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Common Techniques Used In Day Trading

Common Techniques Used In Day Trading

There are different basic strategies used in day trading. Day traders use any or a combination of strategies to try to make a lot of profits. Some traders use the contrarian strategy when they feel that the surge in market prices is due to irrational behaviors of most traders. If a day trader wants to thrive in trading, then he must be ready to adjust his trading techniques to be in tune with erratic market conditions. Flexibility is required from traders who want to profit from trading.

Some day traders opt to short stocks. This means that traders borrow shares of stock from their broker. They sell the stocks with the expectation that the price of the stock will fall so that they can purchase the shares they earlier sold at a lower price. Short sales often pose a lot of technical problems because the broker may not have an inventory of the shares some traders want to borrow. Also, short sales may be made if the price of the share has risen, and the broker calls for the return of the borrowed shares. In 2007, the Securities and Exchange Commission removed the requirement on the price of the shares for short sales.

Trend following is a strategy which involves time-frames. Traders who follow trends assume that the price of the financial instrument will continuously move in one direction. They opt to short sell when the price continues to fall. They buy the shares when the price continues to rise. Contrarian investing, on the other hand, uses market timing in trading using time-frames. Traders assume that the price which continuously rises will eventually fall, while price which continuously fall, will eventually rise. A day trader buys the financial instrument when the price is continuously falling. He short sells when the price is continuously rising.

Range trading is a technique wherein a trader monitors a financial instrument which has shown to rise off the support price or fall off the resistance price. This means that a financial instrument immediately falls back every time it hits a high. It rises up immediately after it hits a low. A day trader usually buys a financial instrument when it is near the low price. He sells it if it reaches the high price. Scalping, on the other hand, is a technique used when there are small price gaps due to the spread. The day trader usually opens and closes a position in just a matter of minutes. This strategy minimizes risks and involves quick profit-taking for highly liquid financial instruments.

Rebate trading, on the other hand, is usually employed with stock trading because it uses the rebates offered by electronic communication networks. These networks offer commissions to traders who provide liquidity by making limit orders. Day trading traders use the strategy to trade high volume shares of stocks at a low price. News playing is also another strategy used by day traders. A financial instrument is bought based on good news. In cases of bad news, the day trader short sells.

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