Is Stock Market Day Trading For You?
Most investment firms talk of the stock market as if it were a bank in which one can put money and watch it grow over time. The truth is that there is as much chance of losing money in the stocks as there is of making money. With this in mind, many people do not hold long term positions in the stock market. Instead, they make several trades each day and have each position closed by the end of the market day. This practice is known as stock market day trading.
What is Stock Market Day Trading?
Unlike the traditional investment option of buying stock and holding it as it gains in value and pays dividends,
day trading means to take advantage of the swings in price of different stocks each day. In many cases, the fluctuations in price occur so quickly that one may open a position and close it within the same second with a hefty profit or hefty loss to show for his effort.
What Are the Risks Associated with Stock Market Day Trading?
Day trading takes advantage of the volatility and liquidity of stock prices based on trends, technical analyses, and financial news releases. One can usually judge how the market will react to certain types of news and place orders that take advantage of these movements in the moments following a release of information.
Sometimes, however, the news does not affect the market in the way one would expect. Typically this is because the information in a news release has leaked to the market somehow and prices are already reflecting that information. In these cases, the market does not move as expected. One could easily lose money on trades based on the release of information.
Most day traders use borrowed money (margin) to amplify the profits from their trades. An example of this would be a trader with 25000 rupees in an account that allows 25 percent margin. This means that the trader can enter a position with 100,000 rupees at his/her disposal. Another term for this practice is leverage because the original investment of 25000 leverages the results of a 100,000 rupee trade.
Traders who leverage their trades in this manner are subject to a margin call at any time. This means that the lender whose money is being used can demand repayment at any time. If one has one or two trades that are going against his/her position at that time, a margin call can wipe out his/her entire account.
In addition, losses can be amplified in the same way that profits are. If one uses leverage and margin to make trades, it is critical to have stop loss orders in place for any open position. The original investment can disappear four times faster in an account such as the one mentioned above or the profits can add up four times faster than they would without the margin.
What Are Some Stock Market Day Trading Strategies?
Playing the news is probably the most widely used day trading strategy. In this strategy, one follows the release of important news and financial information, entering and exiting trades based on the market’s reaction to the news. Some traders go so far as to prepare two separate sets of orders planned around the release of information so that they can take advantage of price movements in either direction.
Scalping is the second most popular of all available stock market day trading strategies. This strategy takes advantage of the difference between the bid price for a stock and ask price, known as the spread. This difference is normally quite small, but its effects add up quickly when one is talking about large trades. Positions are normally opened and closed very quickly, usually within less than one minute with profits taken or losses minimized by the speed with which one closes out of the position.
There are several other strategies that people use for stock market day trading. One, known as rebate trading, uses commission paid by ECNs to traders that place limit orders that create a phenomenon known as “market making”. These traders normally deal in lower priced stocks that can be bought or sold in huge blocks in order to create more liquidity within the market but this method is not applicable for Colombo Stock Market.
Is It Possible to Earn a Living with Stock Market Day Trading?
Absolutely. Day trading creates an environment that allows for the accumulation of huge amounts of profit in a very short time. Active traders who enter and exit several positions in any given day tend to maximize their profits while minimizing their exposure, thus limiting their risk. One can lose money on any given trade, but if the technical analysis is accurate and one has accurate news and financial information with which to work, the odds of entering a losing trade are drastically reduced.
The key to successful stock market day trading is to create a plan for when to enter and exit trades, follow that plan to the letter, and never let emotions guide a trade. One may see a trade continue to climb in value well past the limits one has set for profit taking and choose to keep the position open based on the emotional high of seeing more success than anticipated. Then, without any warning, the market price can reverse and see that winning trade become a losing position in a heartbeat.
Overall, stock market day trading can prove to be a very lucrative source of income. There are some key elements to take into consideration in order to limit exposure to risk and minimize losses. Proper analysis of technical data, price trends, and the importance of news items and how they will affect the market are critical to one’s success as a day trader. This may take time to develop all the necessary skills to plan and execute trades in such a manner as to maximize profits. However, the rewards for success prove to be well worth the risk one takes by investing in the stock market.
Update..
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