Day Trading Strategies to Improve your Performance and Profitability

Posted by Deb | Guest Post | Thursday 5 July 2012 11:04 pm

Day traders are seeking to make a profit by leveraging large amounts of capital in order to take advantage of small price movements in highly liquid stocks or indexes. In this article we look at some strategies that can be used to improve your performance and in doing so, increase your profitability.




Certain stocks are better than others as candidates for day trading. A day trader should look for two key elements in a stock, liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price with a tight spread (increasing your profit with lower commission charges) and low slippage. Volatility can be your friend as the greater the volatility in a stock price the more potential there is for profit but also a loss.

Once you identified the type of stocks that you wish to trade in you then need to identify the most advantageous entry points and there are tools that can help you in this regard.

Intraday Candlestick Charts – These charts provide a basic analysis of price movements

Level 2 – This a service that provides real time access live price movements

Real Time News Service – If there is one thing that can cause a price movement it is news and if you are to profit from day trading, a live news feed is essential in order to capitalise on good and bad news as it is being delivered.

Understanding and interpreting the patterns created by candlestick charts allows you to identify a profitable entry and exit point based on the data. If you can identify the volume spike it is an indication of whether traders are supporting the price at a particular level and backed up by looking at prior support, you can begin to see the range where you can get in and out of a stock with a profit. Using these charts in conjunction with Level 2 Market Data, which shows you all the open orders and their relative size, should when used correctly, give you the tools needed for a successful day trading strategy.

Identifying a price target will largely depend on your risk profile and trading style. There are a number of tried and tested strategies if you are looking for an “off the shelf” solution that will then help you to hone your skills to a particular style that suits you.

Scalping is one of the most popular ideas. This involves basically selling as soon as a trade has moved into a profit situation. As the saying goes, a profit is a profit, but you will have to have a reasonable turnover to show a decent profit overall if you are exiting as soon as a trade becomes profitable.

Fading is based on shorting stocks after rapid upward movements. The strategy works on the assumption that the stock has initially been overbought and also assumes that early buyers will be looking for a quick profit. Fading is risk but also rewarding and you simply set the price target at a point when buyers begin to buy in numbers.

Daily Pivots is a trading method working on the basis that you are seeking a profit from a stocks daily volatility, rather like fading, you attempt to but at the lowest price point in the day and sell at the highest point, using the trading patterns to identify the timing of these trades.

Momentum Trading is essentially trading around news releases or trends supported by high volumes. You can either be a bear or a bull using this strategy, depending on your style of trading and point of view.

The fundamental difference between a day trader and a regular trader is that when you are trading on margin, you are far more vulnerable to sharp price movements than someone taking a longer term view. This is why you need to determine a stop-loss, crucial to any day trader.

A stop-less that reflects your risk tolerance would be when a price level is hit where you have reached the maximum amount you are prepared to lose. A lot of day traders also tend to have a second stop-less strategy which mainly involves setting a financial limit per day of what you can afford to lose and making sure they stick to it. You are not going to come out on top every day so it is essential for your wealth and your health that you avoid the classic mistake of chasing losses and accept defeat gracefully. There is always the next day and by using basis strategies but enhancing them with your own techniques and opinions you should be able to improve your performance and profitability.

Written by Liz Goldman, financial writer and part-time day trader, who writes for MahiFX



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