The stock markets maintained their growth momentum over the past year, despite major economies around the world plunging into recession. While unemployment rates have reached multi-year highs in the United States and United Kingdom over the past year, benchmark indices such as the S&P 500 and FTSE 100 reported impressive gains.
In light of these developments, many people have taken up trading as means to amp up their income, with day-trading becoming one of the most popular trading strategies among the younger generation.
The remote lifestyle freeing up spare time of individuals across the world has contributed to the growing popularity of the stock markets. According to a Bloomberg report, millennials in South Korea began borrowing heavily for day trading over the past year, as unemployment hit its 11- year high.
Day Trading for A Living – Is It Worth It?
Day traders are known to rack up immense wealth by capitalizing on the market discrepancies, as well as predicting future drivers of the market. However, this money-making strategy is highly risk oriented, as investors have to assume a substantial amount of risk to generate decent profits. As such, brokers often ask retail day traders to maintain a substantial amount as margin requirements.
In addition to this, an exhaustive knowledge of the current events of the global economy is one of the main factors determining the success of day traders, as even a small international affair can offset the markets on any given day.
Since it is virtually impossible to keep track of worldly affairs daily, people who engage in day trading stocks for a living often use state-of-the-art analytical software and technical analysis indicators to isolate the optimum investment periods. This, along with proper brokerage ties and sufficient capital balance can help investors churn out sizable profits with ease.
Popular Day Trading Strategies
Successful day trading involves significant capital balance and access to highly efficient analytical software, among other things. Moreover, having a direct access broker is vital for profitable day trading, as it ensures timely execution of trades as when required. This is possibly the key factor determining the profitability of trades, as intraday trading aims to exploit market fluctuations over a short span of time.
Some of the most methodical day trading strategies are –
1. Scalping
This trading strategy focuses on making multiple small profits through arbitrage throughout the trading window, thereby culminating into substantial returns when the market closes. Since smaller fluctuations occur in virtually all stocks every day, scalping allows investors to make modest returns on virtually all trades placed.
One of the key aspects of scalping trading is a solid exit strategy. This can be placed through limit orders or stop loss orders on a particular stock, allowing investors to close their position upon hitting a definitive price mark. However, in order to make sizable profits through scalping, investors require a significant capital investment, as multiple high volume trades need to be placed.
One of the major benefits of this trading strategy is the lower risk exposure, as it bets on small fluctuations across multiple stocks, rather than massive deviations on a select number of stocks. Moreover, with execution orders placed with brokers, scalping does not require constant monitoring of the stock markets, making it a convenient option for most traders.
2. Momentum Trading
Momentum trading strategy aims to profit off of market volatility. Investors often utilize technical indicators along with a working knowledge of the current events and macroeconomic factors to identify strategic entry and exit points of investment in a particular stock.
Receptive stocks heavily responding to market movements tend to be some of the best picks for momentum trading, typically having beta values of more than one. Additionally, investors can look into the average volume of shares traded to determine the profitable investments.
Given the time sensitive nature of momentum trading, investors aiming to maximize profits need to spot ideal entry and exit points on their investments. A rough idea regarding this can be obtained from the moving averages as well as support- resistance levels. Also, trend reversal signals identifiable through trend lines and candlestick patterns can be used for momentum trading.
3. Whipsaw Patterns
Whipsaw patterns occur when an external, often unrelated factor causes massive fluctuations in share prices, triggering breakout-pullbacks. Such patterns are generally triggered by broader macroeconomic factors, affecting the highly volatile stocks, and hence, are used by contrarian investors betting against the broader market movements.
However, it is extremely difficult to spot a whipsaw pattern as it occurs based on sudden market announcements. A broader knowledge of the socioeconomic and political event occurrence around the globe can help investors develop a basic sense of understanding, thereby giving them a quaint idea regarding upcoming events.
These strategies are from the basics of day trading strategies. A comprehensive understanding of the broader markets with knowledge of technical analysis are some of the key factors determining the success of day traders.
