Monday, July 5, 2010

Day Trading - The Risks and The Rewards

Day Trading - How To Make Money In The Markets Effectively

Many people would have heard of day trading. It's the process of trading the markets whereby one enters a trade and exits the trade position in a matter of minutes or hours. Day trading is considered to be a great way to make money in the markets and to generate cashflow or extra income for many people. Those who have had success in day trading have, in some cases, turned trading as their primary source of income, and thereby getting rid of their normal day jobs to work from home.

While day trading can be a very lucrative way to make money rather quickly, it can also be a very quick way to lose money, if you don't know what you're doing. Many people who start with day trading think it is just as easy as buying a stock and make some profits by selling it at a higher price. While this is right in terms of the outcome we want, it does not always work out that way, and the market can turn to the other direction so fast so soon without you knowing it.

The reason people day trade is to be able to take advantage of the quick short term movement of a stock and be out of it if the market goes in the other direction. That way, we can effectively use our money to profit from the short term moves and deploy or use our money elsewhere when the market goes in the other direction from what we think it should be. Day Trading does not involve applying the "Buy and Hold" strategy that most people investing in the stock market are familiar of.

Day trading involves studying the technical aspects of a particular stock or commodity, and identifying the direction of that particular stock or commodity in the short term. Knowing if the stock is going up or down in a particular period is the key to becoming successful at day trading.

Another important aspect of day trading is one's mindset. You have to be prepared to take your profits when they are present, or cut your losses before it gets too late. For many people starting out day trading, having a stop-loss in place is very important. Identifying the appropriate level to take a loss is quite arbitrary, and it all boils down to reading the charts and knowing where the support and resistance levels are for a particular stock or commodity. This is to ensure that you are not going to completely wipe out your trading account and at the same time, ensure yourself with a degree of success to buffer yourself from the market movements and take profits later on when the price moves to your direction.

Another factor that has to come to the picture with day trading is position sizing. You cannot simply throw every single cent of your money into one trade. Most traders follow a rule that you only risk 10% of your total account balance to one particular trade position. This is obviously because there is a chance that the trade will not go in your favour, and you want to be in the position to trade further down the track and benefit from future winning trades.

Day Trading does offer a lot of great opportunities to make money and profit, and many people who have developed the right discipline and mindset have become truly successful as traders. Many have achieved a lifestyle of their dreams with trading. They have all gone through losses and made profits, and it is all part of the day trading business. Just be aware, that there are risks in day trading, and accept those risks by managing your trades carefully in order to be successful.

Happy Trading!


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