A glimpse of the financial markets in February 2021 confirms what most of us already know – bullish sentiment abounds. The Dow Jones Industrial Average, the S&P 500 index, the NASDAQ Composite Index, and the NYSE Composite Index are all in positive territory. Stocks are rebounding thanks to multiple stimuli, and a mass rollout of FDA-released vaccines.
Source: Bloomberg Stocks [February 5 2021]
In fact, similar sentiment is evident across Europe, the Middle East & Africa, with the exception of the FTSE 100 index which is still lagging. Against this backdrop of positive sentiment, traders can employ a variety of tactics, and strategies to better understand market dynamics and profit accordingly.
What Makes the Markets Tick?
The financial markets offer opportunities to profit from price increases and price declines alike. The traditional mindset of buying low and selling high certainly warrants merit, but many traders actually bet against stocks, shorting them and profiting accordingly. The recent GameStop saga is an example of hedge funds shorting a penny stock, gone horribly wrong for them.
The winners in that saga were the recreational traders following the Reddit thread WallStreetBets. What happened with GameStop can happen with any stock – whether it’s penny stocks, or blue-chip stocks. Just to put things into perspective, GameStop Corp (GME) increased to a record 52-week high of $483, from a 52-week low of $2.57. It was speculative sentiment, spurred by recreational traders that ran up the price on GME.
It is clear that institutional traders alone do not control stock prices; retail traders are having an outsized impact on stock prices. It’s against this backdrop that we examine the ways that people are day trading for a living. Markets are subject to a variety of interrelated and unrelated forces, pushing and pulling on prices every minute of every day. Rather than trying to understand the individual components, a big picture perspective is more useful.
1) Use Paper Trading
Practice makes perfect, as they say. Trading platforms can be a minefield for the unskilled trader. It takes care and precision to carefully navigate trading platforms, especially when real money is changing hands. It simply isn’t worthwhile risking a real money bankroll on trades when the underlying elements are misunderstood. Use paper trading options – demo trading – to mimic the activity you are likely to experience as a real money trader. Once you’ve racked up the necessary experience as a paper trader, make the switch to real money trading using all the lessons you’ve learned in the process.
2) Conduct Due Diligence
Whenever you are risking real money on a trade, it’s important to have as much relevant information as possible at hand. For this, consult charts and graphs, economic indicators, market updates, and financial reports. Stocks listed on the exchanges are subject to reporting requirements by the SEC. Find out as much relevant information as you can, and use it to help you make intelligent trading decisions. Stocks often move contrary to expectations, owing to volatility and the unpredictable nature of the financial markets.
3) Plot out Your Day Trading Strategy
It has been said before, but it’s worth saying again: the trend is your friend. Chart patterns are especially useful when mapping out your trading strategy. Understand what the charts are telling you, and trade accordingly. Patterns tend to repeat, as do cycles. Fortunately, there are plenty of technical indicators which you can use to help you make better trading decisions. These include RSI (Relative Strength Index), Bollinger Bands, Ichimoku Cloud, 50-day moving averages, 200-day moving averages, and others. Learn to apply the technical indicators in a practical way and trade accordingly.
4) Pick the Right Brokerage and Trading Platform
Not every broker will serve the purposes you need it to. Some brokers tout themselves as low-cost trading options, while they have hidden fees, commissions, charges, and limits in place to restrict your ability to trade unhindered. The top brokers are licensed and regulated, and they present traders with useful tools and resources to make trading easier, and simpler. You may even find brokerages with stock screening tools to help you pick out equities with the greatest volatility.
5) Trade Penny Stocks to Start
Penny stocks are low cost equities that you can comfortably trade from your chosen broker and trading platform. According to the SEC, a penny stock is defined as any equity that trades under $5 per share. In the UK, penny stocks conform to the traditional definition of £1 or less. Penny stocks are traded as pink sheets, or OTC. Not only are the stocks more accessible to traders, because they’re cheaper, they also feature tremendous volatility, and the opportunity to profit off price spikes. Several big-name S&P 500 companies began as penny stocks, including Ford Motor Company, Amazon, Fannie Mae/Freddie Mac, and Facebook.
And there you have it! 5 simple tips for day traders following the volatile stock market. Risk mitigation is vital when you are engaged in equities trading. Set stop loss, take profit, and buy limits, either in dollar terms, or in trailing percentages.
