Every successful day trader has a technique or strategy that he or she follows. A strategy and sticking to it is very important because otherwise your investments will be little more than guesses and essentially the same as gambling.
One popular day trading technique is trend following. Trend following, as the name suggests, means to identify the current trend of individual stocks and then make purchases or sell shares based on the direction that the stocks are moving in. So if the stock is moving up, the day trader buys; if the stock is moving down, the day trader sells.
Trend following is not about making guesses or doing research on individual stocks in order to try and predict the direction that they move. Trend following is about reacting and then making the decisions about how much to buy or sell. Once a trend has been established, the day trader needs to decide on how much money to use. This can be determined based on the day trader’s comfort level, amount of capital, and information about the stock itself.
The day trader also needs to have an exit strategy in place. Disciplined day traders will usually setup a stop-loss order in place for this. A stop-loss order is an instruction to sell off all the shares owned once the value of the stock reaches a certain level. This allows the day trader to plan her strategy in advance and because the order will come into effect automatically, there is less monitoring required on the day trader’s part.
One problem with stop-loss orders that occur automatically is that in the event that there is a brief dip in the stock’s value, an abnormal movement, not a trend, then the day trader may lose out by selling all her shares before the stock truly reverses its trend.
In addition to deciding how many shares to buy, and when to exit, a trend follower needs to make choices on how much to risk when trading shares, and how many shares to trade at any given time. All of these choices will affect the profitability of the investment, and since there is often a slim margin of profit for day traders in the course of dealing with a single stock, these choices need to be planned out as soon as possible.
The best way to plan out the steps needed to take advantage of the stock’s trend, is to use specialized software designed to help the investor make the most informed decisions on how many shares to trade, for how much, and when the trades should be made. The software will give likely scenarios based on the information inputted, and the variables can be adjusted to produce more positive results. The day trader can then use that information to follow the trend of the stock and maximize her profits.
Day trading can be a challenging and stressful way to invest money, but with a strategy in place, like trend following, there is a greater chance that the investor will have more control and success with what happens in the market.