There is a lot of hype around day trading. Some websites promote it as a way to get rich quick (it isn't), and others say it is impossible (also not true). There are lots of day traders around the world who find success and make a living off the markets, so the truth lies somewhere in between those two extremes. If you've thought about day trading, it's worth your time to read through and understand the concepts discussed below, so you'll be better prepared for what to expect if you decide to proceed.
With low barriers to entry in the trading world, the number of people trying their hands at day trading and other strategies such as scalping has increased. Newcomers to scalping need to make sure the trading style suits their personality because it requires a disciplined approach. Traders need to make quick decisions, spot opportunities and constantly monitor the screen. Those who are impatient and feel gratified by picking small successful trades are perfect for scalping.
Many times, neither a bullish nor a bearish trend is present, but the security is moving in a somewhat predictable pattern between parallel resistance and support areas. When the market moves up and then pulls back, the highest point reached before it pulls back is the resistance. As the market continues up again, the lowest point reached before it climbs back is the support. There are swing trading opportunities in this case too, with the trader taking a long position near the support area and taking a short position near the resistance area.
Since it is unknown how many days or weeks a pullback or counter trend may last, you should enter a bullish swing trade only after it appears that the stock has resumed the original uptrend. One way this is determined is to isolate the counter trend move. If the stock trades higher than the pullback’s previous day’s high, the swing trader could enter the trade after performing a risk analysis. This possible point of entry is known as the “entry point.” This should be examined against two other price points to assess risk and determine your upside target.
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in loss. While the data Ally Invest uses from third parties is believed to be reliable, Ally Invest cannot ensure the accuracy or completeness of data provided by clients or third parties.
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Spreads are bonuses as well as costs - Stock Markets operate on a bid and ask based system. The numerical difference between the bid and ask prices is referred to as the spread between them. The ask prices are immediate execution (market) prices for quick buyers (ask takers); bid prices for quick sellers (bid takers). If a trade is executed at market prices, closing that trade immediately without queuing would not get you back the amount paid because of the bid/ask difference. The spread can be viewed as trading bonuses or costs according to different parties and different strategies. On one hand, traders who do NOT wish to queue their order, instead paying the market price, pay the spreads (costs). On the other hand, traders who wish to queue and wait for execution receive the spreads (bonuses). Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades.
The information contained in this article is provided for general informational purposes, and should not be construed as investment advice, tax advice, a solicitation or offer, or a recommendation to buy or sell any security. Ally Invest does not provide tax advice and does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances.
ECN/Level 2 quotes: ECNs, or electronic communication networks, are computer-based systems that display the best available bid and ask quotes from multiple market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book composed of price quotes from market makers registering every Nasdaq-listed and OTC Bulletin Board security. Together, they can give you a sense of orders being executed in real time.