Day-Trading Tips
Because day trading attempts to profit from short-term movements in the price of financial assets, fundamental factors relating to earnings and financials have very little bearing on success. Most retail day traders use some form of technical analysis to make trade decisions. Technical analysis forecasts future price movement by evaluating past price and trading volume data. Many technical analysis techniques can improve profitability and reduce the number of losing trades.
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Understanding Support and Resistance
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The principles of support and resistance are central to day trading. Support and resistance occur where supply and demand dynamics change, often at the level of past price reversals. Support areas tend to attract buyers, while resistance areas attract sellers. Support and resistance areas can form at price consolidation zones, trend lines, and significant highs and lows. Day traders can use support and resistance to time trade entries and exits, and set stops, improving the probability of success.
Tracking Volume
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When trading stocks, many traders look to take advantage of the activity of large institutional investors. When large mutual funds or the trading desks of large banks make major moves into a security, trading volume will rise noticeably. High trading volume often translates into momentum. The large investors often continue their buying pattern for an extended period of time, driving prices even higher. Moreover, many short-term traders will look to capitalize, adding more fuel to the price movement.
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Buying the Hammer
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On a candlestick stock chart, a hammer occurs then price moves significantly lower after opening, but then rallies to close above the opening price, preferably at a net gain for the day. When a hammer occurs after a period of declining price movement, it can indicate seller exhaustion and the start of a move higher. While a hammer does not always mean a reversal is imminent, is can be indicative when combined with other technical factors. For instance, if price has dropped to a support level and a hammer forms on heavy volume, the following day has a high probability of positive price movement.
Avoiding Overtrading
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Overtrading is one of the biggest causes of trading losses among day traders. A day trader, sitting in front of a computer screen all day, often feels the need to take some kind of action, regardless of whether circumstances are conducive to success. Some of the best traders are those who are patient and pick the best spots. The best recipe for success is a high percentage of winning trades. Winning trades are derived from solid buy signals and are confirmed through more than one technical factor.
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References
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