Swing Trader Day Trading Strategies

Day trading or “high frequency trading” first rose to great prominence and into the public consciousness in the 1990s during the tech boom. During this time day traders became infamous for both making and losing fast sums of money in a very short time. After the tech bubble crash, day trading died down somewhat, but continued under the radar.

Now, intra day trading has become popular again, with a vast increase during the recovery from the last Recession. This article will explain what day trading is, the benefits and risks of day trading, with a special focus on swing trading.

Day trading means buying and selling a stock within a relatively short period of time – typically within one day, hence the name “day trading.” Day traders will put a lot of leverage into one stock or index. By doing this, the day trader can make a lot of money (or lose a lot of money) by small fluctuations in the price of a stock throughout the day.

These fluctuations are the bread and butter of day traders and would be virtually ignored by more traditional investors, like value or growth investors, who invest with an eye toward medium or long-term gains. Because they are focusing on short-term fluctuations that are basically meaningless with respect to the overall valuation of the stock, day traders do not necessarily delve deeply into traditional investment techniques like fundamental analysis. However, high frequency trading algos have replaced many day traders where they once ruled.

Day traders do have to perform lots of research to be successful, however. They just tend to focus on different aspects of stock performance that can be quantified. The main things that are important to evaluating a stock for a day trader are liquidity and volatility.

Liquidity simply means the ability of a stock to be sold without losing value (“slippage” is the term used in finance circles to describe a loss in value due to low liquidity). An example of a highly liquid asset is cash, while something like real estate tends to be fairly illiquid. Stocks can vary on how liquid they are, and it all depends on the demand for that stock at the time it is sold.

Volatility refers to how much the price of a stock moves around over a given period of time. For a day trader the relevant time period is very short – typically a day. Nearly every stock experiences some volatility throughout the day.

The reason that liquidity is so important for the day trader is that day trading involves large sums of money and relatively low stock price movements. If a stock is not extremely liquid, then even though on paper the day trader might be “up” in terms of the value of the stock, the day trader might not be able to actually sell the stock for a profit. The difference in even a few dollars can determine whether a transaction is a gain or a loss. Volatility is important because the more movement of a stock, the more opportunities there are for taking advantage of price differentials.

Now that you understand the basics of day trading, it is time to the actual strategy. Swing trading is fairly simple in concept, it simply means that the trading time horizon is longer. With high frequency trading computers making trades within milliseconds, some day traders are focusing on swing trades that may last from open to close. Of course traditionally, swing trades mean “overnight” but the rules and concepts can be applied to any time horizon.

There are many resources for beginning day traders that go into depth about the swing and day trading strategies that are so crucial for day traders. It is advisable to pick up a book or attend a webinar before putting real money on the line, but more importantly is to not listen to someone who is going to profit from you becoming a trader. i.e. Ask another trader for advice on becomming a trader before asking a company that sells a book or trading strategy.

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