Trading Methods
Day Trading
1. Day Trading involves taking a position in the markets
with a view of squaring that position before the end of that
day.
2. A day trader typically trades several times a day looking
for fractions of a point to a few points per trade, but who
close out all their positions by day’s end.
3. The goal of a day trader is to capitalize on price
movement within one trading day.
4. Unlike investors, a day trader may hold positions for
only a few seconds or minutes, and never overnight.
Real day trading means not holding on to your stock
positions beyond the current trading day; in other words,
not holding any position overnight. This is really the
safest way to do day trading because you are not exposed to
the potential losses that can occur when the stock market is
closed due to news that can affect the prices of your
stocks.
Day trading can be further subdivided into a number of
styles:
1. Scalpers: This style of day trading involves the rapid
and repeated buying and selling of a large volume of stocks
within seconds or minutes. The objective is to earn a small
per share profit on each transaction while minimizing the
risk.
2. Momentum Traders: This style of day trading involves
identifying and trading stocks that are in a moving pattern
during the day, in an attempt to buy such stocks at bottoms
and sell at tops.
Advantages of Day Trading
1. Zero Overnight Risk: Since positions are closed prior to
the end of the trading day, news and events that affect the
next trading day’s opening prices do not effect your
portfolio.
2. Increased Leverage: Day Traders have a greater leverage
on their trading capital because of low margin requirements
as their trades that are closed in the same market day. This
increased leverage can increase your profits if used wisely.
3. Profit in any market direction: Day trading often will
utilize short-selling to take advantage of declining stock
prices. The ability to lock in profits even as markets fall
throughout the trading day is extremely useful during bear
market conditions.
Swing Trading
Swing Trading takes advantage of brief price swings in
strongly trending stocks to ride the momentum in the
direction of the trend.
1. Swing trading combines the best of two worlds the slower
pace of investing and the increased potential gains of day
trading.
2. Swing traders hold stocks for days or weeks playing the
general upward or downward trends.
3. Swing Trading is not high-speed day trading. Some people
call it momentum investing, because you only hold positions
that are making major moves.
4. By rolling your money over rapidly through short term
gains you can quickly build up your equity.
How does Swing Trading work?
1. The basic strategy of Swing Trading is to jump into a
strongly trending stock after its period of consolidation or
correction is complete.
2. Strongly trending stocks often make a quick move after
completing its correction which one can profit from.
3. One then sells the stock after 2 to 7 days for a 5-25%
move. This process can be repeated over and over again. One
can also play the short side by shorting stocks that fall
through support levels.
4. In brief a Swing Trader’s goal is to make money by
capturing the quick moves that stocks make in their life
span, and at the same time controlling their risk by proper
money management techniques.
What are the advantages of Swing Trading?
1. Swing Trading combines the best of two worlds the slower
pace of investing and the increased potential gains of day
trading.
2. Swing Trading works well for part-time traders especially
those doing it while at work. While day traders typically
have to stay glued to their computers for hours at a time,
feverishly watching minute-to-minute changes in quotes,
swing trading doesn’t require that type of focus and
dedication.
3. While Day Traders gamble on stocks popping or falling by
fractions of points, Swing Traders try to ride “swings” in
the market. Swing Traders buy fewer stocks and aim for
bigger gains, they pay lower brokerage and, theoretically,
have a better chance of earning larger gains.
4. With day trading, the only person getting rich is the
broker. “Swing traders go for the meat of the move while a
day trader just gets scraps.” Furthermore, to swing trade,
you don’t need sophisticated computer hook-ups or lightning
quick execution services and you don’t have to play
extremely volatile stocks.
We believe that the Swing Trading method is a better way for
the individual investor to attain superior investment
results through short-term trading in the stock market. This
trading strategy has been carefully designed for the needs
of the individual investor who does not have the resources
that institutions and professional money managers may have.
To fully understand what swing trading really is, you first
need to understand what up/down trends are.
Up Trend: Simply put an uptrend is a series of higher highs
and higher lows. In other words, an uptrend is a series of
successive rallies that extend though previous high points,
interrupted by declines which terminate above the low point
of the preceding sell-off. Often the high of the last
“swing” in the trend will serve as support for the next low.
These areas are circled.
Down Trend: Simply put a downtrend is a series of lower
highs and lower lows. In other words, a downtrend is a
series of successive declines that extend though previous
low points, interrupted by increases which terminate below
the high point of the preceding rally. Often the low of the
last “swing” in the stock’s trend will serve as resistance
for the next high. These are circled.
Long Swing Trades: Once an uptrend has been identified a
swing trader looks for buying opportunities in that stock.
This can be identified when the stock experiences a minor
pullback or correction within that uptrend. The swing trader
then activates a trailing buy-stop technique. If prices
break out above the trailing stop loss, you will be stopped
out and long in the trade. If prices decline, your buy-stop
will not be touched.
Short Swing Trades: Once an downtrend has been identified a
swing trader looks for selling opportunities in that stock.
This can be identified when the stock experiences a minor
rally within that downtrend. The swing trader then activates
a trailing sell-stop technique. If prices break down and
fall below the trailing stop loss, you will be stopped out
on the short side. If prices rally, your sell-stop will not
be touched.
Trend Trading
A trend is nothing but the general direction of the price of
an asset or market in general.
A trend can apply to equities, bonds, commodities and any
other market which is characterized by a long-term movement
in price or volume.
What is Trend Trading?
1. Trend trading is one of the most effective and easy to
use methods for making money in the market. Trend trading
success depends on identifying and catching the trend after
it has started and getting out of the trend as soon as
possible after the trend reverses.
2. Trend Trading involves taking a position in the markets
with a view of holding that position for weeks to months for
larger than normal gains. Trend traders or investors
generally trade the long term or secular trends and are not
concerned with the day to day market volatility.
Advantages of Trend Trading?
1. Trend trading is the fastest and most risk free way to
make money in the markets. In trend trading you can identify
a change of trend in the market as early as possible, take
your position, ride the trend and close your position
shortly after the trend reverses.
2. With Trend Trading it is very possible to catch 60 to 80%
of many intermediate term and long term market movements and
thus create wealth for yourself and your family.
3. Trend Trading will help you take large profits out of the
market, without having to watch the market or stocks on a
minute-by-minute or even a day-by-day basis.
4. Whether you are a short-term day trader or a long-term
investor, we believe incorporating Trend Trading into your
overall trading plan is a must. There are two types of
trades: “Income producing” trades and “Wealth-building”
trades. Swing trading and day trading produce income, while
Trend Trading Picks is designed to amass wealth.
Mastering Risk and Reward in Trading
Not mastering risk and reward in trading is probably the
main reason why so many traders and investors are destined
to fail. It’s really dumb when you think about it, because
reward/risk is the easiest way to get a definable edge on
the market house.
The reward/risk equation builds a safety net around your
open positions. It’s designed to tell you how much can be
won, or lost, on each trade you take. The secondary purpose
is to remove emotion so you can focus squarely on the cold,
hard numbers.
Let’s look at 15 ways that reward/risk will improve your
trading performance.
1. Every setup carries a directional probability that
reflects a specific pattern. Always execute positions in the
highest-odds direction. Exit your trades when a price fails
to respond according to your expectations.
2. Every setup has a price level that violates the pattern.
Only take trades where price needs to move a short distance
to hit this “risk target.” Look the other way and find the
“reward target” at the next support or resistance level.
Trade positions with the highest reward target to risk
target ratios.
3. Markets move in trend and countertrend waves. Many
traders panic during countertrends and exit good positions
out of fear. After every trend in your favor, decide how
much you’re willing to give back when things turn against
you.
4. What you don’t see will hurt you. Back up and look for
past highs and lows your trade must pass through to get to
the reward target. Each price level will present an obstacle
that must be overcome.
5. Time impacts reward/risk as efficiently as price. Choose
a holding period based on the distance from your entry to
the reward target. Then use price and time for stop-loss
management. Also use time to exit trades even when price
stops haven’t been hit.
6. Forgo marginal positions and wait for the best
opportunities. Prepare to experience long periods of boredom
between frantic surges of concentration. Expect to stand
aside, wait and watch when the markets have nothing to
offer.
7. Good setups come in various shades of gray. Analyze
conflicting information and jump in when enough ducks line
up in a row. Often the best thing to do is calculate how
much you’ll lose if you’re wrong, and then take the trade.
8. Careful stock selection controls risk better than any
stop-loss system. Realize that standing aside requires as
much deliberation as an entry or an exit, and must be
considered on every setup.
9. Every trader has a different risk tolerance. Follow your
natural tendencies rather than chasing the crowd. If you
can’t sleep at night, you’re trading over your head and need
to cut your risk.
10. Never enter a position without knowing the exit. Trading
is never a buy-and-hold exercise. Define your exit price in
advance, and then stick to it when the stock gets there.
11. Information doesn’t equal profit. Charts evolve slowly
from one setup to the next. In between, they emit noise in
which elements of risk and reward conflict with each other.
12. Don’t be fooled by beginner’s luck. Trading longevity
requires strict self-discipline. It’s easy to make money for
short periods of time. The markets will take back every
penny until you develop a sound risk-management plan.
13. Enter positions at low risk and exit them at high risk.
This often parallels to buying at support and selling at
resistance, but it can also be used to trade momentum with
safety and precision.
14. Look to exit in wild times in order to increase your
reward. Wait for price acceleration and feed your position
into the hungry hands of other traders just as the price
pushes into a high-risk zone.
15. Manage risk on both sides of the trade. Focus on
optimizing entry and exit points and specialize in single,
direct price waves. Remember that the execution of low-risk
entries into bad positions allows more flexibility than
high-risk entries into good positions.
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