If you are trading in penny stocks, then instability is something that you need to get accustomed to.
At the same time, you will have realized how some of the most volatile penny stocks can actually work in your favor.
This is because erratic prices often bring the promise of high gains and minimal losses if you know what stock to put your money in.
For others, unstable penny stocks may be a cautionary tale about what companies to avoid. Day traders love volatile stocks.
Here is a list with penny stocks that are the most volatile:
1. Insignia Systems
For the most part, the stock for Insignia Systems does look as though it is going to improve. Nevertheless, there are some confounding performances that add to the overall uncertainty. Let’s take a closer look at this to see where it can go…
On the one hand, this does look like a positive growth opportunity for traders that are interested in short-term as well as long-term stocks. This is largely because the company has experienced some heavy losses and is only now making its way back, in the latter portion of the year. Not to mention, the small, company-instigated flash crash caused the share prices to dip even lower.
Despite this, though, there is a silver lining for this company, particularly when you look at the way that the company is performing. The general direction of the company, including its sales, make this a company to watch out for. The main reason for uncertainty here is the fact that the share price is facing a mild resistance level. Should it be able to break out of this, however, things could start looking up.
2. Dogness Corporation
Once again, this is yet another company where it can be difficult to know the direction of progress. The main issue with Dogness Corporation is that it is standing in the middle of two rather extreme share price scenarios. Should the market stabilize itself and head in a more positive course, then there is a good chance that the share prices will move in a similarly upward direction. In the event that this doesn’t happen, though, you could take on some serious losses.
Ignoring this, there are a few other points to take into consideration. On the plus side, this company offers a rather innovative product – smart technology for pet-related products. Due to this, the potential for growth is high. That being said, as the main company is based in China, many potential investors may be put off by this.
These penny stocks are almost completely geared towards investors that don’t mind some speculation. They also need to be able to accept both the high risk and reward scenario. Last but not least, these individuals will have to conduct further review of the company to be certain about its performance.
3. LUNA Innovations Incorporated
This is yet another company stock price that is at the mercy of the surrounding market. As such, if the current volatility continues, then there is a good chance that the share prices of LUNA will follow suit. In this sense, it can be difficult to pinpoint just how well it will do, at least in the near future.
See, this company shows signs of long-term progress and therefore, a good share price for penny investors. This situation can be determined by looking at how well the company has been doing over the past few years. Where it gets tricky, nonetheless, is the short-term position. So, if the rest of the market looks to be in a tough position, then these shares will certainly not fare well.
One clue that may help you to decipher the situation is to check if there is a mild support level around the price point. As long as it stays at $3.00 or more, you should be fine. Still, if it gets any lower than this, you should stay away from the stock.
4. Turquoise Hill Resources Ltd.
Turquoise Hill Resources is a company that finds itself in a rather precarious position. On the one hand, this a company that has been performing quite well and for the most part, this was reflected in the stock price. Unfortunately, sentiment towards commodities changed in the marketplace. This meant that most investors began selling their positions in relation to commodities.
Nevertheless, there is also just as much good news for investors as there is bleak news. This is because the company is actually strong enough to make a comeback on its own. Therefore, buying shares for a lower price now could be beneficial in a short while. To add to this, if market sentiment towards commodities also rebounded, you could be looking at even more profits.
All these are great volatile penny stocks for day trading.
How to Find the Best Possible Penny Stocks to Trade With
As mentioned, trading volatile penny stocks does afford you the chance to make a good profit. This, however, is dependent on you making the right selections at the best possible chance. As such, you should always remember these following tips in this kind of situation:
Focus on the Facts: before buying stock, you will need to have a full understanding of how that company works. This means understanding the business plan and its potential for profit. At the same time, you will also need to look into how well that company can survive in a particular sector given its competitors.
Understand the Value: the other thing that you will need to do is to understand the value of the stock that you are buying. Keep in mind, it isn’t just share price that you need to focus on. You will also need to look at the number of shares that are still remaining. This will allow you to more accurately determine what your shares are worth in the company.
Consider All Factors: finally, there is more to penny stocks than just the company’s performance and share price. To really understand how the price will increase or decrease within a period of time, you will need to look at all compounding factors as well. This includes elements such as market sentiment, global issues, and various other aspects.
These are the most important volatile penny stocks that you need to know about. Based on this information here, you can plan how you would like to proceed with each of these companies. Just make sure that you make the best possible investment decision for you.
Top Volatile Penny Stocks for Day Trading
When it comes to day trading volatile penny stocks offer the potential for high profits.
These stocks are known for their dramatic price swings making them attractive to traders looking for quick returns.
Here are some of the top volatile penny stocks to consider:
1. Insignia Systems: Despite some confounding performances the general direction of this company including its sales makes it an intriguing option for traders.
While facing mild resistance a breakout could lead to promising results.
2. Dogness Corporation: This company offers innovative smart technology for pet-related products presenting potential for growth.
However as a Chinese-based company investors should weigh the associated risks before investing.
3. LUNA Innovations Incorporated: Although long-term progress appears positive this stock’s short-term performance is tied to market volatility.
Traders should be cautious and examine the company’s support level before making investment decisions.
4. Turquoise Hill Resources Ltd.: Despite recent challenges due to changing market sentiment towards commodities this company has the potential to rebound.
If market sentiment towards commodities improves investors could see profits.
Remember trading volatile penny stocks involves high risk and reward scenarios.
Conduct further research on the companies and consider market conditions before making any investment decisions.
By focusing on the facts understanding the value and considering all factors traders can maximize their chances for success.
Exchange Traded Funds are one of the best ways to diversify your investment portfolio as provide exposure to a multitude of different markets and industries – but then, so do mutual funds.
So if you were to choose one over the other, how would you go about it?
Of course, you could invest in both simultaneously if you have an ample of amount of dough to spend. However, that is not the case with a lot of traders.
So in this article, we try and explain the reasons why you might fancy investing in ETFs over any other alternative.
As far as investment portfolio diversification and exposure goes, we often see ETFs and mutual funds being listed alongside each other as very strong investment strategies.
That is because, in a number of key ways, they are quite similar. But crucially, in a number of key ways, they are also very different.
ETFs trade in the same way as stocks do and can be traded any time during the day. That affords them with a number of attractive qualities that mutual funds simply do not have.
Reasons to Invest in ETFs
Here are some of the key reasons why you would want to invest in ETFs exclusively.
ETFs cover a wide variety of markets and industries. In fact, some of them even represent the economy of an entire nation. The main benefit of this kind of diversity is that it effectively allows investors to ‘hedge’, relying on one investment to compensate for the risk associated with another.
But it is not merely with investing that ETFs offer flexibility. That quality is also present in the transactions. Since ETFs trade like common stocks, there are no time constraints on when they can be purchased or sold. To put that into context, if you wanted to short sell a mutual fund, you could be liable to pay penalty which could be as high as 1% of your initial investment. And the early sale period could be as long as 90 days after the purchase.
2. Low expense ratios
Owning and managing an ETF can be remarkably less costly than doing the same with a mutual fund. One study shows that in most categories, ETFs have expense ratios that are lower than mutual funds.
That said however, investors who prefer mutual funds will point out that the sum of commissions for all transactions combined with the scale of the bid-ask spread is enough to nullify the benefit of having a low expense ratio. Incidentally, these are both costs that do not apply to mutual funds.
3. No minimum purchase
If you have had prior experiences with investing in mutual funds, you will be aware that a lot of them have a minimum purchase amount which can be anywhere between $100 and $3000, maybe more. In fact, it is not unheard of for a minimum purchase to be as high as $50,000.
Fortunately, there is minimum purchase amount attributed to ETFs. You can literally invest in one share at a time if you want to.
4. Lower taxes
Once again, ETFs out-cheap mutual funds when it comes to capital gains taxes mainly because of the way each trade is structured. With a mutual fund trade, capital gains taxes are applied immediately whereas with ETFs, those gains are not realized until after the securities are sold along with the whole fund. That makes them a lot more cost-efficient when it comes to taxes.
When managing your portfolio, it is important to focus on risk management as well as diversification. A lot of ETFs offer plenty of useful tools to control risk including futures contracts, options, and swaps. So chances are, you can find a fund where you can hedge your bets with call or put options, or trade with option straddles.
However, some ETFs do actually contain options and futures in which case you should find out about how they may affect your trading strategy and the amount of risk involved.
These are just some of the many benefits you can have by trading ETFs over their alternatives. These benefits have been a driving factor in the popularity of ETFs since the early nineties and they continue to be so even today.
The market for gold is one of the most liquid out there. It offers a ton of opportunities for you to profit, no matter what the state of the market is like. If you want to learn how to trade gold online, there is also a plethora of guides to help you do this. Some people choose to actually buy the metal in its physical form and own it as a nest egg for the future.
However, using gold trading on the stock market (GDL or GDX) to speculate about the future, equity and more allows you to gain leverage with minimized risk.
The value of gold isn’t a very stable one, as it fluctuates quite often. This can make trading quite difficult because there are many pitfalls that can cause a large loss in profits. The global markets in gold have a ton of different unique traits that can be utilized to your advantage, but it takes a lot of effort to actually learn this, and to keep up with the fluctuations in order to decide when to sell and when to buy stocks in the gold market.
One of the main reasons why people simply don’t trade in gold is the price. In order to invest in the gold market, a huge investment needs to be made. This can be tens of thousands of dollars. This opens up the gate to a large amount of risk as well. The smallest bad call could lead to massive losses that drain you financially and leave you broke.
Cheaper, Safer Alternative to Traditional GLD Trading
If you don’t want to take this type of risk, or if you simply want to be able to invest in the gold market without spending that much money, binary options is perfect for you. Binary options brokers usually offer the chance to trade in gold as a commodity. It is one of the trending assets for trades of any size because it is volatile and because it doesn’t get affected by most market factors that can impact the value of other assets. This makes it one of the safest to trade in, and is perfect for times when the economic stability of the world is in question as well.
The big difference in gold as a commodity in binary options is the cost. It can cust upwards of $10000 to trade in the metal in the traditional way, but with binary options this is cut down to hundreds of dollars instead. The margin for losses is also reduced significantly, making it far easier to deal with a single loss, learn from mistakes made and try again.
High Rate of Return and More Control
When trading in gold binary options, you gain a lot of control over just how much money you can win and lose. A return of up to 85% is offered by most brokers for wins. There are many ways in which the metal can be traded as well.
One of the most popular is the Touch/No Touch trade type. Typically, a traditional binary option trade would involve predicting that the value of the option would hit a certain upper or lower limit in a set amount of time. With this trade type, the value doesn’t have to touch the threshold. As long as the strike price and the direction of the value of the asset are correct, the win is granted to you.
While it is definitely true that gold is a volatile commodity, it is also one that can used very easily in the world of binary trades to your advantage. Make sure you get on a binary options broker and use it to earn some great profits!
Are you interested in learning how to trade stocks online and make some good money? The stock market is a system that is based on supply and demand, just like any business. People buy stock and hope that the company you bought stock in becomes more popular and in demand over time, so that you can increase the price at which you sell that stock to other traders, thereby making a profit.
If you have been reading up on stocks, you probably know that the price of a share theoretically increases with the value of the company and how it improves over time. However, there are many other reasons for share prices to change, and not all of them are known or fixed.
There is a lot to do in the complex art of trading stocks. You need to do your research and pick the right stock to invest in. You also have to get used to recognizing patterns in share prices. It is also necessary to invest in an online trading service to trade your stocks on the internet. Before engaging in anything, you also need to practice advanced skills, hone your instincts and educate yourself.
Better Alternatives to Trading Stocks
Stocks aren’t the only way for you to earn money by making trades, though. The risks of the stock market are many, and the return to your hand isn’t as much as it should be considering the risk and effort you’re putting into the industry. There are alternatives to the classic method of trading stocks.
One of the best out there is called binary options trading. This doesn’t have to replace your interest in the stock market, but can be used as a way to diversify your investment portfolio over time.
Binary options trading involves trading with stocks, currencies, indices and other assets, but in a simpler, different way to traditional stock trading. The first step is to open an account at a binary options broker. These are platforms and companies dedicated to enabling traders to trade better, wiser and with more benefits. There is a plethora of these companies out there, and they are available based on financial regulations in the area that you will be trading from.
How Does Binary Trading Work?
A binary options trading (you can see the best brokers here) is a trade that is made by taking a company, a division of a company, a currency pair or any other asset and predicting whether, in a set amount of time, its value will increase or decrease. In a way, this is very similar to the way traders work with normal stocks and shares. However, the difference lies in how the money works out. As a trader, you “bet” a certain amount of money on your prediction coming true.
This means that you place an investment of, for example, $5 on the assumption that the value of Apple, Inc. stock will rise to a certain threshold in the next hour. After an hour has passed, if the value of the company has actually risen to this threshold, the option has finished in the money. Your investment is returned to you, along with a nice profit for winning the trade. If the value doesn’t hit the threshold, you are out of the money.
Typically, this would mean that you lose the $5 that you invested. However, some brokers offer a small return of about 5 – 15% of your initial investment even when you lose a trade.
There are actually many different types of trades that you can make, not just for stocks either. The traditional way of trading binary options is just one of many. Trading stocks online is pretty great, but binary options trading might just be the simple alternative we have all been looking for!
The Benefits of Binary Options Trading
If you’re interested in an alternative to traditional stock trading binary options trading may be worth considering.
Binary options trading allows you to diversify your investment portfolio and potentially earn money by trading stocks currencies indices and other assets in a simpler and different way.
To get started you’ll need to open an account with a binary options broker which offers platforms and services to help traders make informed decisions.
Binary options trading involves predicting whether the value of a particular asset will increase or decrease within a set timeframe.
You can place an investment on this prediction and if it turns out to be correct you’ll earn a profit.
Even if your prediction is incorrect some brokers offer a small return on your initial investment.
With binary options trading you have the opportunity to trade various types of assets not just stocks.
This simplicity and versatility make binary options trading an appealing alternative to traditional stock trading.
Apple Inc. or AAPL on NASDAQ and the stock exchanges around the world is considered by many investors to be one of the core parts of their investments. Apple shares are cheap to buy, and has a lower price-earnings ratio than the average for the industry.
While it isn’t a company you would invest in for its yield for a dividend, it is slowly getting to the position where it is. So what are the risks of trading in Apple stock, and what is the answer to the question of how to trade Apple stocks during bad times?
One of the biggest issues is the popularity of the device the company is best known for: the iPhone. This smartphone is the flagship of the company, and its failure could very well mean a huge crash in the demand for Apple shares. At present, the demand for iPhone units has been dwindling with each subsequent generation of the device. According to most analytical services, the stock at Apple Inc. right now is under a death cross. This means that investors need to watch out and prepare for declines in their share prices.
How to Make Money Trading Apple Stocks
There is a way for you to make money trading stocks in Apple Inc., even when share prices are on the decline. There is a sector of the online trading arena that is known as the binary options trade. This is a completely digital industry, in which traders invest their money in predicting the rise OR the fall of the value of stocks and other assets. Profits are earned through accurate predictions. This is a huge simplification of the field of binary trading, of course, but it is still one of the best basic descriptions for a complete newbie to the industry.
Since AAPL stock is currently in a rather tense state, investors could see the value of shares either rising or falling in the near future, with a greater chance of it falling. If you have an account with a binary options broker, you can actually invest in a trade for Apple (provided that your broker offers AAPL as one of the assets available to trade), predicting that the share price will fall further to a certain threshold in a set amount of time.
There is obviously risk involved with this type of investment, but it isn’t nearly as bad if you lose as it would be if you were to lose stock in the real stock market.
Why Trading Apple in Binary Options is Better
If the stock value of the company actually does fall below the threshold you set in the time you specified, you are granted a return of up to 90% from the broker based on the broker you chose to work with. If your prediction isn’t accurate, you will lose anywhere from 85% to 100% of your investment. The good thing in this is that you determine the amount of money you can lose when you start the trade. There is no risk of you losing everything. Even better, a single trade can be as small as $5 in size. A loss won’t be nearly as devastating.
In addition to this, you get the added bonus of being able to make money from Apple stock without having to buy a single share. You are given the chance to make a profit whether the stock rises or falls. Binary trades can last for as little as 1minute, meaning that it is a lot more fast-paced. Your profits can come almost instantaneously if you play the field right. That’s how you can make money off Apple Inc. without having to worry about falling prices in the present day.
Binary options trading is not easy if you want to make money. To be successful it requires measured risk taking and someone who is willing to learn different strategies for different market conditions. Every stock moves in different patterns from other stocks, forex trades much differently than stocks do, and commodities also have their own trading personality.
Binary options traders must always learn and evolve if they want to keep a high enough winning percentage to make hefty profits. Here are some different binary options trading strategies that we use to make money.
Successful Binary Options Trading Without A Strategy
If you don’t have a trading strategy or if you are new to binary options trading, then you could try OptionRobot, the free binary options robot.
A lot of binary option contracts expire in one to ten minutes. A trade this short requires a scalping mentality. The fundamentals of the underlying security are probably not important to pay attention to here. What you want is to take advantage of short term patterns in price action. There are a few ways that you can do this well enough to make money. Here are some of the best binary option strategies to make money:
Use a technical indicator based strategy.
Use a signal service.
Read the tape of a stock by looking at prints.
Jump on momentum.
Trade the news and take advantage of trader sentiment.
Take advantage of a flat market by buying “in the money” options.
Use a Technical Indicator Based Strategy
There are many technical indicators to choose from. Examples of popular scalping indicators that we like to use for binary options include:
Relative strength index – Also called RSI, this is a measure of how strong or weak a stock is taking into account it’s momentum, and its recent momentum relative to its previous strength or weakness. The math behind this is complex, but what it is meant to do is to look for overbought or oversold conditions, and identify that a reversal is likely to take place in the direction of the price movement. Most people use a 14 period time frame (but you can customize this depending upon you preferences), and a high and low threshold of 70 and 30 respectively. You look for a signal when the relative strength or weakness crosses past your thresh hold. Many people will take their position when the relative strength crosses past the set threshold, and then crosses back past it again toward the midpoint. For instance your indicator may drop to 25 (below your threshold of 30), and they will take a position when it fails to stay below 30 and crosses back and hits 31. There are many different strategies involving RSI, and it comes down to the trader preference. A lot of charting software will simply give an indicator automatically so the trader does not need to actually think about the level. RSI is useful for binary options because it can quickly identify points where a short term reversal in price action is likely to occur.
MACD – This stands for moving average convergence divergence. Unlike RSI which is meant to spot a likely reversal of direction, MACD is meant to confirm that a price trend is likely to continue. While this is used more for swing trading than scalping, MACD is still useful for shorter time periods such as 30 minute or 1 hour binary options.
Bollinger bands – These are bands mathematically calculated by looking at the standard deviation of the moving average. They are a volatility indicator, because the more volatile the stock is, the higher the standard deviation will be of the moving average. These are useful for short term trades because when a stock hits the upper or lower band it can signal that a reversal of direction may be about to take place. In other words because stock markets move up and down constantly, we can see when a stock is statistically at a higher or lower end of its range compared to its previous moving average. The way to trade this is to buy a put option when a stock hits an upper band, and a call when it hits a lower band. Many brokerages allow traders to apply the bands to a chart.
Each indicator has its benefits and its weaknesses and limitations. Ultimately it takes some knowledge and experience to understand how to use them to your advantage so that they give profitable buy and sell signals for your trading.
Most brokerages will give you the tools to use something called “back testing”, which allows you see how well a technical indicator would have performed over some past period of time that you choose. Use the back testing feature to your advantage and you can find the indicator or mix of indicators that work for your trading style and whichever security you are trading.
You should also be aware that certain types of market environments favor different indicators. A very choppy market probably favors a relative strength or bollinger band approach, and a more directional market probably favors using moving average based indicators. Here are some additional strategies you should read as well.
Use a Signal Service
There are binary option specific services out there, and there are other larger services meant for all types of traders. Our very favorite is marketclub, which we use to trade with fairly often ourselves, but we also like barchart, and Traderific who have both free and paid services. Signaling services can be very good if you need some trade ideas, but blindly following every single will does not usually equate with profitability. The best results come from combining signals from multiple indicators and services.
Before you use any signalling service, make sure to do your research. Many services simply do not work. You need to ask yourself, if a trader can make money with their own signals, why would they sell their winning trades to other people? Sometimes the answer is to spread risk or diversify revenue streams, but many times it is because their methods don’t work. Whatever service you choose, test your strategy with them many times before putting your money on the line.
Use a Tape Reading Strategy But Trade Binary Options
This involves using a stock trading software such as “Think or Swim” to watch the prints of a stock and trade based upon the buy/sell flow. If you spot a lot of activity in one direction, or you see unusually large transactions or orders on the book, you may get an understanding of which direction the stock is likely to head in the near future. Professional traders have long used the order flow of a stock to predict which direction it is heading in the short term.
The only problem is that binary options brokerages do not display this information like some of the professional equity trading platforms do. The key for traders will be to have two platforms open at the same time, placing trades in the binary option account but using information from the equity account. This strategy will not apply to commodities or foreign exchange trades but it can work well with equity trades.
Jump on short term momentum
A trader can see when a stock is picking up unusual momentum compared to how it usually trades. Momentum is characterized by large quick moves, and moves that are much more prolonged than is normal. Even if a trader does not predict the beginning of a momentum move, they can still make money. The goal is not to predict momentum before it starts, it is to jump in and ride the wave until it shows signs of slowing.
Binary option trades are uniquely suited to taking advantage of momentum trades because they are so short term, and a trader only needs to be in the money by a tiny amount in order to have the option pay out. Even if a trader gets in later in the momentum based move, as long as they are in the money when the option expires they will get paid. This could be a 30 second or 1 minute trade that is highly predictable and pays 60%-80% on the binary option contract.
A binary options trader can easily make money using a momentum based strategy. Look for fast movement and jump in the direction of the move. This is a simple strategy, but it may take some time for a trader to hone their skills and understand what big momentum looks like so that they avoid moves that don’t follow through in the direction that they want a stock to go.
Trading the news can be a very tricky strategy, and it is not something that we would recommend to binary option beginners. News traders usually need to be in extremely quickly after news is released, because computers that can read news releases and act on the information before a human can read the first word are competing against people. A trader using a news based strategy needs to quickly read the release, asses what it materially means to the price of the stock, and judge how the stock is priced relative to where it should be given the new information. Traders who use news based strategies are often MBA types, or quantitative type people.
Even though news trading is complex, a binary options trader may be able to take advantage of the public reaction to news by capturing a small portion of the greater move. Remember binary option trading only requires you to be correct in your trade by one penny.
Remember when you are trading any news release that the direction that it will push the stock is not always apparent to an untrained person. You must balance what is released against what was expected by the market. Sometimes even if news is negative, but not as negative as the market expected, you will see the negative news make a security increase in value. Remember to always compare news against expectations before take a position. Expectations are not always readily apparent, and you should definitely test news based strategies in a demo account before you use real money. You will either get the hang of trading news, or decide that it is too hard to predict how news will affect the price.
Trade Correlated Pairs or Negatively Correlated Pairs
One strategy that many quantitative traders are taking advantage of is called correlated trading. This is largely done by computers, so you need to be fast, but a human can still make money if they are ready.
The way to make money is to find a pair of stocks, currencies, commodities, or some mixture of the two that either trade in tandem, or reliably move in the opposite direction of each other (negative correlation). An example of this type of trade would be Citigroup and Bank of America. On most days, when you compare the charts of these two stocks they will look very similar.
Let’s say that while watching the two charts, you noticed that all of a sudden Citigroup’s price moved up $.20 in one minute. Bank of America has not yet really moved. You quickly should take a long position (call option) in Bank of America, and often times after a very small delay it’s price will follow suite and go up. Usually you only have a few seconds to act before its too late, so be quick!
Of course this doesn’t work every time, and many times they move so closely together that you don’t even have time to take a position. Sometimes you will notice a lag, and these times with a slight lag you can make a lot of money with this strategy.
Trading Flat Markets by Buying Binary Options in the Money
This is a relatively new type of trade for binary options traders because brokerages are just now allowing clients to purchase binary option trades that are already “in the money”. These will trade at a discount proportional to how far in the money the price currently is.
If you have a read on the market that says that it will be flat for a while, you probably want to take advantage of this strategy. As long as the price remains in the money, the trader will receive the payout displayed when she purchased the option.
A good time to employ this strategy is during mid day trading hours (about 12 PM- 2PM EST) because the market usually does not move very much during this time. Another good time is on Friday’s after the morning is over, and Friday’s before a holiday weekend while volume is light.
Time of year may also matter, for instance trading is usually slower during the summer months than it is during the spring.
Long Term Binary Options Strategy- Trading Fundamentals
Another type of binary options strategy which is much less common is a long term trade. Brokerages will offer options, especially foreign exchange options, which may be a month or longer in term. Traders who think that a stock is fundamentally undervalued or overvalued may take a position here, assuming that they price will tend to move in the direction of the fundamentals over the longer period of time.
A fundamental analysis involves looking at what the price of a security should be given its underlying economics and the expected future growth. Some people may use a price to earnings analysis, or a Tobins Q, or they may look at a trade imbalance between two countries whose currency they want to wager on. There are many different types of fundamental analysis, but if you think that a security should be priced differently than it currently is, you may want to take a longer term trade with the thesis that the fundamentals will push the price towards the correct value.
Be mindful that once you enter into a binary options trade, you usually can not exit it. If market conditions change you will have to stick with your trade in most cases.
The Best Binary Options Strategy
There is not one “best” strategy. The best strategy is the one that makes you money. Different trades have different preferences, comfort zones, appetites for risk, and time horizons. Test different strategies in your demo account, and use the one that gives you the highest likely hood of making the most money. While this sounds obvious, it only works if you actually do it! Get started testing strategies today.
Minimizing Risk in Binary Options Trading
Risk assessment and management are crucial aspects of a successful binary options trading strategy.
One way to minimize risk is to use the straddle strategy which involves placing both a call and a put option on the same asset.
This allows traders to profit from price fluctuations in either direction.
Another tactic is to use the Pinocchio strategy which is based on candlestick charts.
Traders look for a long shadow on a candlestick indicating that the market may be reversing.
By taking advantage of these market-relevant signals traders can significantly reduce their risk and increase their profits.
It’s also important to continuously expand knowledge and research the market and assets being traded.
By staying informed and adapting strategies as needed traders can improve their overall success rate and minimize losses.
Day trading has changed significantly over the last decade. New technology has pushed many of the human decision makers from the market, and super-fast computer driven trading has all but taken. Many of the old day traders are complaining that they no longer can make money. Does this mean that day trading is dead? Not even close. But the profession has changed. In order to be profitable today, every trader must take a modern approach.
Success over time in day trading requires the ability to change. The market is always changing. The laws governing trading are changing. The technology driving trading is changing. The global marketplace is changing how the world affects and accesses the US capital markets. Why would old traders think that their tired strategies will still work today? Obviously they do not. They key to trading today is to take a modern approach by following the new rules of trading.
Rule #1 Markets Are Choppy
For most of the history of the stock market, whether you were looking at a short term move or a long term move, the market was very directional for the duration of the move. If you could understand the direction of the market, you could make money relatively stress free without being out of the money. Today, markets are choppy whether you are looking at a 10 minute period or a 10 month period. Trades are often stressful, and the market appears to reverse direction often, only to continue in its original direction further and further.
Why Markets are Fast and Choppy
The reason for this is the high percentage of volume driven by algorithms and executed by computers. For various reasons (think RSI or Fibonacci retracement) a computer will take a trade in the opposite direction as the market moves. Different trading algorithms use different indicators and different math to find potential “oversold” or “overbought” conditions, while other algorithms will pile trades into the direction of the original move. Meanwhile, the original reason for the move (either a large order or a fundamental or technical change) will continue to exert pressure for some period of time. In addition, each stock and commodity has some level of correlation with the overall market, and the market will typically exert pressure in whatever direction it is moving. The result is a lot of “noise” or competing orders in almost every trade.
To combat this traders need to understand the reason a stock is moving in a particular direction and not be tricked out of good trades. Expect most trades to make it tough on the trader to hold, rather than moving in a straight direction. The market moves fast, and trading is not for the faint of heart. The best way to trade is to set your stop loss automatically when you take your trade, and don’t get tricked out of the trade.
Rule #2 Risk Management is Key
Any effective trader has always practiced risk management, but now more than ever this is crucial to separating traders who make money from traders who lose. Computerized trading can move a stock during times of high volatility 10% easily in a matter of seconds. If a big fast move goes against you, especially if you are leveraged, you could lose your entire trading account.
How to Manage Risk While Trading
How do you effectively manage risk while trading? Traders implement many strategies. One of the most popular ones is what is known as a stop loss. A stop loss is a pre-determined price at which your position will automatically liquidate. As long as enough liquidity exists for your position to fully exit at this price, you are guaranteed to not lose any more money than the amount you set. You can set your stop loss at any time, but ideally you will set it before or immediately after you take your position.
Another important technique is manage the size of your trades. This is especially important to a beginner. As a general rule of thumb, it is smart to never to place a trade with more than 1/10th of your total account value. This does depend upon the type of trading that you are doing, and where you set your stop losses. Remember that you always want to plan for a worst case scenario, and you never want your trading account to be completely depleted because of one random circumstance. Stocks can go bankrupt or have surprise good news leaked at any time. Things like terrorist attacks, fat finger traders, mergers and acquisitions, or an algorithm run amok can all move a stock huge amounts in just seconds of time. Computers can read news releases and take positions and can jump on existing momentum much faster than a human. You never want a random even to prevent you from trading in the future.
New Traders Take Heed
New traders have a tendency to take positions that are way too large. The large position creates extra stress, and make them deviate from the system that they are trying to follow. In order to be profitable over time, a trader must follow their system religiously. There is simply not any room to deviate for new traders who want to keep their account balance positive when it comes to managing risk effectively.
New binary option traders especially need to be careful because when they lose, they lose 100% of their entire position value. It does not take a lot of consecutive losses before an account is decimated when position size is too large.
Rule #3 Use Modern Tools
Traders today have unprecedented access to fast trading and liquidity. Market’s are segmented into many various ECN’s (electronic communication networks) and dark pools. Traders do not need to depend upon how good or fast their floor broker is any longer. The trade off that people make in this case is the speed in which prices and liquidity now moves.
Traders should always use a brokerage that provides a modern platform. Traders should have sophisticated “routes” to accessing liquidity, which means that they can access both dark pools and the public liquidity on various ECN‘s. Traders should always strive to get lots of liquidity, and access it fast. This gives them the absolute best price on all of their trades.
Binary Options Offer A Great Modern Tool For Traders
Some traders have moved to new security classes, such as binary options. Binary option trading does not rely on liquidity or access to certain dark pools. Traders get a market price, and they need to be in the money when the option expires. It does not matter how large them become, they can trade any stock or commodity they want equally effectively regardless of order size. Their orders do not move the price, and they always get their orders filled.
Regardless of a traders style or platform, they must be cognizant of how markets behave today. They are fast, computer generated orders represent most of the volume, and the way in which liquidity is spread across different ECN’s and dark pools present new challenges to traders. Traders need to fight back by being smarter, understanding the markets, managing risk and using modern tools.
There is still a lot of money to be made trading stocks. The key is learning to do it systematically.
Probably not. Day trading is extremely hard and computer generated algorithmic trades are making it tougher by the day. Does that mean it can’t be done? Absolutely not. There are day traders today who make a good enough living to support themselves comfortably, and some do much better. You may even consider some day traders to be rich.
The problem is that most people are not able to attain that level of success through trading.Over 90% of people who try to day trade for a living ultimately fail. In fact, as the markets have become more electronic, and more computer algorithm driven, fewer traders have been able to trade for a living. That doesn’t mean that they aren’t profitable, or that they don’t manage to have some big trades along the way. The simple fact is that to do it for a living, over a long period of time, a trader needs to experience a lot of success month in and month out.
If you know that obstacles, you may be able to overcome them. Read on to learn the biggest obstacles to day trading successfully enough to live off of, and learn how to give yourself the highest chance to succeed.
Obstacles To Making A Living
The lack of discipline applying a strategy. This is the number one cause of failure in the trading world. People are often able to develop strategies that are profitable, or would be profitable if they were applied strictly without the trader straying from the system. Unfortunately for a variety of reasons traders can rarely stick to a strategy. Probably the biggest reason why traders are unable to adhere to a strategy involves a lack of patience. Day trading is not as exciting all the time as some people would like it to be. That doesn’t mean that it isn’t very exciting sometimes, but a lot of trading involves sitting around and looking for the right trade setup. Depending upon your strategy, the right trade setups may come few and far between. New traders have a very hard time sitting idle, waiting for the setups to come. New traders think that to become successful, they need to make money every single day. This is simply not the case. Being highly successful on a low number of trades can make a trader rich.
Developing a strategy that isn’t successful enough. It turns out that it isn’t extremely difficult to create a strategy that is slightly profitable, but to create a highly profitable strategy takes some work/know-how. New and experience traders often fall into a trap where they are making money, so they don’t want to change their strategy, but they are not really making enough money to live on. A clearly defined successful strategy is the most important tool a trader needs to systematically make money over a long period of time. Unless you are perfectly disciplined, you need a strategy with a big upside or a high winning percentage (or ideally both).
Pressure to make money quickly. If you want to become a successful day trader who can live off day trading profits alone, the one thing you can’t have enough of before you start trading is money. This is not because you will necessarily lose a lot of money when you start trading (though you may), but because it can take time to get good enough at trading that you can pay yourself regularly. If you are under pressure with low savings and lots of bills or a family to support, you will have a hard time trading successfully. You almost certainly will struggle to maintain any discipline, and you will have a hard time sticking with trading long enough to get any good at it. You need to be able to survive for quite some time without income if trading is your only source of income. Even professional day traders go through a month here and there where they don’t make any money.
The stock market is extremely competitive. I would love to be able to tell you that anyone can become a day trader with a little hard work, but that is not reality. The truth is that the stock market is very, very, very competitive. Wildly competitive. As a day trader, you will be fighting investment banks, hedge funds, trading algorithms, and all sorts of very smart people, institutions, and machines for the same profits. If one person makes money, it means that someone else is losing money or giving up an opportunity to make money (opportunity cost). People who consistently lose money do not survive for very long in the stock market. To be successful as a trader you need to develop a niche, and become very good at what you do. Equity markets are so competitive that they are very efficient at reflecting the “right” prices. There is still opportunity, but there isn’t any “free money”. Being profitable takes intelligence and hard work.
Being unable or unwilling to adapt. The stock market is always changing. A strategy that has worked for a year or longer may suddenly stop being profitable. Laws are changing, and the market has seen the invention of electronic markets, dark pools, and electronic market makers. The way that the market moves will continue to change. For a trader to make a living day trading, an ability to adapt is crucial. Unless you can make a lifetimes worth of income before the market changes, you will need to adapt with the times.
The Keys To Succeeding At Day Trading
After hearing all the obstacles, you may be scared to try day trading. Not day trading may even be the best decision you ever make. Far more traders will lose time, money, and their sanity than than experience riches and success. Even so, day trading is exciting and potentially very lucrative. While fewer traders have been able to make a living in today’s fast moving electronic market, those who are able to make a living tend to do do very well. The odds are against you succeeding at day trading, but if you are able to succeed you will probably be well compensated.
The biggest key to success in day trading is to avoid habits that lead to big losses. Here are the important points to master if you want to earn your living as a trader.
Adhere to your strategy perfectly. By far, the biggest mistake that new traders make is that they are unable to stick to their strategy. Trading has narrow enough margins without wasting money on imperfect trades. Keep yourself profitable by keeping yourself disciplined. A good way to do this is by tracking and reviewing every trade with a trading journal, and by reviewing your trade blotter every day.
Manage your emotions. Negative emotions lead to reckless trading, an inability to properly manage trade size, and make it easier to miss good trades. To master trading you need to master your emotions.
Adapt. If your strategy no longer works, you need to go back to your demo account and either tweak it or develop a new strategy that will work. The market is certain to change, it is up to you to change with it.
Ultimately if you are going to succeed at day trading enough to make a living you are going to have to go through a big learning curve. Their are many resources, and many people willing to help you. You will have to learn to develop your strategies, and learn to control your trading so you adhere to them without wavering. You will need to spot opportunities, and be willing to act quickly and decisively to take advantage while they present themselves. The best day traders are willing to aggressively pursue any opportunity. Any day trader will tell you that the trade setup will not last for long, and if you wait, you will lose your chance.
If you want to make a living day trading you need to be aware that you have a long road ahead of you, but the rewards can be very sweet.
Key Factors for Success in Day Trading
While day trading can be a challenging endeavor there are several key factors that can increase your chances of success.
First and foremost it is essential to develop a winning strategy and thoroughly test it in a demo account before risking real money.
Adhering strictly to your strategy is crucial as straying from it can lead to losses.
Additionally managing your emotions is paramount as negative emotions can result in reckless trading and missed opportunities.
It is also important to adapt to changes in the market and be willing to tweak or develop new strategies when necessary.
Finally it is vital to have the dedication and determination to continually learn and improve your skills as a day trader.
By focusing on these key factors you can increase your likelihood of making a sustainable living through day trading.
You may have heard many traders say that large cap stocks are not a category that should consistently be traded. But is it really a good idea?
There are a number of reasons (some legitimate) that a trader may shy away from large cap stocks:
Not enough volatility (especially in dividend paying large cap stocks)
Too crowded (there are too many algorithms and too much “smart money” transacting already)
Higher risk of a mutual fund or hedge fund with large orders changing the trade out of nowhere.
Too many competing interests for them to ever have a consistently readable direction (in the short run)
The price is already very efficient.
One of the easiest ways to invest in large cap stocks is to sign up with a regulated broker like 24option.
These are the most commonly cited reasons that day traders stay away from large cap stocks during the course of their trading. While these are all real concerns every asset class has its own set of difficulties.
Like anything, the answer to whether or not you should trade large cap stocks depends upon your goals and strategy. Here are some times and reasons to justify when it may behoove a trader to dip into the large cap lake.
A large cap stock is one of the largest stocks traded in the marketplace. Large cap is short for large capitalization (refering to the size of the market capitalization, or total value of all outstanding stock). For a stock to be considered large cap is must have a total market capitalization of more than $10 Billion dollars.
Large cap stocks are mostly extremely well known companies such as :
Proctor and Gamble
Many large cap stocks are also “Blue Chip Stocks”, which refer to large financially strong companies that have been around for a very long time. Many blue chip stocks operate in manufacturing and consumer goods.
Now that you are clear what is meant by large cap stock, here are times when it can be profitable to trade them.
Your Strategy Doesn’t Depend Upon Large Fluctuations
Many large cap stocks do not experience a lot of volatility (as a percentage of their price) on a day to day basis, which can make them a difficult trade for some day traders who need a stock to make significant moves. This would be true of a trader who has a standard brokerage account and only trades with their own capital, buying and selling equities. There are many other ways for a trader to make money today.
Many day trading strategies do not need large fluctuations (in percentage terms) in order to be profitable. A prime example of this would be a binary options trader. In binary options, the trader only needs to end up “in the money”, even if only 1 cent, for the trade to pay out the pre-determined amount. The payout to him is the same regardless of the percent gain in the position. A binary options trader depends upon reliability much more than large movement.
More Large Cap Trading Strategies
A strategy that may not need large moves in the price of the stock is if the trader is using large amounts of leverage. For instance if a trader is a proprietary trader trading for a brokerage. When a trader uses the house leverage in large quantities, their positions may be so large that even a movement of a few pennies can bring them large gains. There are many people who’ve become millionaires from trading.
Another strategy that may not require large movements in price is a strategy involving stock options. Some people buy short term call or put options, and even a small movement in the stock’s price may correspond with a large fluctuation in the price of the option. Other people “write” option contracts. If a day trader writes an option contract, he is betting that the price will either stay the same or move in the opposite direction (down if he writes a call or up if he writes a put) from the direction the buyer would like the price to move. Someone who writes an option contract is creating a contract, and if that contract expires out of the money the trader does not need to deliver any shares of the stock at expiration (and their profit is the value of the option they sold).
If you do not need large movements in a stocks price, large cap stocks may be the trade for you. Reliability may be more important that size of price changes.
The Price Action Is Readable
If you do not need large price fluctuations but instead depend upon a stock being reliability, many large cap stocks will go through periods when their price action is especially readable. The dependability of the trade may be very attractive. These are examples of when (and how) a large cap stock may become a reliable trade.
Many algorithms (or traders) appear to be buying or selling at the same time (when the stock reaches a particular price, RSI, or moving average for example). While this will never always hold true, it may hold true long enough or often enough for a day trader to turn some serious profits.
The largest transactors in the stock may be mostly buying and selling (moving the price) in the same way on a particular day. This may be a result of news, industry changes, or re balancing of their large portfolios (usually takes place at the end of quarters). If the price direction for a day is very readable and the large transactors appear to be moving the stock in the same direction, it may be a trade to consider. Usually large transactors can be “sniffed out” by reading the prints.
A stock is either “hot” or mired in dismal performance. You may notice that a large cap stock appears to have increasingly worse and worse prospects, or a particular stock may be in the news a lot and may be generating more and more profits such as Apple (AAPL) has been doing for years. If you notice a real trend that you want to be a part of, large cap stocks often have long term trends that stay true for enough time to profit from a trade.
You May Want To Play Earnings
Earnings are an especially volatile time for a stock. Many times even a large cap stock stock can move 5%, 10%, even 20% after earnings are released. Because large cap stocks are stocks that consumers may have more knowledge about, and they may have a lot more news/analysis coverage, many day traders want to take part in the earnings trade.
If you think that you have a feel that earnings may be better or worse than the street is anticipating, or what is priced into the stock already, this can be a very exciting trade to be a part of. Just be careful, as earnings release trades can move a stock’s price a lot for the better but it can also move the price a lot for the worse (depending upon the direction of your position).
Large Cap Stocks Are Still Good To Trade
You do not need to fear large cap stocks as a day trader. What is most important is that you recognize when they can be traded, and that they are most valuable either when your strategy depends upon their reliability or you do not need large price moves in order to be highly profitable. If you can develop a profitable trade in a large cap stock, you should work to exploit it to it’s fullest potential, as day traders make the most money when they are creative and aggressive in their trading.
Advantages of Trading Large Cap Stocks
There are several advantages to trading large cap stocks that traders should consider.
First large cap stocks tend to have more analyst coverage which means that there is a wealth of information and research available to help inform trading decisions.
This can provide traders with valuable insights into a company’s performance and prospects.
Second large cap stocks often offer more predictable rates of returns.
These stocks are typically stable and mature which means that they are less susceptible to extreme price fluctuations.
This can make them a more suitable option for traders who prefer a steady and consistent trading environment.
Third large cap stocks provide plenty of data for analysis.
These companies have a long history and publicly available financial statements making it easier for traders to conduct research and valuation.
This can help traders make more informed trading decisions based on fundamental analysis.
Lastly large cap stocks have the potential to pay dividends.
While they may not experience rapid stock price growth these stocks often offer steady dividend payments.
This can be attractive to income-focused traders who are looking for a consistent source of income from their investments.
In conclusion trading large cap stocks can provide a balance between risk and reward.
While they may not offer the same growth potential as small cap stocks they offer stability analyst coverage predictable rates of returns and the potential for dividends making them a viable option for traders looking for a more conservative approach to trading.
Software is extremely important when you trade. There is not necessarily one software that is “best” but there certainly are software programs that are better than others. There are a few points to keep in mind when a trader chooses a software program to trade with, or chooses a brokerage based upon their trading platform.
Every trader wants a trading software or a trading platform that is “low latency”. This is a fancy way of saying that all of the quotes and information displayed by the software is extremely up to date, calculated to the microsecond. This is crucial for traders because the markets move so quickly. A trader needs the most up to date information possible, if they are to trade effectively. This is more true every day, as more and more computer algorithms make up a bigger and bigger percentage of the total trades. Computers act fast, and if a trader has a software that is not up to date, they will struggle, especially on short term trades, where pennies can make the difference between a profit and a loss.
At How We Trade we also recommend that you use the lowest latency software possible. We would not want a trader to have any disadvantage, as trading is hard enough by itself.
It usually makes a trader more effective if the software has a simple user interface. This is not to say that the software should be unsophisticated, or be lacking in formation or features. The key here is that the design of the software allows a trader to navigate intuitively. Not only does this allow a trader to move more quickly with less thought about how to interact with the software, but it also goes a long way to prevent user errors, popularly termed mistakes like “fat finger” trades.
At How We Trade we prefer a simple design. Good software programs for day traders include platforms like Tradestation, Thinkorswim, or Sterling. We also trade with Tradorax when we trade binary options, because they have a clean professional interface with their software.
Whatever choice you make regarding your preferred software, remember that it needs to be something that you are comfortable with, that you can navigate with ease and that you will not make order entry mistakes with. Remember, accurate orders are a trader’s best friend.
Your Software Should Have Advanced Charting Features
Depending upon your strategy, you may use advanced charting features when you trade. If your strategy depends upon charting moving averages, MACD indicators, Fibonacci signals, stochastic indicators, or something similar, you need to make sure that your software includes this. Software and online platforms from many companies do include these indicators today, but if you use one or more of these in your trading, or you think you may incorporate them into your trading at some point, you should have software with advanced charting elements included.
Alternately, you could also use a third party trade indicator software if this is more effective for you. There are a few of them out there. Most do require you to pay a separate fee, which may be worthwhile if they are profitable. As with any indicator, the key is in learning when it is effective and when it is not effective, because not all signals will be profitable and you will have to develop additional rules to using the indicators in most cases.
This may sound a little silly, but trading is very emotional. When you trade, you want to be focused and in an upbeat mood. Using a software with eye pleasing colors, layout, or a good looking scheme can help keep you in the right frame of mind for trading. When emotions play such a big role in determining your ultimate success or failure, every edge counts, just like every edge in your trading strategy counts. In fact we consider superior mastery of your emotions an edge when it comes to making profits. Remember, when you think successful thoughts you have a higher chance of achieving your goals. Software can play an important role in this area.
Most Software Packages Are Sufficient From A Mechanical Perspective
Today, most trading software and trading platforms are technologically advanced enough to provide trader with sufficient features and reliability to access the markets efficiently. What this means is that most software can “get the job done”. The best software packages do more than this though. To succeed, you want your software to be lightening fast, eye catching, have elegance in its sophisticated yet simple design, and to have the tools you need to consistently profit from the markets!
Emotions play perhaps the biggest role in determining whether a day trader ultimately succeeds or fails. Developing a working system is an ability that most traders ultimately develop. Some people even develop or find excellent trading systems that only need to be followed exactly as the system is intended to be followed, and the trader will make enormous profits. Unfortunately, most traders do not follow their systems exactly because their emotions get in the way. This leads to regret, anger, frustration, and ultimately failure. Trading is hard enough without bringing emotions into it. If you can learn to master your emotions, you will begin to master trading itself.
The Slimmest Margins Between Success and Failure
What many people may not realize is that the difference between success and failure in day trading is extremely narrow. Look at this chart showing the net profit a trader of a binary security will make depending upon the percentage of time that their trade is a winning trade.
If a trader is correct on less than 56% of his trades (assuming a binary payout of either 80% or 0 depending upon if the trade is a “win” or a “loss”) he will not make money. If he is correct on 65% of his trades, he will have a net return of 17%, and if he is correct on 75% of his trades, he will have a net return of 35%. A difference of 10% trade accuracy is the difference between losing money and making 17% return!
Because the margins between great success and failure are so slim, a trader can not let emotions cost him even a small amount. Put another way, a trader who masters his emotions has the ability to make a lot of money day trading!
Identify How Emotions “Hurt” Your Trading
The first step to overcoming emotions during trading is to identify the ways in which emotions are harming your trading. These are the most common ways that emotions hurt a trader, and cost him money, and steps to overcome them:
Being Reluctant to Enter A Position When the System Calls For It
This is one of the worst things that a trader can do, and unfortunately it is also one of the most common. Not entering a position when the system calls for it for any reason (burned previously on a similar setup, down on the day, up on the day and protecting gains, not recognizing the opportunity, ect) begets feelings of intense remorse most of the time, especially when the position would have been a big win. It also messes with the winning percentage of a system. If you are not taking positions every time your system calls for you to, then you are missing out on more money over time if your system works. You never want to miss a huge trade because your emotions made you too reluctant to enter into the position.
How To Overcome This
What traders need to realize is that no system works 100% of the time. Even when you do everything correctly, even if you feel like all signs are pointing to a winning trade, a certain percentage of time it will not work. Getting “burned” on a previous trade is a common reason that traders do not take a subsequent position. The problem is that a system is not a system if you do not follow it every time. If your system works, you need to follow it precisely, if your system doesn’t work, you need to shut your trading down and make adjustments in a demo or “sandbox” arena until you can systematically make money again.
A trader needs a short memory. Always stay in the moment. Do not pay attention to your profits/losses for the day, and forget about any prior trades. Treat each opportunity as an individual entity, as a part of a systematic way to make money.
Taking Too Large A Position After A Win(s)
This is the flip side of being reluctant to enter a position. Positive emotions can make you enter a position with much more size that your system dictates, because you are “feeling lucky”. This can lead to big losses, and can lead to reluctance to enter future positions at all, or it can lead you to enter future positions with too small of a size. Using too large of a position can lead to a loss that is nearly impossible to return from, or at best a loss that will ruin your profitability for a period of time.
How To Overcome This
The solution is similar to being reluctant to enter a trade. Remember that your system is in place because statistically over time, it works. If you feel that positive emotions are causing you to enter positions much larger than normal, stop yourself, and realize that you have to stay true to what has been proven to work.
Not Cutting Loses Quickly Enough
Amateur traders almost always make the mistake of being overly optimistic about a trade that goes “out of the money”. They think that if they hold their losses long enough, eventually the trade will become a winner. The problem is that oftentimes, the trader becomes a larger and larger loss. This leads to feelings of hopelessness and dejection. If the loss is large enough, it can also ruin your account balance, and make it very difficult to regain a profitable enterprise.
Always have a pre-determined “out point” or “stop loss“. If the trade reaches a loss of a certain size, cut your position or exit your position all together. You must stick to this religiously. If you have the point pre-determined before you enter the trade, it does not leave wiggle room for you to rationalize holding a loss and letting it turn into a bigger loss. There will be more trade setups in the future, endless opportunity is ahead of you. Cut your losses quickly and move on to the next one.
Letting Anxiety Take You Out Of Winning Positions Too Quickly
This is another very common mistake of new traders. They find themselves in a profitable position, but they become very anxious that it will turn around on them. They exit way to quickly, and take what would have been a big gain and make it a very small gain.
The best way to overcome this is to resist the urge to exit positions completely. Instead, exit a smaller percentage of your position (maybe 25%) and let the rest run. This locks in some of the profits and takes away a lot of the anxiety around holding the trade. Over time, you will train yourself to hold your winning positions longer. There is nothing wrong with taking profits, but you have to make sure that you are holding your winning positions for a long enough period of time.
Letting Any Feelings Surrounding Other Aspects of Your Life Prevent You From Following Your Trading System
Day traders are all people (except the algorithmic traders). People have good days, bad days, fight with spouses, have health issues, have other victories in life, and can have any number of things happen in their lives outside of trading affect their emotions. The problem arises when these emotions influence a trader’s ability to follow their system. If you are not following your system, you probably will fail to systematically be profitable.
If you feel like you have emotions (negative or positive) that could prevent you from following your system you need to identify them, and you need to clear yourself of the emotions. Some traders actually meditate, some sit quietly for a few minutes, others may take a walk. Find what works for you, but it is very important to clear yourself of any strong emotions prior to trading.
This is the emotion that no day trader wants to experience, but every trader on their journey to becoming a professional day trader experiences at some point. If you feel like you can’t make money, you probably are not going to follow your system very well (or do anything very well).
Dejection stems from a lack of trust of your system. Sometimes this lack of trust is not displaced, and your system is not working. Sometimes the lack of trust is simply a product of the up and down cycles of systematic profitability. The key is to regain faith that you can systematically earn money from the markets. Take a step back, and use your system in a demo account or with very small positions. If you need to change the system, change your system. Once you regain faith that your system will make money over time, resume trading as normal. You need to have faith in your system to follow it!
Controlling Your Emotions Leads to Success
Only with a clear mind, and a willingness to jump on opportunities quickly will you succeed as a trader. Ask any professional trader and they will tell you that the most important way that they grew as a day trader was by learning to control their emotions. Control in trading correlates strongly with success.
Mastering Emotional Control: Overcoming Emotions as a Day Trader
Emotions can be the downfall of many day traders making it crucial to learn how to overcome them for successful trading.
While developing a working system is important it is equally essential to master emotions to follow the system consistently.
One common emotional hurdle is being reluctant to enter a position when the system calls for it which can lead to missed opportunities and regret.
To overcome this traders should treat each opportunity as an individual entity and follow the system precisely.
On the other hand positive emotions can lead to taking too large a position causing big losses and reluctance to enter future positions.
Traders need to stay true to their system and avoid getting carried away by positive emotions.
Additionally not cutting losses quickly enough and letting anxiety take you out of winning positions too quickly are common traps.
Having a pre-determined stop loss and exiting a smaller percentage of the position can help address these issues.
Finally it’s crucial to clear yourself of any strong emotions from other aspects of life before trading.
By identifying and managing emotions day traders can gain control over their trading and increase their chances of success.
You don’t need the stock market to go up to make money. There are a number of ways that you can bet on an individual stock or the stock market as a whole to go down. While this is a speculative strategy (as opposed to an investment strategy) it can provide a useful hedge if you have other long positions, or it can be a great way to make money when conditions are not favorable for a bull market.
When you are betting on an asset to decline in value, your position is known as a “short position“. You may also see a trader who has a “short position” referred to as “being short” or “shorting”. The most common ways to do this are by selling a stock short, by purchasing Put Options, by writing Call options, or by purchasing a Put binary option.
Ways To Profit From Short Positions
Purchasing A Put Binary Option
This is perhaps the easiest way for the average trader to take a short position. A binary option is extremely simple (it pays out a pre-set amount if the trade is in the money, or expires worthless if the trade is out of the money). Binary option accounts are easy to open, can be funded with a credit card, and do not require any special “margin privileges” like a traditional brokerage account that is option eligible.
High Risk High Reward
The trader takes a short position by purchasing a Put option contract and entering the dollar amount that they want to risk on the trade. The “strike price” is determined by the price of the security at the moment the trade is entered. The trade has a pre-set payout amount (usually between 60% and 90% of the amount risked). If the option expires in the money, the trader wins their money back plus the payout percentage designated for the trade. It does not matter how far in the money the option contract expires, the payout is always the same. If the trade expires out of the money, the trader loses 100% of the amount that they risked. In this way a trader can potentially make a lot of money from their short position, but they also will lose their entire position if it expires out of the money.
By using binary options, a trader can purchase put options for different time frames to place a bet that will pay if an asset declines in value. This is a viable way for an average trader to profit from a stock, a market, or other assets falling in price. There are various lengths of time available for binary option trades, usually ranging from 1 minute up to a period of a month or months.
Selling a Stock Short
This is the most common way that traders and investors, and especially day traders, can profit from a decline in prices. A short sale involves selling a quantity of an asset (usually a stock) that the trader does not actually own. The trader will sell at the current market price to the open market, and their brokerage will provide the shares to the purchasing party. The trader is effectively being loaned the shares from the brokerage.
The trader’s account is credited with the value of the sale. The trader is usually charged interest from the brokerage daily for the shares that are loaned to the trader.
When the trader decides to close the position, they purchase the shares back from the open market. If the price of the security has fallen, the trader will purchase the shares back (to payback the loaned shares to the brokerage) for less than what they were sold for. The trader can then keep the difference between the price it was sold for and the price it was bought back for.
Limitation On Profits And High Potential Risk
The highest amount of money that a trader can make from selling a security short is 100%. A 100% profit would be realized if a security becomes completely worthless (the trader would not need to pay back the loaned shares to the brokerage because they have no value). Most assets which are shorted do not go to a price of 0 though. In fact a decline in price of 20% for the most commonly traded securities would be considered significant.
It is important to note that if a position is out of the money when it is closed, the trader does not need to necessarily lose a lot of money. A position which is closed out for a slightly higher purchase price than the sale price, for instance, will result in a very small percentage loss.
That being said, there is no maximum to the amount of risk that a trader is exposed to. While their maximum return is 100%, the price of a security may double, triple, quadruple, or even go up higher in price. While brokerages have risk controls in place in the form of “margin calls”, this is not a perfect system and it does not necessarily limit the risk effectively. If for instance a security closed one day below a level which would result in a margin call, and opened the next day significantly above the price which would incur a margin call, the trader is responsible for paying the brokerage any losses, without limit.
Selling Short Takes More Capital
Because a short sale of a security typically provides the lowest expected return compared to the other ways discussed here to profit from price declines, it takes the most capital on the trader’s part to make money. Short selling can also only happen in a margin approved account, which has minimum balance requirements. While many day traders do engage in short selling, and some are very profitable from it, there are limitations and benefits unique to this form of short position. It is important for every trader to understand this completely before choosing their method of taking a short position.
Purchasing A Put Option (or Writing a Call Option) Using Traditional Options
A traditional stock option works by giving the owner the right to either buy (a Call option) or sell (a Put option) a security at a future date, for a specified price. The option has a value because it provides this right to the owner at a future date (and prices may change between the purchase time and that future date), and it may have a value because it is either above or below the strike price when the option contract is purchased.
Purchasing a Put Option
If a trader owns a Put option, it gives that trader the right to sell shares of that particular stock to the option writer for a specific price on a specific date. If the price is below the strike price, the trader will execute the option. This means that they will buy shares at the market price, and sell them for the higher agreed upon strike price. By owning a Put option the trader is making a bet that the price will decline, and that they will be able to purchase the shares on the open market for below the strike price (which the option writer is obligated to pay).
Returns are Potentially High and Risk is Capped
The benefit of a Put stock option is that they rewards are potentially very high, the highest of each of these methods. A trader has the ability to make multiple times the money that they purchase the option for. If the option expires out of the money, the option expires worthless, capping the risk to the trader at the amount they spend on the option contract(s). Some view purchasing traditional stock options as the most beneficial risk/reward profile of any type of position, for trading purposes. The caveat is that while the risk is capped, an option that expires even slightly out of the money has no value. An option that expires slightly in the money will have a small value, so while the upside has a lot of potential, the expected return may not be high enough to compensate a trader for the risk of losing the entire trade amount.
Every option has a time value, otherwise known as Theta. This is the value in the amount of time left between when an option is purchased, and when it will expire. Time has value because the price of a stock can move over time. The more time remaining, the more potential a stock has to move further into a profitable position for the option. Even if the price of a stock or underlying security doesn’t move, the time until the option expires is constantly reducing. As time passes, the time value of the option lessens. This reducing time value is known as option decay.
Writing a Call Option
A trader can also profit from a decline in an assets value by writing Call options. The trader sells the call options that they write on the open market, and if the price drops below the strike price, the trader will keep 100% of the money he earned by selling the options. If the option is executed in the money, the writer will be obligated to sell shares to the option owner at below market value prices, potentially resulting in a loss on the position.
No Cap On Risk
Because the price of a stock hypothetically has no limit to how high it can rise, the potential exists for very large losses when writing Call options. As an example of how writing a Call option can turn out especially poorly, let’s say a trader writes a Call option (100 shares) for stock XYZ at a strike of $50. Let’s say that the trader sells this option for $2 (taking in $200 of revenue). If the price of the stock rises to $60 when the option is exercised, the trader must sell the owner of the option 100 shares at $50. Because it costs $60 per share to acquire the shares, the trader will lose $8 per share ($10 a share on the price difference minus the $2 a share in revenues from writing the option). This position loses $800, and it only had a maximum potential gain of $200. Writing options can result in unfavorable risk/reward profiles in some circumstances, and traders should have extensive option knowledge before writing any options of their own.
The Best Method Depends Upon the Trader
There is no “best” method for profiting on a decline in prices. There are unique benefits and risks to each style. We use Binary Options because there is a high payout no matter how far in the money the option contract expires. This allows us to precisely control our risk/reward profile. It is also well suited to traders who do not want to put up substantial amounts of capital (as the other methods require).
The highest potential payout is using traditional Put options, but there is option decay, and an option that is executed a little bit in the money will only provide a small return to the owner (who also took a significant risk by purchasing the option and possibly losing 100%).
It is important for every trader to understand the workings of each type of short position, and to thoroughly understand their chosen method. For simplicity and for the predictable payouts on all winning trades, we use binary options. If you would like to become a binary options trader and you need to open a binary option account of your own please sign up for an account today.
Risk free trading is the holy grail of day trading. While stock traders have been scheming creative ways to mitigate risk for over a century, they are never really able to eliminate all risk.
Even a high tech hedge fund running a high frequency trading algorithm is open to the risk of flash crashes or technology errors disrupting their trading. See the story behind the line of code that almost took down the largest US market maker, Knight Capital.
Binary Options Brokers That Offer Risk Free Trades
For small to medium retail traders, your typical day trader, there finally is actually a risk free trade proposition. Tradorax is letting anyone who funds a binary options account have 2 risk free trades! That means even if you lose, your account will not be negatively impacted. It will be as if the trade never happened.
For an example of how much this can help you, think of a trader who places 4 trades. Now, some traders are better than others, but overall, about 50% of trades will be winners, and 50% will be losers. This means that from 4 trades, a trader who meets the averages can expect to be correct on 2 of them, and lose on the other 2.
This would result in an overall loss for the trader in his account if all trades are the same size.
Now imagine that the same trader has 2 winning trades, and 2 risk free trades that do not lose any money. If each trade returns 80%, The trader will return an astounding 160% on his 2 winning trades, if all trades use the same amount of capital.
He will not lose any money on the incorrect trades, and from 4 trades the trader has made a higher return in a short period of time than most pros make in a year! Even if a trader only makes 4 trades and withdraws all his money, he can net a nice profit.
Risk free trading sounds too good to be true, but 24option and BancDeBinary have made it a reality. Why would they basically give money away? The first reason is they know only about 50% of the trades will be losers. A trader has to choose the trade as his risk free trade before he initiates the order.
So even if the trader has a winning trade, he will still use one of his risk free trades. This still is a huge advantage to traders though. Some traders will end up losing on both of their risk free trades, and the savings will be immense.
The second reason they do this is because it is a great promotion. They know that traders will not usually stop after the two free trades, and that they have an opportunity to generate profits in the long run. The onus is on the traders to be smart and take their profits while they are still on the table.
So while risk free trading has until now been a bit of a myth, Tradorax has created a great new opportunity for new accounts with their brokerage. If you want to take advantage of this offer while they are running the promotion, you must open and fund your account with their low minimum deposit. Remember it always pays to be smart.
How Risk-Free Trades Can Reduce Risk at Critical Moments
Risk-free trades can be a helpful tool to reduce the risk of losing funds to zero at critical moments.
When faced with a trade that has the potential for significant losses using a risk-free trade can provide a safety net.
By activating a risk-free trade and choosing the trade amount needed traders can protect their investments in case of an incorrect forecast.
This compensation mechanism allows traders to trade with real money without risking anything providing them with an opportunity to save money in risky trades.
However it is important to remember that risk-free trades should not be relied upon as the sole strategy for success in trading.
They should be used as an additional tool to mitigate risk and enhance trading performance.
Volume weighted average price (also abbreviated VWAP) is a formula used to calculate the average price a stock trades at, weighted by volume transacted at each price level. Normally traders are concerned with the volume weighted average price over a 1 day trading period, but some may be interested in longer or shorter term periods.
Day traders may track VWAP because this calculation is very significant to the trading of many mutual funds and most pension funds. When the current intra-day price varies significantly from the VWAP, there may be pressure for the price to move towards the VWAP.
This calculation is important to large passive institutional investors who are simply trying to match their average transaction price to the average price transacted over the course of a trading period. By matching the VWAP as closely as possible, they may reduce their market impact costs, which are the costs incurred by large traders whose trades are so large they move prices. They also reduce the risk that incorrect market timing will result in their average transaction value being significantly worse than what the market as a whole received.
How Volume Weighted Average Price is Calculated
Volume weighted average price is very simple to calculate. One takes the total value traded over the time period being analyzed, and divides by the total quantity traded.
VWAP = Quantity of Shares Bought at Each Price * Price of Each Transaction / Total Volume
Or more simply
VWAP= Total Value of All Transaction / Total Volume
Here is a simple example.
Transaction 1 = 100 shares at $10
Transaction 2 = 300 shares at $10.20
Total Value = (100* $10) + (300*$10.20) = $1000 + $3060 = $4060
Total Quantity = 100 + 300 = 400
VWAP = $4060 / 400 = $10.15
Practically speaking a trader could not keep track of VWAP in real time without computer calculating assistance. Many charting software packages do include VWAP tracking capabilities.
An exchange traded fund, abbreviated ETF, is a fund that trades like a stock, and tracks an index, an asset class, a commodity, or basket of commodities. Like a stock, an exchange traded fund will transact throughout the day, and does not necessarily trade at it’s intrinsic value, or net asset value (NAV). This is unlike a mutual fund, which only trades on market close exactly at the net asset value.
Unlike a mutual fund an ETF is not actively managed, meaning its performance is meant to mimic the underlying asset(s) tracked as closely as possible, either on an intra-day or long term period, depending on the ETF. Exchange traded funds typically have much lower expense charges than mutual funds, making them attractive to some investors. ETFs are also attractive to day traders, who can trade an index or commodity with an equities trading account, rather than a futures or commodities account.
Some exchange traded funds are meant to trade double or even triple the volatility of the underlying index or asset tracked. These funds are solely for the purpose of day trading, and never should be held long term as they have considerable decay in their net asset value. The reason for the decay is the use of leveraged products to create the extra volatility. Recently these funds have come under more regulatory scrutiny because by design, they will all eventually be worth $0. They also create extra volatility in the market as a whole as the funds must rebalance their own assets during the trading day.
While an exchange traded fund is not necessarily required to trade at a share value which would correspond exactly with the true NAV, any significant deviate would qualify as an arbitrage opportunity, and any inefficiencies in pricing are typically rooted out very quickly by high frequency traders.
ETF volume accounts for hundreds of millions of shares of market volume daily, and these products have become very popular amongst both investors and traders. The most popular ETFs include: SPY (S&P 500), EEM (emerging markets), GDX (gold miners), VXX (S&P 500 VIX), and XLF (Financials).
Sometimes an ETF may be useful to a trader acting on sector specific news, when the trader is unsure how one particular asset within the sector will be affected. An example is when the US Government decided to increase capital holding requirements of banking institutions. Without a full analysis of each bank, a trader would not know how significantly each would be affected. Instead knowing that the industry as a whole would likely decline in price on the news, the trader may have decided to short the XLF (Financial Sector)
Traders and investors alike should educate themselves on exchange traded funds as they provide a useful alternative to other assets.
A market order is an order that a trader enters that does not specify a specific price to execute. A market order will seek liquidity at progressively further prices from the current bid and offer until the order is completely filled. The purpose of the market order is to ensure that the transaction is completed instantly. This can be very useful to traders in a fast moving market because they are assured of the order executing. A market order is the opposite of a limit order, which is an order that must execute at a certain price or better.
A market order can be a buy or a sell order. If the order is a buy order, it will first remove liquidity from the offer. If this does not completely fill the order, the market order will continue to seek liquidity at progressively higher prices until the fill is complete. Conversely, if the order is a market sell order, it will remove liquidity from the bid and progressively lower prices until the order is completely filled.
The obvious benefit of the market order is the speed and surety of execution. A market order will always fill, and it will always fill almost instantly. If a stock is very quickly changing prices and it would be difficult to take the time to enter a specific price a market order can be extremely useful.
This works very well for traders if the order is small, or if there is a lot of liquidity posted in the stock. This type of order can potentially be very dangerous for traders as well. Because price is not specified, the order can legally transact at whatever price is necessary to complete the order. If a trader enters a very large market order relative to the liquidity available in the stock, he risks moving the price significantly away from the current bid and offer. Because high frequency trading programs can remove posted liquidity so quickly, there is always a risk that the programs will remove liquidity before the market order is even able to access it, resulting in an even worse execution for the trader. Traders should always be aware of how large their order size is in relation to the available posted liquidity for a particular stock. All stocks are different in this regard, and the same stock can be different during different days or even during different times of the day. This is yet another reason why traders must always watch the book of a stock while trading.
It should be noted that using a market order in the dark pools can access more liquidity than can be seen on the books. Sometimes this can result in a much better fill for a trader, other times the light pools will pull orders when a large market order is entered into the dark pools. If you have access to a sweep order that will seek both light and dark liquidity it is most beneficial to trader entering the market order.
A market order is simply one more tool in a traders toolbox. It is useful in fast moving markets with ample liquidity. Used at the right time it can be tremendously useful, used at the wrong time it can cost a trader a lot of money. Traders must always be aware of the circumstances when deciding between using a market order or a limit order.
What Is A Stocks Volume
Volume is the total quantity of shares which have transacted in a given time frame. Traders use volume as a measure of a stock’s volatility or potential volatility. Higher volume will generally signify that a lot of parties are interesting in trading the stock, and the stock is likely to move as a result. Volume measurements are also used as a signal of liquidity of a security, so a trader can judge his ability to enter or exit a position at current market values.
Higher volumes are generally favorable to traders, but may only be beneficial to a point, or may not be beneficial depending on the exact strategy. A trader may also look at average volume at a daily level, or may even break this down in smaller increments of the day to judge when he may best employ a strategy.
Volume does not double count transactions, meaning if a trader purchases 100 shares from another seller it results in 100 shares of volume, not 200.
Typically in charting software volume is displayed below the price chart. Volume is normally displayed for every price bar, so that if a chart is displaying 1 minute price bars volume will display for each minute. The chart and volume together typically will look something like this:
This is a daily chart of GE, with the volume displaying for each price bar directly below the bar. In general it can be noted that days with lower volume also have a smaller range in price.
Volume is NOT an indication of price direction by itself, it simply is a signal that traders use to judge if a stock is likely to move. Often times traders will watch screens displaying the stocks with the highest volumes, or displaying sudden spikes in volume, which is can be a sign that news was released, or at least that the stock will be moving.
Traders who are relatively new and are working on refining their strategy will be well served to watch how volume impacts trading.
What are the Stock Market’s Trading Hours
The stock market’s regular trading hours are from 9:30 a.m. to 4:00 p.m. Eastern Standard Time. There are is also a pre-market session every day from 4:00 a.m. to 9:30 a.m. EST and a post-market session from 4:00 p.m. to 8:00 p.m. EST Check the NY Stock exchange’s website for hours and holidays.
The regular trading session from 9:30 a.m. to 4:00 p.m. is the typical market session that most people refer to as the “day’s trading session”. This is when the vast majority of the day’s volume transacts and when most market participants are active. Because there is more volume posted to stock’s books during the regular session it is arguably more predictable and a safer time for day traders to be involved due to the higher likelihood of having liquidity available to execute orders. Some day traders prefer pre-market or post-market sessions however and only trade these times. Generally it is recommended that only experienced traders participate in the extended hour’s sessions however due to the possibility of extreme volatility.
Some stocks are very active in the pre-market and post-market sessions, and some have no activity at all. The spread will often widen significantly at non regular session hours and it can be very difficult to enter and exit large positions.
It is very important for a trader to understand the stock they are trading and the likelihood of liquidity being available after the closing bell. If a trader accidentally does not exit a position by 4:00 p.m. it can be very tough to exit after the close, and with a wider spread significant price slippage can occur. This can needlessly cost a trader a lot of money.
Only experience can give a trader a feel for the differences; but it is crucial to understand the differences between sessions and the differences between how particular securities trade during these times. Always trade a light position until you understand the risks and movements of the hours you are trading.
What is A Share of a Stock?
A share of a stock represents ownership in the company that the share is issued for. Share ownership entitles the investor to share in the profitability of the company (or lack thereof) as well as a say in company matters put to a vote of investors. Stock investors purchase shares issued by corporations in hopes that the company will become more valuable through increased profits and business prospects.
One share of a corporation may represent different percentages of total company ownership based on the number of shares outstanding for each particular corporation. For instance, if there are 10,000 shares outstanding for a given corporation, one share represents ownership of 1/10,000 of the company, and the shareholder has 1/10,000 of the total vote in shareholder votes on company matters. If a shareholder owns 5,000 out of 10,000 total shares, they would own 50% of the company and have 50% voting rights.
Shares bought and sold on the stock market represent true ownership of a corporation, and entitles owners to the benefits and pitfalls of ownership. A nice perk for investors of publicly traded corporations is that while they are entitled to share in the upside if company profits soar, an investor can not lose more than his or her investment if the company goes bankrupt. In other words, owners of shares are not required to pay back company debts personally if the corporation can not meet its debt obligations.
Some people think of a share as something intangible that goes up and down in price almost randomly. The reality is this is far from the truth. The price of shares is based on buying and selling, most of which is is performed by large institutions like hedge funds and mutual funds. They decide to buy and sell based on exhaustive research and financial modeling of all available information on a corporation’s current profitability, current and project future asset values, and future profitability estimates and potential. The price of a share, and the value represented by the share is no arbitrary matter.
The ability to break a corporation into many shares which can be sold to many investors has allowed owners of large companies to sell their companies, which would otherwise be too large to purchase for any single investor. It has allowed average citizens to partake in the benefits of company ownership when they otherwise would not be able to, and this investment propagates economic growth, allowing companies to use investor money to expand operations and hire additional workers. When a company first breaks itself into publicly traded shares, it is said to have an IPO or initial public offering. When a company issues additional equity to the public after an IPO this is known as a secondary offering.
A trader should never lose sight of the fact that while their ownership may be short term, the instruments they are trading represent real tangible value, often in some of the world’s largest corporations.
What Is A Stock Trade
A stock trade is actually a transfer of ownership in a publicly traded corporation. The trade refers to the exchange of money for ownership rights, which are denoted in shares of stock. In common parlance, the term trade has come to mean a shortly held position taken with the intent of capitalizing on near term volatility. Those who do this for a living are known as day traders, but many people will buy or sell stock in shortly held positions with the hopes of making a lot of money.
An example of how this is done:
A trader buys 1000 shares of stock ABC at $50. The stock price moves up to $54 dollars after a positive earnings announcement creates buying interest. The trader sells his 1000 shares at $54 and makes $4 of gain per share on the position. Total earnings are 1000 x $4 = $4000. The trader made $4000 in a short time period, or an 8% gain on his investment of $50,000. Traders will also use some tools such as margin buying power and options to create leverage, and magnify the extent of their gains. Caution must always be taken by the trader however as losses are also magnified by leveraged positions.
Generally speaking short term trading is discouraged by the government, both for the safety of the trader’s capital as well for general healthy functioning of capital markets, since trading increases volatility. Let’s not forget that the purpose of capital markets are for corporations to access public wealth so they may make investments in their businesses, and for the public to invest in corporations that they believe will make money for them, so that their personal wealth will grow. This relationship is beneficial to both parties and it is why capital markets are such positive drivers of economic growth. The value of having short term traders involved in these markets is always up for hot debate, especially with the explosion of high frequency algorithmic trading.
No matter which side of the issue you are on, you should always understand what you are doing when you place a trade. Always understand what exactly you are trading, the maximum amount of money you can lose, and how you can be most effective in placing your orders. This includes understanding how your broker works, how much you pay for commissions, the types of orders you are placing, and how you are determining that a particular moment is the best time to place the trade.
What Is A Day Trader
A day trader is someone who buys and sells securities, usually equities but possibly bonds, derivatives, futures, currencies or options, with the intent of taking advantage of short term price movements to create profits for their account. Day traders may occasionally hold securities overnight, but normally close all positions by the end of the day, hence the term “day trader”.
A day trader works to establish a trading strategy that will result in the trader either only taking trades with a higher probability of being profitable than not, or with the probability of a winning trade creating profits such that over time the profits will be greater than the losses, even if there is a higher probability of the trade ending in a loss. Once developed a trader’s goal is to adhere to the strategy as strictly as possible, gradually using greater and greater trade sizes in order to increase their profits over time.
Strategies for equity traders may including reading a stock’s tape and order book to spot large buyers or sellers, going with price momentum during times of high volume or rapid price movement, or reacting to technical or algorithmic signals. Some day traders work exclusively by writing algorithms, often times ones that operate on extremely short time frames, taking advantage of small inefficiencies in the market. The trader will then let their algorithm work throughout the day, usually monitoring it constantly and adjusting it in response to changes in market conditions. If you have the ideas but don’t have the computer skills to program your own algorithm, Cyborg Trading offers traders a fantastic resource by taking the need to know programming languages out of the equation for the trader.
Day traders may work for a proprietary trading firm, such as WTS, T3 Trading, or Bright Trading, or they may trade their own accounts with a retail brokerage such as TD Ameritrade or Interactive Brokers. A trader will work with a proprietary trading firm to get increased leverage and more professional trading tools, or a retail brokerage in order to keep 100% of their profits. A proprietary trading firm may have lower commission charges than a retail brokerage, but may require the trader to pay for some monthly costs such as software and ECN access, and will generally keep a percentage of the trader’s profits. A proprietary firm will provide a trader with firm capital, however, and may increase a trader’s total profits significantly. The right choice is an individual decision for each individual.
A day trader is a participant in the markets, always working on their strategy to predict short term price movements in order to create profits for their account.
What Is Trading On Margin
Trading on margin is the ability to buy or sell more of a security than you would normally be able to with your account equity. It is basically a loan from the brokerage provided as a service to clients. By law you cannot have more margin value loaned to you than you have in equity. Put another way, you can borrow up to 50% of the value of your purchase. You are also free to borrow less if you wish. Some brokers will require a higher percentage of account equity of the total margin purchase.
This applies to retail accounts, and accounts must be specifically given privileges as margin eligible accounts. A broker will require an affidavit from the account owner stating that they understand all risks associated with trading on margin, and are in a strong enough financial position to assume those risks. Margin accounts require a minimum deposit of $2,000, and some brokers will require a higher deposit.
Traders use margin in hopes of magnifying their gains. If they are buying a position that is twice as big as the equity in their account, the hope is that they will make twice as much money from it. This is sometimes the case, but unfortunately there are no guarantees.
Buying on margin is risky by nature. When you have twice as much equity invested in the position than equity in your account, every price increase or decrease will have double the effect on your account equity. This is very good if the position goes in your favor, and will at least double the damage if the position moves against you. A trader should only use margin if they fully appreciate the risks and rewards.
Margin is also not free. It can be thought of as a loan from the brokerage, and like all loans there is an interest rate attached. The interest rate will vary amongst brokerages but will often be indexed to an established rate, for example the rate may be libor+ standard markup, or the rate could just be a flat rate. Either way every day you are using margin, you are obligated to pay interest. The interest is deducted from your account, and it usually behooves the trader to only hold positions on margin for short time periods.
If a trader is holding a security on margin, and the value of the position declines substantially, a trader may be subject to a margin call. A margin call is a call made by the broker to add more funds to an account when the equity declines to a certain percentage of the total position value. This happens to help assure the brokerage that they will not lose their own money on the position. Different brokerages may have different standards for when a margin call is placed, but if funds are not added in time the brokerage will liquidate the position to a point where the account equity is an acceptable percentage of the position value.
Trading on margin can be beneficial for day traders as long as they have controlled risk parameters, but essential to understand the full consequences of using it.
Stock Market Terminology: Volume Share Stock Trade Day Trader Trading on Margin
Volume is an important concept in stock market terminology.
It refers to the total quantity of shares that have been traded within a given time frame.
Traders use volume as an indicator of a stock’s volatility and liquidity.
Higher volume signifies increased buying and selling interest which can result in price movements.
Traders often monitor stocks with high volumes or sudden spikes in volume as it can indicate significant market activity or news releases.
Shares represent ownership in a publicly traded corporation.
When investors purchase shares they become partial owners of the company and have a say in company matters put to a vote of shareholders.
The percentage of ownership is determined by the number of shares outstanding.
Shareholders can benefit from the company’s profitability as well as participate in growth opportunities.
A stock trade involves the buying or selling of securities such as stocks or bonds with the intention of capitalizing on short-term price movements.
Day traders in particular aim to take advantage of these short-term fluctuations to make profits.
They typically close all their positions by the end of the trading day.
Traders study market patterns order books and technical indicators to identify potential opportunities for profitable trades.
Trading on margin allows traders to buy or sell more securities than their account equity would typically permit.
It provides leverage by borrowing from the brokerage but it also increases both potential gains and losses.
Traders should use margin with caution and fully understand the risks involved.
Interest is charged on margin accounts and failure to meet margin requirements can result in margin calls and liquidation of positions.
Understanding these terms is essential for investors and traders in navigating the stock market.
Volume and share information help assess market activity and liquidity while knowledge of stock trades and day trading strategies empowers traders to make informed decisions.
Awareness of the risks and rewards of trading on margin is crucial to managing investments effectively.
Never risk more, than you can afford losing. Trading carries a high level of risk, and we are not licensed to provide any investing advice. Understand the risks and check if the broker is licensed and regulated. A percentage of the external links on this website are affiliate links and we may get compensated by our partners. We are not financial advisors. Do your own due diligence. This is an information website only.
Please be advised that certain products and/or multiplier levels may not be available for traders from EEA countries due to legal restrictions.