Home
| Work & Business
| Investments & Stocks
| Buy & Sell Stock
| Buying & Selling Stocks the Same Day
Buying & Selling Stocks the Same Day
by Carmelo J. Montalbano
-
Overview
The appeal of day trading to make profits by buying and selling stock on the same day, is the ability to use limited capital, achieve regular profits, use various technical trading techniques, and close positions at the end of the day to avoid overnight capital demands. Trading intensively through buying and selling in the same day results in a lack of a diversified portfolio and wide swings in profits and losses. Most day traders are not successful.
Trade with the Trend until it Bends
-
Optimal Trend Trading System
Day trading has drawn attention in the past decade because of the relatively high volatility and long bullish and bearish trends that the market has traded in. Buying and selling stock requires the discipline to buy and sell from a trading strategy rather than from emotion. Most traders do not have the necessary discipline or tested strategy to do well. The result is that most day traders lose money. The trading strategy requires a money management plan that attempts to minimize risk, a well-tested plan for buying and selling stock, and a plan for diversifying the portfolio as much as possible.
-
Money Management
Typically, day traders follow a few stocks intensively rather than own a wide selection of diversified stock. In order to maximize profits, traders mistakenly make large bets on the few stocks they trade. A better strategy is to make several small bets during the day so that no one trade can be allowed to absorb a significant loss.
The betting algorithm should be based on a percentage of the total portfolio not to exceed 5 percent. Once the trade is made, the trader must have the discipline not to allow small losses to become large losses. This means a day trader must have the consistent discipline to cut losses so that the loss per trade is no more than 8 percent.
Profits should be allowed to run either to the end of the trading session or until the exit strategy eliminates the trade. The trading platforms in use today allow traders great trading control of their trading position as long as the trader has the discipline to enforce his chosen money management and stop losses.
-
Practical Considerations
Scientific investigation on random circumstances dictate that a trader is likely to go through a string of losses far greater than generally imagined. Thus a trader could substantially draw down most of his trading capital.
Imagine risking 2 percent or 5 percent per trade. Ten consecutive losses that result in a 20 percent or a 50 percent capital draw down will certainly affect the trader and cause the trader to doubt her abilities. Traders must therefore have back-tested or practice-traded the strategy they use under bull, bear, and neutral markets. Then it is easy to compute the chance of a 20 percent or 50 percent draw down and, finding that it is more common than expected, adjust the trading strategy.
Knowing the likelihood of a substantial draw down without incurring the "risk of ruin" (also known as bankruptcy) is a function of how well the strategy was tested under many market conditions. Traders should employ several market strategies, each one independent of the others to diversify trading risk.
