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What are the key skills required to master day trading?

Traders who buy and sell stocks on the same day are called day traders. This type of trader looks to generate profits from large amounts of capital, by trading off small price fluctuations. In so doing, substantial profits can be generated if the markets move in your favour. Day trading is particularly popular with highly liquid indexes or stocks. Fortunately, there are several useful spread betting and CFD trading strategies available to day traders.

Day traders tend to look out for volatility and liquidity when trading certain stocks. Volatility offers insight into the potential price range of a stock during the course of the day: the higher the volatility, the greater the profits or losses. Liquidity is what allows a day trader to enter/exit stocks at the right price by way of low slippage and tight spreads. With that in mind, it’s important to be able to pinpoint the right entry points. There are several tools traders use to achieve this, including candles, news briefings, ECN and more.

Finding entry points is essential to candlestick analysis. Several factors need to be considered including volume, technical analysis, and candlestick patterns. A popular method of finding entry points is known as the Doji reversal pattern. Day traders typically look for volume spikes, indicating a level of support among traders at a particular price level. Next up, support at that price level needs to be considered (Day Lows and Day Highs). Lastly, we must consider the Level II predicament for all order sizes and open orders. By following the aforementioned steps, it’s possible to spot turnarounds.

Margin trading is susceptible to sudden price movements and for this reason Stop Losses are imperative. These can be both mental and physical. A mental stop is determined by the point at which entry criteria have been violated. Physical stops are placed at price levels best suited to a trader’s appetite for risk.

Popular strategies used by online traders

Momentum trading strategies rely on news reports or news releases. They also place emphasis on the strength of high-volume trending moves. For example, a momentum trader may be likely to purchase on the back of a news release and then follow that trend until it reverses.

Another popular trading strategy used by traders is daily pivots. By trading on the volatility of a stock, traders attempt to buy at the low price and sell at the high price. Reversals are used to determine the price targets.

Scalping is another method used by many traders. This is by far the most common method of day trading whereby you close your trading position almost as soon as it has become profitable. Price targets in this instance are set as soon as profitability has been reached.

One contrarian strategy used by some day traders is known as ‘fading the market’. This involves buying a market when prices drop in order to sell for a profit when the market rallies (or vice versa for a short position). Fading strategies tend to carry a high degree of risk, but the benefits can be substantial.

Money management with day trading

Successful day traders have mastered the art of money management. This is especially true if a strategic approach to trading and identifying new day trade set-ups is undertaken. The particular approach that is selected, vis-à-vis money management and day trading, will be determined by your personal preferences. The risk/reward ratio is something that must be factored into the equation – every step of the way. The important element in this regard is how much greater your wins are over your losses.

Successful money management requires an unemotional approach to investing. Day trading is intensive work and clarity of purpose, thought and deed is essential. Attention to detail lies at the heart of successful day trading and constant focus is paramount. In this vein, day traders are encouraged to maintain high levels of discipline in terms of how they trade, when they trade and what they trade. The importance of Stop Losses cannot be overstated. All orders placed in the market need to have a degree of security attached to them – that’s what stops are all about. They offer solid downside protection (though you should remember that Stop Losses are not guaranteed and may be subject to slippage and market gaps).

The skills you will need to acquire as a successful day trader include not being influenced by the actions and opinions of other traders. While other traders will offer to share their insights, these should not sway you from your chosen trading system. The opinions of others have a clear slant and you may only want to solicit the advice of professionals. This lends itself to the view that you remain independent at all times. Flexibility is an important component of the equation as changing market conditions are commonplace.

Other skills to develop include maintaining a watchful eye on your stress levels so that you can gain perspective on your priorities without being overwhelmed by the day trading activity. And when you are generating profits from day trading, you should always be ready to take your gains accordingly. Many traders are concerned about decreased profits after they exit trades, but profits are always preferable to losses and something such as a re-entry strategy may be worth considering. All the while, maintain detailed trading records on all trades you open and your reasons for opening them.

Brett Chatz

Published: 7 July 2015

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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