Three Ways That Stocks Are Traded
When deciding how to trade stocks, you must take several important factors into consideration. The right method will depend on how much time you are willing to commit, how much experience you have and what fits your personality. You can use many different trading styles and tactics. Three of the most basic tactics are scalping, breakout trading and pullback trading.
Other People Are Reading
-
Establishing a Time Frame
-
Before you begin trading, it is important to establish a time frame for your trades and stick to it. For example, if you want to be a day trader, close your positions before the market closes. If you choose to be a swing trader, holding positions for a few days to a few weeks, do not engage in day trading activities. Keep in mind that day trading is a full time business. If you cannot devote yourself to sitting in front of your computer terminal all day, you may wish to use become a swing trader, as longer trading time frames require less time commitment.
Scalping
-
Scalping is a method of buying stock and selling it just a few seconds or a few minutes later. Scalpers typically buy very large quantities of stock so that a small price move in their favor will offer a significant profit. For example, a scalper may buy 1000 shares of IBM at $50, selling them a few minutes later for $50.10. This would give them a $100 profit. Scalpers can make a hundred or more similar trades each day. To scalp successfully, it is necessary to have a significant deal of stock trading experience. Beginners are unlikely to succeed using this method.
-
Breakout Trading
-
Breakout trading is a method used by day traders and swing traders alike. Many times a stock price will trade for a period of time in a narrow price range. A breakout occurs when the price moves above the upper limit of a range it has been trading in for several hours if you are day trading, or several days if you are swing trading. Price breakouts often lead to continuing higher prices, so breakout traders buy when the price breaks through a trading range.
Pullback Trading
-
After a stock price has recently made a strong move higher, it will oftentimes pull back, giving up a small percentage of recent gains before continuing higher once again. Two basic methods pullback traders use to find buy points exist. If a price makes a new 52-week high, they buy once the price begins to rise again after the first pullback. A second method is to buy when the price pulls back to a rising moving average. Two well-watched moving averages used for pullback buyers are the 20 and 50-period averages.
-
References
- Photo Credit Jupiterimages/Photos.com/Getty Images
