Saturday, February 7, 2009

What about day trading?

[Blog #4 on financial markets]

There are five main types of trading that technical traders can utilise:
  • Scalping
  • Day trading
  • Momentum trading
  • Swing trading
  • Position trading

They involve time frames from between seconds or minutes (for scalping) to weeks and months (for position trading) and everything in between.

A successful technical trader should at least be proficient in several different strategies, but every trader should specialise in one particular strategy and master it. This is dependent on:

  • your personality,
  • your timeframe and tolerance for risk, and
  • the current market environment.

Day trading used to be the preserve of financial firms, professional investors and speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. Day trading is the system of speedily buying and selling securities throughout the day in order profit from the marginal changes in the market for that particular day.

Day trading can be a fast paced and exciting hobby that depends upon the trader having the most up to date information. Some of the more commonly day traded financial instruments include stocks, options, futures contracts and currencies. In the ideal world, day trading strategies let investors garner profits from the tiny increases in the market. Day trading requires a great deal of time and close attention.

Day trading is not a get rich quick scheme - don't try to make it one. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. Day trading can't really be considered safe investing. You must realise that it may be a zero sum game – for every winner there is a loser!

Make sure you're ready and willing to monitor the near-perpetual shifts that occur moment to moment in the stock market.

Day trading is quite easy once you have the proper education. Technical analysis and fundamental market analysis are both necessary for successful day trading. Technical analysis is the counterpart of fundamental analysis.

Fundamental analysis is basically the ability to analyse a company’s financial strength and determine a decision based on value. Fundamental investors look for stocks that are below their intrinsic value. The objective in fundamental analysis is to make a projection on its future business performance.

Simply put, technical analysis is the process of analysing market (price) action and using past data on charts to attempt to forecast the highest likely outcome of the future. Charts are the primary tool. Technical analysis can be learnt in a short period of time. There are no financial statements to read over. It requires the reading and interpreting charts, their patterns, and determining the highest likely short-term outcome of the future.


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