is however held for a very short period, often seconds, and is closed out either when the stop loss or the take profit price is reached.
Trend following: this technique assumes that rising prices will continue to rise and falling prices will continue to fall, the trader therefore buys in a rising market and short sells in a falling market. The basic expectation is that the trend will continue.
Contrarian investing: this is the opposite of the above and the investor assumes that prices that have been steadily rising will fall and vice versa. The contrary and investor will therefore short sell in a rising market and buy in a falling one.
Range trading: this is the opposite of the trend investing and investors watch where prices have been rising from a support level of falling from a resistance level. The assumption is that the price will fluctuate in the "range" between the support level and the resistance level so that the stock is bought at a low and sold at a high.
News playing: this is a staple for most day traders and involves predicting how the market will move on the strength of news items breaking through the day. They traders will buy on good news and sell on bad news. The danger here is that the market may not always react as expected. Additionally if the news has been anticipated, the market may have already reacted by discounting the price and there is therefore no profit to be made.
Rebate trading: many ECNs charge a commission for customers who want their trades filled immediately at best price but pays commissions to customers who place a limit orders that enables "market-making". These rebates become a source of profit for the trader.
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