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What are the Different Types of Day Trading Strategies?

Jim B.
Jim B.

Day trading refers to the practice of investors opening and closing an account on a stock within the same business day. As the margin for error is thin and decisions must be made quickly, day trading strategies are often tailored to those conditions. Many investors base their day trading strategies on the use of leverage, which is borrowing capital from their firms for specific investments, and on the practice of selling short, which is a technique by which an investor benefits from a stock dropping in price. Strategies for day trading depend on price movement, both of an individual stock and the market as a whole, the volume of stock being traded, and developing trends.

As of 2010, day trading is still a popular investment vehicle for those who have the capital to finance it and the expertise to pull it off. It requires timing and daring, and a few false moves can make the difference between a hefty profit and financial disaster. With Internet technology making the practice even more prevalent, it's important for an investor to develop solid day trading strategies before advancing into this pressurized field.

Day trading is the practice of buying and selling stocks over a very short period of time, typically one day.
Day trading is the practice of buying and selling stocks over a very short period of time, typically one day.

Much of day trading is based on the practice of leverage, which is when an investor borrows from his firm an amount much higher than what is in his actual account. This will allow him to make more trades and take advantage of profitable situations as they arise, such as buying more shares of a stock that he thinks is on the rise. The drawback of this practice is that an investor may reach a limit where he has to make a margin call, which is a deposit of more money into his account to pay back the loan, and that can be difficult if some of his trades were unsuccessful.

Selling short is another one of the most popular day trading strategies. To sell a stock short, an investor borrows shares from her firm of a stock that she thinks is going to drop in price, shares that she then sells. Once the stock's price drops to the desired level, the investor then buys shares in the stock equal to the amount of shares she borrowed so she can return them to the firm. The price difference achieved during this process gains her a profit.

Choosing which stocks on which to implement these common day trading strategies depends partly on the goals of the investor. For example, an investor who wants to make a quick profit may choose stocks that have high liquidity, which means they trade in great volume and can be easily bought and sold when the investor wants to get in and out quickly. If an investor is looking for a larger profit, he should seek out stocks that are extremely volatile, meaning their price is fluctuating from one extreme to another. Determining volatility and liquidity requires in-depth analysis of price levels, volume levels, and trends caused by real-world events.

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Discussion Comments

andee

I know some investors who do pretty well at day trading the same stock several times a day. Others have a handful of stocks that they know very well and will trade them over and over again. Really understanding the history of a stock and studying their chart patterns and company information can be very helpful for a day trader.

This same type of information can also apply to swing trading strategies. When you are more familiar with how a stock moves, it is easier to make decisions than if you are just choosing stocks that you aren't as familiar with.

John57

Research is key when looking at day trading. There are many day trading techniques that you can follow, but you also have to do your own research. Earnings is a big one to watch for. You also should be up to date on company events and be able to quickly react or respond accordingly.

In addition to current events for the particular stock you are going to day trade, you also have to watch the overall market because that will also play a role in how the stock moves on any given day.

honeybees

I will never look at day trading a stock that does not have high volume. Low volume stocks can be very volatile, but you can also get burned if there is not a high volume of trading going on. I was always interested in learning how to day trade, but it really is not for those who do not like risk. I think many people are attracted to it because of the quick profits that can be made, but there is also risk associated with those quick profits.

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    • Day trading is the practice of buying and selling stocks over a very short period of time, typically one day.
      By: Jasmin Merdan
      Day trading is the practice of buying and selling stocks over a very short period of time, typically one day.