Momentum Stock Picks

Day trading is the buying and sellingof stocks or other forms of security within a single trading day. Itis most common in the foreign-exchange (forex) and stock markets butthis can occur in any marketplace. While highly-speculative andrisky, this practice is nonetheless legal and an ethical way of doingbusiness. In fact, it serves two critical functions: keeping themarkets efficient through arbitrage and providing liquidity,particularly in the stock market.

Day traders speculate on stocks thatthey feel will rise in price in the few hours, minutes or secondsthat they own the stocks, affording them some quick profits. For anideal day trader, all stocks purchased during the day must be sold,and all stocks that were sold short were covered, before the day�send. Day traders typically use borrowed money (margins) to trade andusually will not risk holding stocks until the next day because ofthe danger of radical price changes overnight, which may result toirrecoverable losses.

To be a successful day trader, thereare some requirements and methods that have to be in place. Among therequirements are access to the trading desk (usually reserved fortraders working for larger institutions or those who manage largeamounts of money) for instantaneous order execution; multiple newssources (as news provides the opportunities day traders capitalizeon); analytical software with automatic pattern recognition or neuralapplications that make accurate predictions of future pricemovements.

There are various methods used bysuccessful day traders. Shorting involves borrowing and selling ofstocks, in the hope that the price falls during the day and thetrader can repurchase the shares at a lower price. In trendfollowing, the trader rides on the momentum of the price movement andbuys rising shares or short-sells a falling one, in the expectationthat the trend will continue until the trader disposes of the stocks.
Contrarian strategy employs just theopposite of trend following: the trader buys falling stocks orshort-sells a rising one, in the expectation that the trend willchange.

Range traders watch the support (highrange) and resistance (low-range) prices of a stock for sometime, andthen buy the stock at or near the low price and sells at the highrange. Quite related to range trading is looking out for movementsoutside the established range, called breakout (price moves up) orbreakdown (price moves down) – the trader buys or sells shares on theassumption that the movement will continue in that direction for sometime. Scalping or spread trading involves exploiting the small pricegaps created by the bid-ask spread � which means tradersestablishing and liquidating a position quickly, usually withinminutes or even seconds. Rebate trading uses the ECN paymentstructure to trade low priced, high volume stocks to earn revenues inthe form of rebates.
Experts normally advise market playersagainst day trading because of the inherent high risk and volatilityof the markets. Also, the NASD has separate rules for accountsclassified as pattern daytrading accounts and requires a minimumequity of $25,000 for such accounts to trade in the stock market.However, due to the temptation of easy and quick bucks, manyindividuals and institutions engage in the practice and, yes, thereare some who actually make a living in day trading.

This entry was posted on Thursday, October 7th, 2010 at 6:23 am and is filed under Daytrading . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.