Day Trading Skills - Techniques For Becoming A Skilled Trader
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Day Trading Skills - Techniques For Becoming A Skilled Trader
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By:
Ron King |
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Despite the dire admonitions by the Securities and Exchange Commission cautioning investors against the controversial yet potentially lucrative venture of day trading, people want to try and attain day trading skill, and a day trading stock tip is literally worth it's weight in either gold, or dross! Here is some information on learning trading techniques, the risk involved, and tips for becoming a skilled trader.
Just what is day trading and how do individuals gain day trading skill? Day trading is the process of quickly buying and selling stock throughout the day to profit from the minute fluctuations in the market for that given day. Ideally, day trading strategies allow investors to garner profits from the tiny increases in the market.
Day traders look at a specific set of indicators when determining whether a stock is a candidate for day trading. First, the stock must have high liquidity. This means that the stock in question has many of buyers and sellers. The liquidity permits day traders to rapidly purchase and then sell stock. Liquidity is determined by the volume of transactions on the market, the number of outstanding shares, the total number of shareholders and the number of market makers. Almost all stocks on the NYSE and NASDAQ have a high degree of liquidity.
A day trader also studies volume individually, in addition to using it as criteria for liquidity. To be a candidate for day trading, a stock must trade at least 500,000 shares a day. Stocks with 500,000 trades a day or more allow the day trader to acquire or sell a large amount of stock without greatly altering the price of the stock. Volatility is another issue in appraising a stock for day trading. The phrase refers to the actual or expected price movement of the stock. This movement is up or down over a period of time. Day traders look at the pattern and volatility of stocks over an individual day. Stocks that change price many times over one trading day are perfect candidates for day trading. A fluctuation of at least $2.00 per day is recommended.
Finally, a day trader evaluates the price transparency of stock. This term relates to the ability to collect information on the order flow of a stock. Also called market depth, price transparency helps the day trader determine just how much money there is to be made on a certain stock. The NASDAQ II quote system offers information on all bids. Day traders who arrange to access the NASDAQ level II quote screens can survey the performance of a stock and watch its swing in price.
While these trading practices are totally legal and totally ethical, they are extremely risky. Day traders commonly buy on borrowed money with the hope that they will procure higher profits through their acquisitions and sales. People who are deemed "pattern day traders" by the NASDAQ and NYSE must have at least $25,000 in their accounts and can only trade in margin accounts. Margin accounts are brokerage accounts in which the broker lends the investor cash to purchase securities. If the value of the stock drops a great deal, the investor is required to deposit additional cash to cover the margin or sell the stock. The SEC discourages day trading and acting on a day trading stock tip, and has taken many steps to inform people of the corresponding risks.
The first few months, a large majority of day traders endure massive financial losses and only some make it through to become profit-making day traders. For this reason, day traders should only invest money that they can afford to lose. They should never invest money set aside for the essentials like living expenses or education funds.
Bear in mind that day traders do not own stocks for longer than a few minutes at most. Stocks are never kept overnight because of extreme dangers of prices changing to the detriment of the trader. Day traders do not invest, instead, they speculate on the movement in price of a stock throughout the day.
There are lots of websites whose sole purpose is to make their living from those who seek a day trading stock tip. These websites offer quick results and offer hot tips to their members for a fee. The sources are usually paid to make these recommendations and are best avoided. Get the advice of a proven professional, and take plenty of time to use trading strategies for longer term success. Remember, there is no quick money, and day trading skill is often paid for with intolerable stress and cataclysmic losses.
For a wealth of free info on understanding stock trading, check out the articles at Stock Trading Information Resource, or make sure to read The Wall Street Journal - my #1 pick for stock information. Ron King is a web developer; visit his website Authoring Articles.
Copyright 2008 Ron King. This article may be reprinted if the resource box is left intact and the links live.
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