The world of trading has a large variety of methodologies. Traders can execute trades based on numerous factors. Some traders may prefer to make trades based on market fundamentals, while others may prefer to make trades based on market technicals.
The technical trading arena has a large amount of methods that may be utilized, and traders may use those methods to both buy and sell stocks, currencies or other contracts. Technicals may also be used to exit a position, whether it is a winner or loser.
What Are Buy and Sell Signals?
A buy or sell signal is made when the market performs in a specific manner. There are many different types of buy and sell signals that may be used, and these signals are the result of specific market price action and behavior. These signals may be used to form trading strategies while also being used for both entries and exits. Outlined below are some of the most basic, yet powerful day trading strategies available today.
Moving Average Crossovers
Moving averages are heavily used among traders and investors to determine a contract’s long-term or short-term trend. Some have suggested, for example, to be long stocks when they are trading above their 200-day moving average and to be short when they are trading below their 200-day moving average.
Many traders use a moving average crossover strategy to buy and sell the market. These strategies are easy to follow and simple to execute, and they will help keep you on the right side of the prevailing trend. An example of this strategy is the 9/18 moving average crossover. This means that when the shorter period moving average (the 9 day) crosses above the longer moving average (the 18 day) you look to buy and go long. The opposite would hold true when the shorter period moves below the longer period, at which time the trader would look to sell or go short. The crossover could also be used to exit a position. A long position could be exited, for example, when the 9 day moving average moves below the 18 day moving average, signifying a change in trend.
Overbought and Oversold RSI
The Relative Strength Index, or RSI, may be useful for spotting overbought or oversold conditions that could be close to reversing course. The gauge moves from 0 to 100, and a reading of 70 or higher is considered overbought while a reading at 30 or below is considered oversold. A simple, yet potentially effective strategy for using the RSI involves a counter-trend trade that may initially take some heat. The following example shows how this strategy might be set up:
Suppose that stock ABC has moved from $22 per share to $35 per share in just a few weeks. No official news has been announced and the buying may just be due to hopes for a strong earnings report in another month.
Given that the stock has moved sharply higher in a short time frame, the move may prove to be unsustainable and the stock could backtrack. A trader could, therefore, look to sell the stock short or buy put options when the RSI reaches a reading of 70 or higher. The position could then be closed using a trailing stop or when the RSI reaches neutral territory at the 40-50 region.
The opposite could be done if the stock falls dramatically. Suppose the shares price declined from $22 to $11 in a few weeks. If a trader feels the long-term prospects for the stock are good, he or she could look to buy when the RSI closes at 30 or lower. Again, a trailing stop may be used to exit the position or an exit may be placed when the RSI returns to neutral territory around 40-60.
What Indicator is Best for Day Trading?
With so many potentially useful indicators, picking one that is the best would be difficult, if not impossible, to do. The best indicator for a particular trader, however, may be limited down using the trader’s objectives, time frame and markets traded. A trader that trades highly volatile markets, for example, may use strategies with wider stops and more room compared to a trader that focuses on slower markets with less movement.
Which Time Frame is Best for Day Trading?
The chosen time frame can have a significant impact on trading results. A day trader, for example, is someone who focuses their trading efforts on the day and rarely, if ever, takes a position home over night. Given that most markets are open for several hours each day during the week, traders can choose varying time frames. Many day traders will focus on smaller time frames, such as the 5-minute and 15-minute. Others, however, may look to trade larger blocks of time and may use the 30-minute or hourly charts. Different strategies may produce different results based on the time frame used. It is imperative, therefore, that traders experiment an research what time frame may work best for their preferred trading methods.
How Much Does the Average Day Trader Earn?
Earnings for day traders can vary sharply. Many aspiring day traders make little to no money, while some established day traders could earn seven figures or more per year. The amount that a day trader can make is determined by several factors. These include the amount of trading capital at their disposal, the markets traded, position sizing and risk tolerance. While many traders will fail and run out of capital, some will achieve great results and be highly successful, earning a great living in the process.
Day trading is a high risk endeavor that requires capital, patience and the ability to learn quickly. Most successful traders have observed that the key to being successful and profitable is to cut losses quickly while allowing profits to run as much as possible. Doing so may not require an advanced degree or a background in rocket science, but may be require the ability to quickly admit when wrong and to take action.