Trading

Day Trading 101: Use These Strategies to Make a Profit

 

Day traders are those that buy and sell an instrument during the same day. Some even do it many times over the duration of the day. That way, they can easily profit from the price movements that occur during the day. However, this type of trading is not without risks. While it can be a lucrative venture, lack of knowledge or experience can cost you a lot of money.  That is why you should, at least in the beginning, stick to the tried-and-true strategies and methods. That’s why we will take a look at some principles you should definitely adhere to. So, to help you on your way, we will go over the top ten day trading tips for beginners. First things first, make sure you have a solid broker like Ally Invest. You’ll also want to make sure you have access to a quality trading platform.

Top 10 Tips

1. Do Your Homework:

Remember, knowledge is power. And not just knowledge of how trading works. If you want to be successful, you have to follow the stock market news and any event that can affect the market. Use any information you can find. Always make sure to do your homework. That includes making a list of stocks you would like to buy, informing yourself about that stock on a regular basis and keeping up with the news. You should also visit trustworthy websites with reliable financial information as often as you can.

2. Set Aside The Amount of Money You Are Willing to Spend:

You should know how much money you are willing to risk in each trade before even starting your day. We would recommend setting aside the amount that is no bigger than 1-2 percent of your account. Remember, you will lose money in trades, no matter how good you are. Remember, even Warren Buffett doesn’t have a 100% success rate. And you don’t want to risk a large percent of your account on a single trade. So, make sure to set aside the money you can trade with. And be ready to lose that money. We are not saying you shouldn’t be optimistic, but don’t take away from the money you require for your living expenses.

3. Make Sure You Have Enough Time

Day trading can, without a doubt, be a very lucrative trading style. However, you should bear in mind that it will take up most your day. If you don’t have a lot of spare time, you should consider a slower trading style. Reacting to the market movement is crucial and missing out due to the lack of time can cost you a lot of money.

4. Don’t Overdo it

As a newcomer in the world of trading, you should remember not to make too many trades in a day. So, try to focus on a couple of stocks for the first few weeks, at least until you get some experience.

5. Avoid Penny Stocks

We understand that trading low-cost stocks seems ideal for a new trader. However, penny stocks usually lack liquidity, and it is not easy to make a profit with them as a beginner.

6. Let Others Trade First

Day trading can be very volatile, and this is very noticeable during the first 15 minutes of each trading day. A lot of people will execute their orders as soon as the market opens. And this practice increases the volatility of the market. Once you have some experience behind you, you will be able to profit from this volatility. However, until then, you should avoid the rush hour and trade during the milder moments of the day. Take your time, and read the movement of the market.

7. Use Limit Orders to Cut Your Losses

There are two main types of orders you should use as you are starting out – market orders and limit orders. Market orders guarantee execution, however, they don’t guarantee the price. This order executes the trade at the best price it can get at the moment. On the other hand, limit orders demand the right price but don’t guarantee the execution. Use limit orders to trade with precision and set the price you want. Make sure to set realistic prices for trading to avoid missing out on the trade.

8. Keep Your Expectations in Check

Some people imagine that every single trade has to be a win to make a profit. Others expect incredible outcomes after just a couple of trades. And, we have to tell you, neither of those is necessarily true. In fact, many successful traders have success rates that barely go over the 50% mark. However, they focus on making more money on winning trades than they lose on their losing ones. That is why risk management is one of the most important aspects of trading. So, don’t get discouraged if some of your trades end up losing you money. Just take your time and develop a strategy that lets you get more than you lose.

9. Control Your Emotional Response

Trading in the stock market can get very emotional. You might get overly optimistic, hopeful or fearful, depending on the day. But don’t let your emotions take the lead. In the end, use your logic to make the decisions.

10. Always Stick to Your Plan

Make sure you have a plan before you start placing orders, and stick to it. As a day trader, you will have to move fast to grab a good trade. However, you don’t have to put yourself in the position where you have to make snap decisions. Don’t blindly chase profits if that trade goes against your overall plan. Instead, develop your formula and follow it as closely as you can.

Buying For Beginners

As a day trader, you will try to make a profit by using the small price movements during the day. However, there are factors you should always consider when entering a trade. Typically, you should look for liquidity, volatility, and trading volume of a stock. Allow us to explain:

* Liquidity – Stocks with a lot of liquidity usually have tight spreads. That means that you can both enter and exit a position with a good price.

* Volatility – Volatility is a measure of the price movement of a stock. If a stock is very volatile, it means you can gain, or lose, more money.

* Trading Volume – This measure will tell you how many times a stock has been traded in a certain time period. Usually, you should check for a period of one day. You can use this to measure the interest in a certain stock. If the volume increases, it usually means that the price will change too.

Once you have a grasp of these measures, it is time to find what your entry point should be. For this, you should use the following three tools:

* ECN/Level 2 Quotes: ECNs represent the electronic network that will automatically execute orders for you. Level 2 quotes are a service that will get you price quotes from NASDAQ and OTC securities. Use these two in conjunction to vastly improve your chances. It might take you some time to get a good handle on how to use these.

* Live News: Stock prices are always changing. And one of the biggest catalysts for that are news. Subscribe to real-time services to make sure you are in the loop.

* Candlestick Charts: Use these charts to analyze action prices. More on them later.

Selling For Beginners

Once you find the stock you want to buy, it is time to make a plan for the exit point. Namely, identify your price target. Once the stock reaches that target, leave the position. There are numerous strategies when it comes to price targets. Let’s go through them:

Scalping: This is probably the quickest strategy to perform. And, for that reason, it is one of the most popular ones. With this strategy, your price target is met as soon as the trade becomes profitable for you. In essence, you set the price target by planning to sell as soon as the numbers show you will make any money.

Fading: If you see a stock experience several rapid upward moves due to overbuying, you should consider this strategy.  As soon as the stock spikes, the early buyers will start turning profits, and others will avoid the higher price. So, once it goes up, you start shorting the stock to turn a profit from the subsequent price drop. This strategy is risky, but it can be very profitable. Set the price target as the moment new buyers start buying the stock at the lower price.

Daily Pivots: With this strategy, you will be looking to profit from the volatility of the stock. Follow the price patterns of stocks and notice when the prices are at their lowest. Buy at that point, and sell when they are at their highest. Set the price target at first signs of reversals.

Momentum: If you opt for this strategy, follow the news closely. Your goal is to recognize the news that will trigger an increasing trading volume of a stock. Buy on the release of the news and sell once the volume starts decreasing.

The Candlestick Chart

We said that you should use the candlestick chart to find your entry point. Well, this is how to do it. Start by focusing on patterns, technical analysis, and volumes. Of course, there are way too many setups you could run for us to instantly cover. However, one of the most reliable ones is the doji reversal pattern. The doji candle is the one that is signaling the reversal. This is how you can try to confirm this pattern:

  1. The first confirmation is a volume spike. The spike shows that there are traders that will support the price. The spike can be on the doji candle or on those that come immediately after.
  2. Check if the prior support levels match up.
  3. Check the level 2 to see what the open orders have to say.

Margin Trading and Stop Losses

As a margin trader, you will be borrowing the funds for your investments from a brokerage. If you become a margin trader (which is not easy), you will be vulnerable to sudden price movements. In essence, margins amplify trading results. So, if you make a profit, it will be bigger. However, the same goes for your losses too. So, using stop-loss orders is crucial for day traders.

This type of order will greatly reduce your risks. And, you can set the stop-loss to any metric you want. If you are entering a long position, set it just below a recent low point in price. Or, if you decide to enter a short position, set it above a recent high.

 

Alternatively, if you are afraid of market volatility, you can design a stop-loss order that will protect you from it. If the stock’s price is moving up and down every minute, you can place a stop loss at a certain distance away from your entry point. Make sure to leave some breathing room as the price fluctuates.

We should also mention that a lot of traders like setting up two stop-losses. A physical stop loss is the one you place at the point at which you would lose the most money you are willing to risk on this trade. A mental stop loss is the one you set at the point where the movement breaks your entry criteria. In essence, you set it up to exit the position the moment your trade makes an unwanted turn. Just make sure that the exit criteria are very specific.

Final Remarks

Mastering day trading can be a daunting task. It will take a lot of time and discipline on your end. In fact, many who try to do it either fail or give up. The fast-paced environment and the pressure that comes with it can prove to be too much for a lot of traders. But, if you utilize the tips and strategies you can find above, you might make a strategy that will turn a profit. After you get enough experience to be a consistent trader, you should be able to beat the odds. And, if it gets tough, just bear in mind that you can always try again tomorrow.

Posted by Judy Romero in Trading

Day Trading Guide

There is a reason every brokerage desires to have as many active or day traders as possible. They usually have a lot of experience and don’t require a lot of assistance compared to newcomers, not to mention that they generate a lot of revenue for the brokers every day. Of course, the terms don’t have strict definitions. So, how many trades do you have to make to become a “day trader” or an “active” one?

We did speak to a number of brokerages, experts, and investors to see if there is a definitive answer. And, it does seem like there isn’t an exact number where “active trading” starts, especially since every broker seems to have a different set of rules when it comes to that. Rules that usually depend on their prices and costs. In fact, one of the brokers who deals with active traders even thought up a new term of “hyperactive trading.” The broker in question is Lightspeed, and they believe that people overuse the term “active trading.” So, they distinguish between active traders and hyperactive ones. The former would be those who place 10 or more trades per month, while the latter would be those who place at least ten times that volume.

So, let’s take those numbers and go with them. To become an active trader, you would have to place around 120 trades, or more, every year. However, to qualify to become a hyperactive trader, the number is much larger. You would have to place at least 1,200 trades per year or more. So, figure out in which of these two categories you fit in better before you go on to choose your broker.
Top 5 Platforms for Day Trading
As we have said, in order to choose the best broker for yourself, you need to understand where you fit in. If you are an active trader, paying up to 7 dollars per trade should be acceptable. Finding a low-fee service is desirable, but you also require a platform that has a lot of features. After all, research is fundamental in trading. That means that you should be willing to pay a bit more per trade for access to those features.

On the other hand, if you are a hyperactive trader, it is not as important. We spoke to a number of hyperactive traders, and they say that the costs and the speed of execution are the most important factors. They believe that flashy tools and intricate research are simply not that crucial to them. So, when we were making our list of the best day trading platforms, we kept those in our minds. But, without further ado, these are our five picks for day traders.
5. Fidelity – 9/10
4. TD Ameritrade – 9/10
3. Lightspeed – 10/10
2. TradeStation – 10/10
1. Interactive Brokers – 10/10
Let’s start out with our number one pick for this list. Interactive Broker is a clear winner when it comes to the needs of day traders. This broker caters to both subcategories of active traders. If you choose them, you won’t find a beginner friendly platform. In fact, we wouldn’t recommend it for new investors. And it doesn’t boast impressive research features. However, you will see that they have everything you need for day trading. Highly customizable hotkeys that you can program for a variety of actions. Pre-set order types that will let you place any imaginable trade. They even include algorithmic orders in there. And, they offer the lowest margin rates you will find. Not to mention that their commissions are the most affordable in the industry. All of this makes the platform also popular among hedge funds and institutional traders.

We should also mention that this broker, along with Lightspeed and TradeStation, offers something called “unbundled” rates. That term refers to rates that include all of the rebates the brokerages get for your trades. In essence, a lot of exchanges will offer rebates to your brokerage for routing your transactions to them. And these three brokers will pass every penny of those rebates on to you. Now, to be fair, these rebates are relatively small amounts of money. Usually, you would have to go through 10 shares to get a single penny. However, after a year of trading, the numbers add up. In essence, these rebates will reduce the amount of money you have to pay per trade.

Let’s use Lightspeed as an example. If you’re using Lightspeed to trade a 1,000 shares on the NYSE, the rebate will be 0.14 pennies per share. At the same time, the commission rate you pay to Lightspeed is 0.45 pennies per share. So, trading a thousand shares would end up costing you $3.10 instead of $4.50. Now, if you are a hyperactive trader with 2,000 trades per year, this can add up to $2,800 of a difference in that year alone.

On the other hand, you could go with one of our other top brokers. TradeStation, for example, has three different structures when it comes to commissions. TD Ameritrade boasts the thinkorswim desktop platform which is basically second to none, and a mobile app to boot. And Fidelity is on the list thanks to their order execution quality.
Tips for Choosing Your Broker
Overall, finding the perfect broker for your needs mostly depends on how you plan to trade. For starters, decide how many trades you plan on making per year in advance. Then, try to decide between powerful tools and low commissions. And, don’t forget to check the minimum deposit values. In the end, the rest is up to you.

Posted by Judy Romero in Trading

Getting Started: The Balance Sheet

Are you new to trading and want to master the basics? Well, we would recommend learning about the balance sheet as soon as you can. It can be a useful tool that will help you make trading decisions.

What is the Balance Sheet?

If you spend some time in trading chat rooms, you will inevitably hear about balance sheets. And, you will probably notice that a lot of people pay close attention when someone brings it up. Well, they do so for a reason. But why?

To put it simply, the balance sheet is one of the primary financial statements of a company. In fact, it is one of the most useful documents you can put to use while evaluating a firm. Its job is to inform you, as an investor, of the financial standing of the company.

There are two main sections in a balance sheet.  The first one (usually on the left-hand side) is there to inform you about the assets. This section will include anything that the company owns that has actual financial value.

The second one (usually on the right-hand side) is for liabilities and equity of shareholders. Liabilities present the company’s debt. Most commonly, they refer to bond issues and bank loans. However, anything that the firm owes to someone is a liability.

Owners’ equity (or stockholders’/shareholders’ equity), on the other hand, consists of the stock of the company and the income it holds from operations. This income is known as retained earnings. The company can use liabilities, its stock, or owners’ equity to purchase assets. So, if we were to present the balance sheet in an equation, it would look like this:

Shareholders’ Equity + Liabilities = Assets

This equation is one of the original concepts accountants have been using for a long time. To put it in words, assets of a company are equal to the liabilities of a company plus the shareholder’s equity. And, it does make sense. Allow us to simplify. In order to buy something, a company has to pay for it. In order to do so, they either have to use their earnings, sell stock in the same value, or take out a loan. And, of course, this simple equation works for every single company. No matter how big it gets or how small it starts. In fact, you can even apply the formula to a lemonade stand your neighbor’s kid is running.

Allow us to demonstrate: Let’s say the child spent 10 dollars to make the lemonade stand. Let’s also say that it got a 10 dollar loan from the parents to buy lemons, sugar, and straws. With that situation in mind, let’s make a simple balance sheet.

Assets

Supplies: 10 dollars

Property: 10 dollars

Total Assets: 20 dollars

 

Liabilities and Shareholders’ Equity

Liabilities: 10 dollars

Shareholders’ Equity: 10 dollars

So, let’s take a look at this basic balance sheet to figure out how it works. The kid spends the 20 dollars on the business overall and has no cash at the moment. However, the “books” still show 20 dollars in assets. After all, the supplies for making the lemonade are still all there. The kid owes the parents 10 dollars, which are there as a liability. And lastly, as the owner, or the sole stockholder, the “company” has 10 dollars of equity. Hopefully, this example was helpful. Now that we can grasp the basics of balance sheets let’s delve a bit deeper into the details.

The Assets

Our example was very simple, but in the real world, it can get a bit more complicated than that. So, let’s go through some common assets. The most common examples are cash, inventory, property, plant and equipment (PPE), accounts receivable, and goodwill. Now, most people will instinctively understand a couple of these terms. However, other items on the list are not quite as self-explanatory as cash or inventory – for example, account receivable. It is an item that represents liabilities that clients owe to the company. Since they represent the money that others owe to the company, they are that company’s assets. PP&E is the account that summarizes all of the property the company has, the plants it uses for manufacture and any equipment it owns.

You can further classify assets as current or noncurrent assets. The current ones are those that the company will use up in one year (for most companies, the year is the length of one business cycle) or the assets that the company can easily convert to cash. The noncurrent ones, on the other hand, are those that are going to remain on the balance sheet for longer. An example of noncurrent assets is the land the company owns.

But, is it possible to have too many assets? Actually, it is. Bear in mind that the company has to pay for every asset with its equity or through liabilities. Especially if the company is buying unnecessary assets. That can lead to increasingly difficult debt or devaluation of the stocks as they are overselling. And, if the company is buying too many assets, the investors might lose money through devaluation of their holdings.

Also, having stagnant assets can increase the costs of operation, and thus reduce the profit margins. While most assets are a good thing, there are those that the company won’t be able to sell. And, not only does the upkeep cost rise the more stagnant inventory you have, but it takes more time to move it. And, over time, the inventory might become obsolete and lose value. So, make sure to check the inventory turnover if you see a company that has a lot of assets.

You should also bear in mind that certain assets (like PP&E) will depreciate as years go by.  For example, if a company buys a building for 10 million dollars, and plans to use it for 10 years with no residual value, the depreciation rate would be 1 million dollars per year.

The Liabilities

While liabilities represent the debt of the company, they aren’t necessarily a bad thing. After all, they allow the company to buy assets they otherwise would not be able to afford. In fact, almost every single large company in the world has had debt in their books. And, it makes sense in the short term – borrowing money is a great way to improve your business.

Most common liabilities are bonds payable, mortgages, and accounts payable. However, even if you find a company with little to no liabilities on the balance sheet, it doesn’t mean you have found a company that has no financial obligations. Some companies might try to hide their debts by rewording the balance sheet. So, keep your eyes open to see if the footnotes of the financial statement hide something you should know about. Sometimes, the company might list debts as “operating leases” or “other transactions.” In fact, while there is no reason to hide existing assets, it could be appealing for companies to hide liabilities. Just remember the Enron scandal.

And lastly, always check if there are red flags when it comes to company’s debt. The last thing you want is to be an investor in a company that is about to default on its debt.

The Shareholders’ Equity

This is one of the trickier sections of the balance sheet. There are multiple topics that affect this section, and they require some knowledge to understand fully. Some of these topics are multiple stock classes, equity financing, subsidiaries, and many others. So, make sure to take the time and go over this section in detail if you are an investor in the company. This part of the balance sheet is the part where the company speaks about what you own.

The Limitations of The Balance Sheet

While balance sheets are definitely useful, they have their limitations, depending on what you want from them. First of all, balance sheets are financial statements, and, as such, they follow the guidelines GAAP and the FASB set up. So, why do we mention that? Well, primarily because the balance sheet doesn’t show the fair value of most items. That is mostly due to the practice in the accounting industry referred to as lower of cost or market.

This practice dictates that the accountant recording the asset uses the lower of two values between the fair value and the cost of the asset. This way, the accountant can’t inflate the numbers it records on the balance sheet. Let’s go back to that lemonade stand. When it makes lemonade out of the ingredients worth 10 dollars, the lemonade itself is worth a lot more. So, the kid expects to sell the inventory for 50 dollars instead. That means that while the cost was 10 dollars, the market value is 50. However, the balance sheet will still show that the “company” has 10 dollars worth of assets.

If the company ever sold all of the assets, the result would not be equal to the balance sheet numbers.

Maintaining the Balance

Financial statements can be quite intimidating. In fact, not all investors take the time to investigate them. However, they can be incredibly powerful tools for analysis. And the Balance Sheet is one of the financial statements that you can investigate even when you don’t have a lot of time. It holds a lot of information you can successfully use to predict what the future holds for the company. Just remember – there is a learning curve to investigating these statements. So, make sure to take your time and develop your knowledge.

Posted by Judy Romero in Trading