Overview of Day Trading
One of the most important tips of buying and selling stocks is to make investment decisions that are not based on emotions. When stocks go up, it is easy to be excited and optimistic. When it goes down, it is easy to be fearful and hesitant. Buying and selling stocks should be decided solely by logic and information that you have gathered. This information can vary from person to person.
Some people prefer short-term investment (a.k.a. day trading or short selling), while others prefer long-term investment. In general, long-term investment is better. Since stocks do not guarantee a profit, and if exponential future savings is your goal, then day trading will hinder your efforts.
The majority of day traders use financial indicators to target when to buy and sell. These indications can give technical investors information about the stock’s net and gross profit margin, industry metrics, debt/equity ratio, manufacturing defects, price to earnings ratio, and balance sheet metrics.
On the other hand, most long-term investors choose their stocks by characteristics of the company along with technical indicators. They research the company inside and out, and decide whether they believe it will grow and have the potential to make profit. Long-term investors rarely sell the companies they buy, and buy their stocks with the intention of never selling.
Although buying stocks based on technical indicators is an entirely different strategy from researching a specific business, they are both accurate measures of a part of the stock market. It is almost impossible for humans to fully predict what will happen to the stock market, however, we know the factors that cause it to move.
Factors that impact the stock market:
Inflation, economic strength, government bonds, executive transactions that are not based on the value of the stock (intrinsic value), trends (for example: more people will buy a stock for the sole reason that it is already going up), liquidity, news, and market sentiment.
Day trading researches these stock market factors, and more.:
Oscillators determine the momentum, of the curve’s trend: A buy signal is when the stochastic indicator have been below 20 and then rises above 20.
Relative Strength Index determines the strength of the trend: A buy signal is when the RSI falls below 30 (indicates and underpriced product). If the RSI is above 70, the stock is overbought. The RSI can also estimate an upward trend when it is above 50 and a downward trend when it is below 50.
Moving Averages provides day traders with information about the trend’s direction and momentum.
Bollinger Bands indicate volatility: The wider the band, the larger the stock’s price rises and falls. Long-term investors find low volatility (more stability) more desirable.
Lastly, the Commodity Channel Index identifies new trends. With a range of -100 to 100, a negative means a downward trend, a positive means an upward trend, and similar to RSI, it can identify overbought stocks.
Day trading’s allure is that people can get rich quick, however, the chance of succeeding is a gamble. Your money can get lost in the multitude of day trading transactions that you execute, and for how many losses will you gain one win? Although people can be skilled at day trading enough to make a profit, there is stress and time involved that can be avoided by a passive, long-term investment.
On top of that, transaction costs and taxes from commissions can significantly hinder the profits you make by day trading. Although day trading is not illegal or unethical, the high risk of money loss, time, and stress is not worth it. Many long-term investors think negatively of day-trading, and while there is nothing stopping you, the odds and likelihood of successfully predicting the market are not perfect.