The first key to successful swing trading is picking the right stocks. The best candidates are large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.
Volatility is the name of the day-trading game. Day traders rely heavily on a stock’s or market’s fluctuations to earn their profits. They like stocks that bounce around a lot throughout the day, whatever the cause: a good or bad earnings report, positive or negative news, or just general market sentiment. They also like highly liquid stocks, ones that allow them to move in and out of a position without much affecting the stock’s price.
Before day trading, if someone wanted to trade a stock, they needed to call a stock broker to place their order, who would then route the order through a specialist on the floor of the exchange. The specialist would match the buyer with a seller and write up a physical ticket that would transfer the stock and send that confirmation back to both brokers. Commissions were charged at a flat rate of 1% of the total amount of the trade. That means that to buy $10,000 worth of stock, it would cost you an additional $100 in commissions. In 1975, the SEC (Securities and Exchange Commission) made fixed commission rates illegal opening up the markets to the first of the discount brokers competing for business by lowering their commissions and making short term trading much more profitable.
Day trading is defined as the purchase and sale of a security within a single trading day. It can occur in any marketplace but is most common in the foreign exchange (forex) and stock markets. Day traders are typically well-educated and well-funded. They use high amounts of leverage and short-term trading strategies to capitalize on small price movements in highly liquid stocks or currencies.
Order execution: A novice needs to master the art of efficient order execution. A delayed or bad order can wipe out what little profit was earned and even result in a loss. Since the profit margin per trade is limited, the order execution has to be accurate. As mentioned above, this requires supporting systems such as Direct Access Trading and Level 2 quotations.
The following are several basic trading strategies by which day traders attempt to make profits. In addition, some day traders also use contrarian investing strategies (more commonly seen in algorithmic trading) to trade specifically against irrational behavior from day traders using the approaches below. It is important for a trader to remain flexible and adjust techniques to match changing market conditions.
Although they’re usually not as orderly as an uptrend, downtrends also tend to move in a step-like or zig-zag fashion. For example, a stock could decline over the course of many days. Then it may retrace part of the loss over the next few days before turning south once more. When this behavior is repeated over time, the downtrend of the chart becomes easier to see. The move downward is the trend itself, with bear rallies or retracements being visible as the counter trend.
Price volatility and average day range are critical to a day trader. A security must have sufficient price movement for a day trader to achieve a profit. Volume and liquidity are also crucial because entering and exiting trades quickly is vital to capturing small profits per trade. Securities with a small daily range or light daily volume would not be of interest to a day trader.
A trader can measure their performance as a percentage of the trading channel width. The perfect trade would be buying at the bottom channel line and selling at the top channel line, which would be a 100% performance. If a trader captured one-half of the channel, it would be a 50% performance. The goal is to continually increase the performance percentage of the average winning trade.
Aside from a risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn't given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share. Thought of another way: a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months.
An unexpected movement can wipe all your investment in a few minutes. Hence, it is important to keep in mind a few intraday trading basics while carrying out intraday trading. Do not trade in the first hour as the opening range is established during that time. The fluctuations of this range can help to identify the intraday trend. Move with the market trend as it allows potential for a greater profit if the trend continues. Another basic rule is to fix entry price and target levels. Set a stop-loss limit so that your losses will be curtailed if the share drops. Also, withdraw if your desired profits are met. Stick to your plan and carry trade in a disciplined manner.
Suppose a trader employs scalping to profit off price movements for a stock ABC trading for $10. The trader will buy and sell a massive tranche of ABC shares, say 50,000, and sell them during opportune price movements of small amounts. For example, they might choose to buy and sell in price increments of $0.05, making small profits that add up at the end of the day because they are making the purchase and sale in bulk.
Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset's price. This isn't easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn't required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades.
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks—the Fed's interest rate plans, the economic outlook, etc. So do your homework. Make a wish list of stocks you'd like to trade and keep yourself informed about the selected companies and general markets. Scan business news and visit reliable financial websites.