Three Things Every Day Trader Needs to Understand
Technical indicators
Technical indicators are used by short term day traders, primarily. What technical indicators do is provide a specific formula to the price of a security. The purpose of theses indicators is to try to predict market direction by using price previous price patterns as a model for future behavior. These include the use of moving averages, the relative strength index, stochastic MACD and Bollinger Bands. As a day trader you will use indicators to identify specific times in the market when the opportunity for winning trades in the greatest.
Discretionary Trading Rules
The key to consistent profitable day trading is discretionary trading rules. Just as in running a business requires you to write up a business plan to allow you to run your business. A business plan will cover everything from start up capital, research and development, operational expenses and even the re-investment for your profits or the management of any losses.
Professional traders have a similar outline of their strategy called discretionary trading rules. Just like a business plan, the day trader will discipline him/herself to stick to the rules so as to only purchase stocks that meet his/her specific trading criteria and nothing else.
Look at it this way, a small business owner will never buy inventory for a product that they don't sell, because they would not be able to make any money off of it. A day trader uses the same logic in picking trades that do not meet his/her criteria, so as to only choose the trades that have shown the highest percentage of winning results.
Tape Reading
Tape reading is looking at the raw price activity as it streams across your sales window. It's considered by many to be the Valhalla of the market. There used to be old timey machines that would print stocks on a thin print of strip tape so that is where the name comes from.
Tape reading is used to examine the short term price and volume fluctuations it is also helpful to gauge the overall market sentiment and it helps determine the future price direction.
Published by Jim Posey
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