Day trading is an incredibly risky investment strategy. Many new traders experience severe financial losses and wind up in debt.
While long-term buy-and-hold investing provides better odds for consistent, positive after-tax returns, there are some investors who enjoy the thrill of making fast trades. Depending on the trading strategy, it is possible to lose hundreds or thousands of dollars in a single day.
News-Based Trading
News trading is a method of profiting from events that impact the market. It is based on the idea that some events cause more volatility than others, and that those events can be predicted to some extent. For example, if the demand for oil drops unexpectedly due to a hurricane or other event, the price of oil will likely drop as well.
This type of trading is very time-sensitive and requires a lot of attention. Traders must follow an economic calendar to know what events are coming up and when they should be prepared to trade. For instance, an announcement of a government report on an economic indicator like GDP or unemployment can send markets reeling, and a trader with knowledge of the release schedule of these reports can be ready to capitalize on that volatility.
Traders who heavily rely on this strategy are known as News Traders, and they aim to profit from the high market volatility leading up to and immediately after a news event, often while other traders are still reacting to the news. It is akin to the old adage “buy the rumor, sell the news” and can be quite profitable if executed correctly.
The drawbacks to this type of trading include the need for constant attention and the fact that news events are highly unpredictable. Unlike other types of day trading, it is difficult to predict the exact impact of an event on the market, so a trader should always use stop losses and take profits with every trade. Also, since news can trigger an immediate reaction in the market, positions left open overnight are subject to overnight risk.
There are many ways to use news-based trading, from using a specific news filter to incorporating technical analysis into your trading strategy. Whatever approach you choose, it is important to understand the underlying causes of the news and how that information might affect your trading decisions. While it can be very lucrative, this type of trading is not for everyone and should only be considered as a part of a comprehensive day trading plan that includes risk management strategies.
Breakout Trading
If you’ve done your homework and are careful to follow the rules of risk management, breakout trading can be a lucrative strategy. But it’s not easy, and even if you’re right most of the time, you’ll still lose money on some trades. This is because, no matter how much research you do, there will be some stocks that just don’t want to cooperate.
Breakout strategies work by focusing on hot sectors. These can be electric vehicles, weed stocks, solar stocks, or meme stocks – whatever’s currently trending. This means you can take advantage of the prevailing trends without having to wait for big news stories or market inefficiencies to play out.
But you have to be ready to act when the market gives you its signals. Otherwise, you’ll miss out on some great opportunities. For example, when a stock breaks out and the volume surges, it’s important to be ready to enter the trade immediately. Professional floor traders and others will look for large buy orders in the tape to scoop up shares at the new price levels. This is how they’re able to make so much money day trading breakouts.
Another danger is false breakouts. These are trades that spike up for a moment or two but then reverse back down. This is a common trap that snares newer traders who have not yet built up their confidence and skills. If you don’t know what to look for, false breakouts can quickly eat up your account balance.
Also, remember that support and resistance levels are subjective. Some levels may be important to traders, while others don’t care about them at all. It’s also important to keep an eye on the volume, as low volumes could indicate that big players aren’t interested in the asset. These are just a few of the risks associated with breakout trading, but they’re enough to make it difficult for newer traders to succeed. However, with patience and decisiveness, you can overcome these challenges. Just be sure to set clear goals, stick to your rules, and always exit at your target if you’re wrong.
Scalping
Traders who make scalping their primary trading strategy—or use it as a complementary strategy to other trades they perform—can earn small profits over and over throughout the day. This style of trading involves buying and selling stocks within a short period of time—minutes or hours at most, sometimes just seconds. Traders are looking to make many small profits, with the hope that those profits will add up to larger profits at the end of the day or trading session. You can learn about prop trading if you really want to know more about trading.
Typically, scalpers are on the lookout for volatile stocks that are likely to make large price moves based on news or other factors. They may then attempt to profit from those movements by buying the stock at a low price and then selling it for a higher price. These types of trades are often known as fading gaps, and they can be very profitable if executed well.
Scalpers also employ a number of technical indicators to help them identify potential buy and sell opportunities. These are often geared to very short time frames, and they can include such things as moving average ribbons, relative strength/weakness indicators and Bollinger Bands. Traders who make scalping their main trading strategy need to be disciplined and stick to their regimen. However, they must also be flexible and able to adjust their position if it’s not working as planned.
Another risk with this trading method is that the need to constantly take quick decisions can lead to emotional mistakes. For example, if a trader believes that a stock is going to go up, they might be too aggressive in purchasing it, and it can quickly turn into a losing position. The same applies to stocks that are expected to decline, as the trader might be too hesitant to sell at a good price.
The need to continually buy and sell stocks can drain a trader’s cash reserves, which could lead to overdraft fees or even debt owed to their broker. Because of these risks, it’s important for anyone considering day trading to consider their own risk tolerance and financial situation. It’s also a good idea to practice trading in a demo account first, using virtual money to eliminate any real-world risk to their own capital.
Margin Trading
While some people make a living as day traders, the process involves high risk and costs. Fees and taxes are a significant burden, plus this type of investing can be highly stressful. High stress levels can also lead to impulsive decisions that can be costly.
To make a profit, day traders capitalize on small market movements and rapid stock volatility. This requires a keen understanding of the markets and the ability to check emotions at the door. In addition, day trading strategies often require leveraging investments by using margin trading, which increases both profits and losses significantly. This is one of the main reasons why this form of investing is a risky endeavor and should only be pursued by people who can afford to lose money quickly.
For example, if a trader has $5,000 in cash and a margin account, he can buy 100 shares of ABC at $100 per share and sell them the following day for $120 per share and make a $10,000 profit (plus any commissions, fees or taxes). However, the risks are much greater with margin trading, which involves borrowing money to invest. If the market turns against the trader and the value of his securities declines, he could lose the entirety of his cash plus any other investments that are held in the margin account.
Another risk associated with day trading is that the narrower time frame in which traders operate often requires precision. For example, a trader may need to be precise with his stop loss order to avoid taking a large loss. This kind of precision is not easy to achieve and can be very difficult when the market is volatile.
Finally, day trading can be a very stressful pursuit and can put a strain on your family life, health and emotional well-being. If you want to try your hand at day trading, it’s important to educate yourself on the different strategies available, backtest your strategy on a demo account and adhere to strict money management rules. Moreover, you should only use a broker that offers the trading instruments you are interested in.
