Sub-trading Styles of Day Trading: Swing Trading, Trend Trading and Beyond

Day trading is a popular form of stock trading activity, best used by those that are suited to it. It is not an activity that is right for everybody- it takes a fairly aggressive personality to day trade, and you have to know exactly how risky it can be. If you understand the risks and are willing to put in the effort and the know how to make good trades, it can lead to huge profits.

As with other types of stock trading, day trading has its sub styles, and some are gaining in popularity- rising rapidly as the market opens up and becomes more accessible to the common man.  Each type of trading style has its advantages and disadvantages and knowing what those are can help you choose the right style for yourself. No matter what style or sub style of trading that you choose to engage in, you should know a few things first.

Most importantly, understand the market itself. Know which market you will be trading on, and what that market is best for moving. Understand the lingo for that particular market. Education is key, not only for these things, but also for the actual trading action itself. Make sure that you understand how to track a stock’s progress, and know how to monitor it and how often you should do so. Know the regulations involved with the trading you hope to do, and remember, ignorance of the law is not a defense if you come in violation of them.

For day traders, the regulations clearly stipulate that there needs to be a minimum amount in the day trading account. This amount is usually $25,000 and must be met or an equity “call” will be issued. The trader will then have the ability to deposit enough to bring the account to minimum or face having his assets liquidated for the same purpose.

Short Term Trading: What to Know for Success

Short-term trading can be lucrative, if done correctly, but there are many things that need to be known before that can happen. Not only are there many types of stocks, markets and financial products to choose from, there are many trading styles and sub-styles to choose from as well.

Not only do short-term traders move fast, they can crash just as fast. This is one area where you do not want to learn as you go, but rather you want to be well educated before the first trade is made. Know the type of stock, or other financial tool that you want to trade, know the performance and forecasted future performance of that stock. Watch for developing trends, and watch for the market movement. The economy is unstable at best right now, so getting into a risky situation might not be the most advisable idea right now. But, if you have a bit of venture capital, the know-how, and a line on a fairly strong performing stock, then by all means, go for it.

Because short term trading does move so quickly, there are some tools that you might consider to be a necessary part of your plan. The first would be a well thought out financial plan, including what you can afford to venture, what you plan to trade, the loss cap, and an exit plan. Next, you should consider a good computer and strongly performing stock trading computer software to be a sound business investment. Being able to closely monitor your stock’s movements is important, but you cannot realistically expect to simply sit in front of your monitor for this news. Trading software can be set up to deliver alerts to your email whenever there has been any change in a stock’s position.

Unless you are a financial professional, you will need to work with a stockbroker to develop the block of trades that you would like to purchase and trade. Working with a broker can also give you some solid information and education that will allow you to develop the skills that you need to go out on your own as a day trader.

Short Term Trading: The Things to Watch For

Short-term traders judge a stock’s performance and gauge a stock’s potential future performance in a number of ways. A savvy short-term trader can talk about the “personality” of a stock- and they determine that by looking at: volatility, volume and trend. Although long-term traders generally watch “trend” more closely than short-term traders, it can also be a helpful tool for the short-term trader at times.

Volatility refers to the movement of the market in general. Have there been any large moves up or down? Has the market come to a stand still for the most part? If volatility is indicating a huge move downward, it is probably a good idea to either wait to enter the market, or if you are already in, to sell as much as possible to avoid a loss if a leveraged company goes under. If it is merely a slow down, you may be able to stand on position without losing ground, or at worst, losing very little.

Volume refers simply to the number of buyers and sellers of stocks. If the volume is high, then the stock is seeing a lot of trading action and might be worth looking into. Of course, high volume may also be seen if a stock is being actively dumped, so careful monitoring is very important.

Trend, again, most usually used as a tool of the long-term trader, does have its importance to the short-term trader as well. A stock’s trend indicates the actual movement over a period of times- usually a week or more will be tracked and averaged to give a brief overview of a stock’s trends. Some stocks will have much longer time to be studied and the trend will reveal much more information for them.

The experts all agree though that after looking at volatility, volume and trend to make an initial stock choice, the next concept that has to be taken into account is your own personal trading strategy. A short term trader will have to know how he will approach the market, how he will enter and how he will exit before he even gets started, and that usually leads to selecting one of the many sub-styles of short term or day trading. There are several to choose from and knowing how the style boils down is just as important as any of the other considerations that you take as a trader.

Trend Trading: Not As Common for Short Term Trading

Short-term traders are not known for sitting back on their heels and waiting for a stock’s information to develop. For this reason, trend trading is the least commonly used tactic for day trading. It is not that the day trader does not look at all at a stocks trend, it is just that they do not wait for the complete trend to even develop. Most trend traders buy a stock and hold it until the trend that it was in ends. (The trend they look to buy into is one of higher highs.) Because it can take a week or more for a stock’s trend to become evident, trend trading is not always high on the list of the ardent day trader. They may look at past performance history, but they will not wait to trade on a stock that is that iffy if they do not have to.

Waiting for a trend to develop on a penny stock is not a sensible business decision, which why they are so appealing to the truly aggressive day trader. Because of their low buy in price, a penny stock is most suited for fast trading, without waiting for any kind of trend watching.

Breakout Trading: Watching for those First Signs

A breakout trader will buy a stock as they move up, usually as a “breakout” from a trend. In most cases, the stock will have either been trading flat, or with no movement at all. Once it starts its breakout movement, the savvy trader will be there, waiting to snap up blocks of this suddenly hot stock. The opposite of a breakout is a breakdown, where a stock suddenly makes a move toward the bottom after either topping out or again, not moving at all in either direction.  Knowing which stocks are about to make these kind of movements is part instinct and part careful stock monitoring. This is one area where the best stock trading software can be the most helpful.

A stock that has been in “trend” for a longer than usual should be even more closely monitored for movement, as non movement can be seen as an indicator of a future movement of one sort or another, so it is imperative to watch- although it will take you away from other faster action trades, briefly, this monitoring might actually pay off with huge rewards if you can catch the right stock heading in the right direction. A breakout may be a break the bank situation if you know what you are watching for.

Counter-Trend Trading: Of Trading Nature

Counter-trend trading lends itself to short term trading very well. A trend takes awhile to establish, a counter-trend can be spotted in a matter of hours. Say the stock of ABB Inc. has been trading rather sluggishly for weeks, with all trend information indicating that the trading will remain that way for weeks. The government announces a huge tax bonus and other advantages for the type of industry that ABB is part of, so the profits for this company are about to shoot through the roof. The trend that had been in place, and forecasted to remain in place is about to change directions and quickly. The counter trend trader would have read all of the signs, along with this news report and been ready at market open to buy blocks of ABB and others like it in a heartbeat.

Of course, counter-trend trading can also move in the opposite direction when a trader dumps off large blocks of stocks after something that will dramatically change the company’s solvency is made public. The counter-trend trader will seek to sell off as much as possible to avoid being caught with worthless stocks.

Pull-Back Trading: Another Form of Reversion Trading

The pull-back trader will take advantage of a stock’s current status to make beneficial trades for himself. For instance, the strong stocks that are temporarily weakened can be bought for reduced prices and held until they come back to their normal state. (If they do.) Weak stocks that are suddenly and inexplicably trading strong can be sold at inflated prices, usually at a fairly steep profit.  Sometimes the trading levels will return to normal levels, but unfortunately there is no guarantee of this happening. The stock market is a very variable commodity and the potential for putting yourself in very big financial risk is very high.

Pull-back trading can be viewed as one of the more unseemly, unscrupulous forms of stock trading, but in reality, it is only business. The whole point of being in the stock market in the first place is to turn a profit, so if a technique can give you an advantage, why shouldn’t you do so?

Intraday Trading: An Adult Game of Hot Potato

Day traders are the shortest of short-term traders, usually. But, occasionally there is a trade that is too hot to handle for longer than a few hours or less and the trader will have to move it. An intraday trade is simply one that has been made within the course of a day, rather than the slightly more patient day trader that will hold a stock’s position for about a day, possibly even two.

Pretend that Billy Broker has suggested that you buy a small block of ten shares of BAB Co., which you do at ten a.m. During the noon news there is a report that there is a possible merger between BAB and ABB, which would change the financial outlook of the two companies. You call Billy and inform him that you want to split your stock block of BAB and add an additional block of ABB- small enough to shield you if both companies stocks fail, but enough to hedge if either or both becomes hot all of a sudden. You have just traded twice on BAB and once on ABB in the same trading day- technically an intraday trading.

Billy might suggest that there be more movement one or the other of the companies, but you are not obligated to follow your broker’s advice. Remember the more action that you take on single block of stock is the more risk that you incur on that same block. This is a trading style that will require discipline and restraint above all else. While it is true that you can walk away with a huge profit, you can limp away flat busted just as easily.

Scalping: How to Make the Most of the Spread

Traders work hard to make the best deal that they can, one that will yield them the highest amount of profit at the lowest risk. The scalper makes countless trades per day with the goal of pulling just a little bit of profit from each through working the bid-ask spread. (Quick Tutorial: the bid price is the one announced by the buyer. Ask price is the one announced by the seller. The difference between the two is of course, the spread.)

The more actively a stock is traded, the harder it will be to determine what price will actually be the final one Lesser traded stocks may be more amenable to one side or the other, but that will depend on whether it is performing well or flatly at the time. Again, it is very important to know which direction a stock is heading, where it has been and how active the trading has been surrounding it. Will there be a huge bid-ask spread to deal with?

There is almost no way to avoid dealing with the spread, and some experts would say that although the spread can seriously cut into profitability, it does have its advantages in the stock trading systems, so it is better to see it as a tool.

Momentum Trading: Riding the Waves to Profits

A momentum trader watches for a stock to start moving in one direction or another and then jumps on board to catch a ride with it. The trader will watch for signs of the impending change in movement by watching volume and other indicators closely, and when volume changes upward, they will make their move.

Momentum trading is one style that absolutely requires careful monitoring of the stock signs for any sign of a sudden movement in volume. If you do not catch the wave right at the beginning, you may miss out completely. For instance if the price is down, but the volume indicates that a stock is about to take an upswing, waiting to long will make you miss out on the lower price. Once that price does start moving upward, it will be almost impossible to find it at the bargain price. The law of supply and demand will stand here. The more demand that there is for a limited supply of stocks, the higher the going price for that stock will be.

Technical Trading: Never Far From a Monitor

The technical trader is one that will never be spotted too far from his computer monitor, his television screen, or without his copy of the stock trading journal of his choice. He will have his cell phone set to give him updates and alerts whenever there is any development on the market, whether that movement involves his own stocks or not.

These are the traders that are often referred to as the “eggheads”, obsessed with charts, graphs and other types of monitoring for any sign that could be used to their advantage. They are thrilled with little dots on graphs and become overjoyed when there is any hint at all of a convergence on those graphs. Look for the technical trader to be a slower day trader, with a more methodical approach, rather than a gut reaction type trader.

Contrarian Trading: Swimming Against the Tide

The contrarian trader is one that does not trade according to what current indicators would suggest. They are buying in a seller’s market and vice versa. They can look at the leading stock market information and make a totally incongruent trade- in the hopes that the contrarian action will net them large profits.

There are actually three schools of thought in contrarian trading- not only the one described above. Another type is the trader that bases his trading on certain aspects of trading rather than the actual value or price of that stock. For instance, they will cite the adage, “what comes up, must come down,” in relation to stock prices- but more importantly, they will base their trading activity on assumptions of the market in general, and the actions of their fellow traders. To the contrarian trader, other traders tend to move in groups rather than solo, and that is what they will watch for and expect. They will then make a move in the opposing direction.

The third type of contrarian trader is the one that works in reverse of the second type. Instead of focusing in the market and the other investors, they will base their trades on the value of the stocks at hand and the assets that are available.  No matter which of the types of contrarian trading you try your hand at, you must understand that the risk of failure is high, with the added bonus of being wrong all alone. Because the contrarian will base trades against the grain, he can fail more miserably than anybody else.

Range Trading: Nothing To Do With Cowboys

This trading strategy can be simply defined as one where you buy when your stock’s price is low and selling when it moves to a higher level. Range traders do not monitor the stock news, for instance, they focus mainly on price as an indicator of a stock’s performance. These traders will suggest that nearly all of the time, a stock’s price will not form an actual trend, so there would be no sense in monitoring that.  Range trading is highly regarded for its simplistic approach to decision making.

Before it becomes suggested that range trading is easy, or that there are not complicated ins and outs to this type of trading, rest assured, this is not the case. There are many intricacies to understand and it’s own terminology that must be learned and understood. Range trading is easy, but only once you know all of these things.

High buying power= support
High selling pressure= resistance

The concepts of support and resistance create a unique pattern on a stock chart, often referred to as a “channel”. Once the market has gone to a level that defines these areas, trade action will become concentrated in one direction or another allowing the trader to make his most lucrative move.

There of course are some exceptions to every rule and range trading is no different. Not all stocks will trade as expected. Markets can change in the blink of an eye and reverse directions without warning. As with any other type of trading, it is important to know that the risks are still there, to know your risk tolerance and to trade accordingly.

Rebate Trading: How to Make Quick Profits

Rebate trading is one of those trading styles that is not only fast paced, it requires some solid trading knowledge and the ability to make some quick trades. You need fast computer access and the ability to get on an electronic communication network (ECN) to take advantage of the quick action of rebate trading.

Once you have bought a large block of stock shares, post them on the ECN without using a middleman, which would cut down on your profits. Once these stocks find a buyer, you will receive a rebate, an amount that will be determined after the ECN takes its fee out of course. Once there has been even the slightest amount of profit on this stock block, exit.  Now is not the time for being greedy, waiting for a larger rebate amount will lead to huge losses for you. Take the small, rebate profit and run. The key adage to adhere to is: cut your losses.

For rebate trading, the actual stocks themselves are not as important as how many of them you can actually move around. The rebates will come from each transaction that is made, not from the stock rankings. There are other tips for the rebate trader to maximize their profit margins. These include trading across all time zones to maximize the day’s trades and working with the most trade volume as possible.

Although day trading in general can be very risky, rebate trading is even more so because the trader can make so many trades per day that it becomes nearly impossible to keep track of all the action. This is one arena that will most certainly require the best available stock trading software, and the fastest computer you can afford at the time.

News Playing: Take the Time to Monitor What’s Going On Around You

The concept of news playing is simple: watch the news for every bit of information that can be gleaned about the market. Right now, that is just about every story, one way or another. If you learn something about a company’s stability on the evening news, it can change the way that you deal with your stocks.

News playing is not actually a stock trading strategy per se, it is more taking advantage of situations that become common, public knowledge. Not listening to the news on the day of a potential trade does not make any sense at all. Could you really buy a certain type of car on the day that there is a major market recall of that vehicle? What do you mean that you did not know about the recall? Not paying attention to what is going on in the market, or the world around you makes you a dangerous, foolhardy trader at best. It can make you a financial cripple at worst.

Avoiding the Price Gaps: Not Falling In

Some traders will let a stock ride no matter how shaky the current market is, or what the indicators would say to do. Even if all arrows are pointing at selling, these traders will stay with their stocks, hoping that the trend will reverse itself without causing too much of a loss.

Price gaps may indicate a stock’s impending doom, or its eventual climb. The larger the gap between actual worth and price being brought in, the wilder the market is behaving at that time. An unstable market can be a good for either buyers or sellers, but only if they truly know what they are doing. Of course, an unstable market will make many traders too nervous and they will back out and wait for some semblance of stability to return. Such unmanageable risks can lead to selling out or selling off the majority of a stock group to avoid anything like company collapse or leveraged buyouts that adversely affect stock holders.

Letting your profits run unchecked can be a problem as well. For some traders, they understand the concept of using your profit margins to fund reinvestment without having to touch other account balances.  Using profits in this way allows your money to work for you, rather than the other way around. Some traders however like to watch the huge amounts of profit run up, and will leave it ride, using the equity in their trade accounts to fund further trading activities. Meanwhile, the market grows even more unstable and the stocks that he had invested in all crash, taking all untouched profit with them. Had he reinvested some of those profits into different stocks or other financial tools, he would have at least had some safe money to fall back on. Now he has nothing.

The economy is in crisis at this time, there is no denying that fact in any way. Not only is the market struggling, many traders are unable to make their minimum trade equity amounts without incurring a trade call. Dealing with an unstable market can be risky at best. This is not the time to play the stock trading cowboy- this is a time for solid investments and strong education. Careful planning and monitoring can mean your financial life or death, especially now.

A news report in recent weeks said that nearly every stock nowadays will be considered a penny stock before too long. Penny stocks, you will recall, are those that have a low per share price, are traded on only certain markets and feature a small market cap. As more and more companies fail, the market caps will continue to drop, making more and more stocks technically penny stocks. Regardless of this designation, there is still the chance to make a profit, even in an unstable market from these small stocks, if you know which to buy and stay within your comfortable loss cap.

It does not take a business degree to understand the news that is coming from Wall Street; hard times are not coming, they are already here. Now is not the time to panic, it is time for careful study and slow rep-growth.

The Final Wrap Up

There were many things covered in this guide in relation to short term and day trading. Knowing what you should watch for when deciding which stock to buy, during the process and after the trade has been made is one of the most important concepts that was presented. Along with monitoring your stock’s progress, you should make sure that you are adequately educated about not only the market that you are trading on, but terminology, jargon and trading in general. Make sure that you are aware of any and all regulations that pertain to you and the type of trading that you engage in. Do not wait until you have gotten into legal trouble to learn these regulations.

Knowing the signs that indicate a stock’s movement potential is very important to decision making as well. Know what you should be monitoring and which of the signs that you normally would read for each trading type. Some trading styles watch volume, volatility and trends, while others simply monitor price or go with gut reaction.

Trend trading does not sit as well with short-term traders as other trading types. Trends take at least a week or more to develop, and the short-term trader does not hold a stock position for that long. Day traders and other short term traders tend to hang on to a stock for a day, or two at most before selling it off to buy others. Short-term traders, especially day traders often look to large blocks of penny stocks for the chance to make quick, potentially large profits.  Penny stocks are even riskier than the day trader’s usual trades, so they should be bought and sold with great care.

Breakout trading is the sub-style of day trading that monitors for a stock to breakout of a slump. Breakout traders must be very quick to react to news or signs that a stock is going to change direction, often suddenly and dramatically. Once a breakout starts, those that did not get in on the first wave, will miss out on a golden opportunity.

A counter trend trader is one that does not follow the crowd when it comes to a stock’s trends. They will cut against the grain and do the direct opposite of what a stock’s behavior would indicate. They will buy when everybody else is selling or vice versa. They follow a stock’s price rather than the actual trends that surround it, hoping to cash in on their unique approach. Although every trading style carries a huge risk of failure, counter trend trading adds to that the humiliation of failing and being very wrong as well. These traders went against all prevailing information and should they fail, they will have to deal with that as well.

Pull back trading takes advantage of stocks when they are performing in ways other than what they normally do. They may buy a strong stock that is performing on the weak side at the moment or sell a weak stock while it is showing some unusual strength. Again, this type of trading requires close monitoring of potential stocks positions.

Intraday trading occurs when stocks are traded within the same business day. A trader can buy a block of stocks at nine, sell a portion at noon and the rest at three- these would all qualify as intraday trading. Intraday traders that buy and sell huge bundles of stocks every day must keep careful track of their movements.

A trader who works with dozens, hundreds or even more trades per day is known in the industry as a scalper. They work to make small profits from each trade that they make by taking good advantage of the bid-ask price spread. Bid price is the price the buyer suggests, the ask price is suggested by the seller. The difference between these two numbers is the spread. The spread can be used to pay for trade fees, and as the commission to the broker who made the deal happen.

Momentum trading is one that will watch for a sudden climb by a stock that has been trading on the downside or stagnant for awhile. If you catch the wave at the beginning, you can make huge profits. The later that you get in, the lower your profit margin may end up being.

The technical trader is one that relies on gadgets, graphs, and charts to make his trades. He will never be far from his computer monitor, his cell phone or any other gadgets that can give him a quick update. He will spend hours watching dots on graphs, waiting for that one connection that will tell him it is time to make his move. The technical trader may be the slowest of the day traders, and although they may actually make trades that qualify them as a day trader, they will still closely monitor trends, and other signs first.

Contrarian traders are difficult to define because there is more than one kind of contrarian in this subset. Some will defy common knowledge and the current market indicators and go the opposite direction. Some will buy or sell stock, not based on actual value but on price patterns. Still others will do the reverse of this, and will not buy on price or other current trends, but on the inherent value of the stock or of the company that they are trading for at the time.

Range trading is a trading style that requires knowing some price structure as well as other trend information of a stock before making a bid on it. There are specialized terms associated with range trading that need to be learned: high buying pressure is support, while selling pressure is known as resistance.

Rebate trading requires making many trades per day, posting them on the Electronic
Communication Network and then allowing them to be sold. The ECN gets its cut, and you reap the rest as a rebate. The more of these trades that you can make, the more of a profit you will incur. Rebate traders do best when they take the profits and go as soon as they get them. Waiting around for larger profits can be dangerous and can leave you empty handed at the end of the day.

News playing is not so much as a stock trading concept as it is good practice. Monitoring what is going on in the stock market and financial world, as well as the world on a whole is important for a wide variety of reasons. News about mergers, trades and other vital facts can influence the way that you buy, sell or trade your stocks, so burying your head in the sand when it comes to the news is not only foolish, it can be very costly.

And finally, the guide briefly mentioned the price gap that could pull traders in and destroy them. The price that you pay for a staff can very likely be different from the amount that it is actually worth. The bigger that that gap gets, the more likely you will be to face financial doom should something happen to that company before you can sell some or all of the stock in question. On the other hand, a very small price gap can equal larger profits when you buy or sell it.

Stock trading can be very lucrative if you play your cards right. It can be a rewarding way to build up your retirement account or an interesting hobby. Trading can become a new and exciting career for the right person, with all of the right attributes and the right mind frame to make it work. If trading is something that interests you, then you should start small and work your way up, but never take on more than you can financially handle. Know your own limitations, your own financial burdens and obligations and set your absolute loss cap well under that. You do not want to find out that this is not the life for you just after you have lost it all on one bad trade.

Educate yourself about stocks and trading in general, as well as about the regulations that govern these trades. There are many publications that will give you the basics, and you must make it your mission to know them all. Pleading ignorance is no excuse when it comes to dealing with the SEC. Make sure that you have not only the know how, but the drive, the desire and the equipment to succeed. Work with a broker at the onset and then move on to trading on your own as your knowledge and skills grow. Make sure that once you are ready to be a trader on your own that you have a fast computer, even faster Internet connectivity and the best stock trading software so that you can get in the game, stay in the game and yes, win the game.

Day Trading Power: Make Sure You Understand All of the Rules

To understand the concept of day trading power, you must know a few other key facts first. The definition of what a day trader is and what constitutes a day trade are probably the most important to understand. Day traders are, simply put, traders who do daily trades that are online, with short term investments. Day trading power is the limit of the amount of these trades that can be done by an individual trader, which also includes a minimum amount of trades that can be transacted per day. Figuring the amount can be complicated and for this reason, it is advisable to get your feet wet in the field of stock trading with the guidance of a certified stock broker who can worry about the rules governing trades, whether they qualify as day trades and therefore culpable under the day trading power rules or not.

Once a trading account has been designated as a day trader account, you must calculate the day trading power of that account. That formula is fairly complex, and again is not something that the average novice trader will be well informed about. Unless you are a financial whiz kid or a math expert, this is probably one realm that you want to leave to the trained and paid professionals.

If you are at all curious about what this formula for calculating day trading power and day trading buying power is it goes like this:
4X Maintenance Excess = DTBP.
For those of you currently scratching your head, you must also figure what maintenance excess as well. That calculation is:
Total Positions + Total Cash = Total Equity
Total Equity-Non-Margin Positions= Margin Equity
Margin Equity-Maintenance Requirement= Maintenance Excess

These figures are based on the previous day’s closing prices.

Along with figuring DTBP and knowing what makes a trade account a day trader account, you must understand the minimum equity requirements for such an account. In most cases that amount is fairly substantial at $25,000,  and can be as much as $5000 more than that. If your day trading account goes below that minimum equity requirement, then you will be issued a “call” to bring it up to minimum, if not, your trades left in the account can be liquidated. Your day trading power can only remain operational if you maintain your minimum equity requirement and your trading activity remains within the set limits.