Day Traders Guide For The Right Approach To Trade

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It is important to understand every aspect of an investment so that a good amount can be made and this rule is followed by all good investors. It is the trend of trading volumes to increase at the beginning of the day and towards the day?s end. If you are the type of person who spends the evening hours researching stocks and placing trade orders, then you are definitely among those responsible for the high volume in the first hour. The moment the market opens up; there is a high volume of programmed trades that pour in and fills up the void.

Along with retail investor trades, a good amount of volume is obtained from hedge funds, mutual funds and high volumes from other traders. Day traders are another source as they set their positions for the day mainly in the first hour. The culmination of all these factors result in the large volume gathered in a short period of time. The rule of day traders is to end the day without keeping any positions for the stock, so it is obvious that by the days end the positions must be sold. On top of that retail investors always purchase stock towards the days end so that if needed next day they can sell it. There are some institutions who do not consider it to be a good idea to maintain large positions over holiday?s or long weekends. If suddenly some big event occurs at some place they will be left without any means of liquidating. So the question is how to avoid a loss or make some profit out of this phenomenon?

Volume Research

While researching a stock, importance should be paid on the volatility amount on last and first trading hours. If the volatility is pretty high during that time, you might get a chance to buy it at much higher price or sell it at a lower price then the original fundamental value. Limit orders should be set at unusually low or high to increase your chances of getting some good bargain during the early trading hours.

Limit Orders

The starting and end hours can be traded safely by maintaining some discipline and limit orders are the best way to achieve that. With the help of limit order you can set maximum sell or buy price instead of going by the selling or buying price offered by the market. For example if you have a stock XYZ Ltd. and you do not want to sell it at a price lower than $20 per share, just place an order for sell with your broker with the limit price at $20. You can apply a similar strategy while buying a particular stock.

Prepare for the Next Day

Selling and buying of stocks within a day is limited to 3 times for retail investors in the five day business period which is also known as pattern day trader rule. But this rule can be avoided by buying stocks during the day?s end and selling it next day. By this process the rule can be avoided and the stock will be in possession for a time of less than a day. But short term trading strategies come with lots of risk and risk management and careful research is necessary.

Gap Trading

If you have purchased a stock XYZ Ltd. for $20 and after the market closes today, you expect a rise in the price to $25 once the quarterly announcements are made. So tomorrow XYZ Ltd. will be available at $25 if your assumption is correct. So the chart shows a gap of $5, which is your per share profit.

It totally depends on your experience and appetite whether you want to trade in these hours or avoid it. If you are new it is best for you to make your moves carefully during these hours.

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Abhishek Gupta

Abhishek Gupta is working as a Fund Administrator (Hedge Funds) with the HSBC Bank (Kolkata) for over a year. He pursued Bachelors in Commerce from Calcutta University and completed postgraduate as MBA (Finance) from Calcutta Business School.

Source: http://lastbull.com/day-traders-guide-for-the-right-approach-to-trade/

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