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Day Trading or Trend Trading
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Different Trading Strategy for Different Timeframe
Summarized Overview
In this article, you'll learn what makes day trader is so different than trend trader, what are the advantages and disadvantages for each stock trading strategy and how to decide which trading style to use. You'll also find information on what are spread and stock scalping.How Day Trading Works in Stock Market
Principally, day traders enter and close their trades in the same day. A day trader can be trading many stocks (or other financial instrument such as futures or FOREX) within the day’s trading session, but has no positions open in the end of the day.Stock scalping, on the other hand, just hold a stock for a matter of minutes! But, what it takes to make money from day trading or stock scalping?
There are three requirements for a share to be considered as profitable for day trading and stock scalping. There are:
1) Volatility
Volatility is the main things that keep day traders alive. No trades can take place if the price difference is not profitable. Oh, btw, volatility is a measure of the price movement of a stock over a given timeframe.
You can use Bollinger bands to analyse this, but, a simple calculation of the daily price range is good enough to screen volatility index for day trading. You can use this simple mathematical formula:
The stock’s price is more volatile if the value is higher, which is good to implement day trading strategy.
2) Liquidity
Daily liquidity is the daily trading volume. Higher trading volume can be either many traders trading small number of shares or just a few traders with large trading activities. This is something you need to discover, though it is not an easy job.
The reason is high liquidity results to close spread between the bids and asked price and it is a favourable situation for day traders. Fyi, spread is the differences between the price a seller is asking for a share and the price the buyer is willing to buy.
Advantages of Day Trading
- Able to start with smaller shares or less capital but with faster return.
- Not exposed to the unexpected market effect in overseas market over the night.
- Can implement close stop loss techniques, which will reduced the dollar risk per trade.
- Stressful and time sensitive.
- Require minute by minute market monitoring.
- Need the latest market data, which can increase the data costs.
- Smaller profit margin as you have to pay brokerage cost every single day.
How Trend Trading is Different From Day Trading
A trend trader can be holding the stock from one week to one month, or even a year! Trend trading which also known as position trading will let the market determine till when he should be in the market. If you decided to practice this trading strategy, you have to use technical as well as fundamental indicators to decide when to sell the stocks.
Even though daily volatility is not that significant in trend trading, liquidity is important. Simply because you need to sell the stocks as fast as possible with minimum spread.
Advantages of Trend Trading
- Can collect dividends, and it is real bonus too!
- No need to consistently monitor daily price movement.
- Able to give more time for the trades to be more profitable.
- Susceptible to unexpected market event while you are sleeping.
- Require bigger range of stop loss order, as you are trading for longer period.
- You can lose focus for extended period of time, results to lose in opportunities.
Which Stock Trading Style Is Your Best Trading Strategy
The decision to use either day trading or trend trading is depend on how frequent you plan to trade and what is your trading timeframe. In the same time, choose the one that fit your psychological type and comfort level; are you disciplined and patient or doHighly Recommended FREE Sign Up
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