Accountancy Resources
Day-trading, once the exclusive domain of floor traders and of the larger investment firm’s proprietary trading desks, is now fair game for all speculators. Inspired in part by the instant availability of quotes, affordable high-powered computers, and competitive online commissions, the new wave of day-trading methods and systems has attracted thousands of traders in recent years. The undeniable thrill of trading is, however, a double-edged sword: one that can hurt as well as heal.
Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding, and a large amount of self-restraint. Anyone who says you can consistently make money on every trade is not being truthful. Don’t expect to generate returns on every trade. Following that, in order to increase your chances of making a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation.
The people at ACM, SA, a subsidiary of REFCO Group Ltd., suggest what a trader needs to do in order to put the best chances for profitable trades on his or her side.
Trade with money you can afford to lose. Trading is speculative and can result in loss, it is also exciting, exhilarating, and can be addictive. The more you are ‘involved with your money’ the harder it is to make a clear-headed decision.
Identify what the market is doing. Is it trending upwards, downwards, or in a trading range? Is the trend strong or weak, did it begin long ago or does it look like a new trend that’s forming? Getting a clear picture of the market is important when preparing to trade.
Time your trade. You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are two-fold. Timing your move means knowing what’s expected and taking into account all considerations before trading.
If in doubt, stay out. If you’re unsure about a trade and find you’re hesitating, stay on the sidelines.
Trade logical transaction sizes. In short, don’t trade amounts that can potentially wipe you out, and don’t put all your eggs in one basket.
What is the market’s expectation? If people are expecting an interest rate to rise and it does, then they’re usually will not be much of a movement because the information will already have been ‘discounted’ by the market. Alternatively, if the adverse happens, markets will usually react violently.
Use what other traders use. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
If you’re going to try your hand at day trading, understand that the odds are high that most newcomers typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. The US Securities and Exchange Commission warns: “While day trading is neither illegal nor is it unethical, it can be highly risky. Most individual investors do not have the wealth, the time, or the temperament to make money and to sustain the devastating losses that day trading can bring.”
Although day trading has become somewhat of a controversial phenomenon, its prevalence is undeniable. Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. Some argue that individuals should stay away from day trading, while others argue that it is a viable means to profit. And although it is becoming increasingly popular among inexperienced traders, it should be left primarily to those with the time, skills, and resources needed to succeed.
The antithesis of day trading is the “buy and hold” strategy. Buy and hold is a long-term investment strategy based on the concept that, in the long run, equity markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that market timing, the prospect that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors so it is better to simply buy and hold.
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