Online Stock Trader

Archive for February, 2010

If you mention day trading for a living to someone who has never traded before, you can be rest assured that they’ll immediately ask you why there aren’t more people doing it if there’s really so much money to be made.

For the most part, this question is asked simply because it’s a convenient and easy way out of having to make a decision as to whether or not you should start day trading for a living. If on the other hand you do indeed want to find a proper answer, then you need to know that there is a massive flaw present when it comes to day trading for a living. Believe it or not, but that huge flaw is none other than the misuse of the word “invest”.     

Before you even begin thinking about trading you need to get something straight, and that is that trading is definitely not the same as investing. In fact, it’s not even a form of investing, in that trading and investing are worlds apart.

Yes there are high risk investment opportunities out there, but you need to bear in mind that whether it’s a high risk investment or whether it’s a conservative investment, the basic principle still involves holding onto your investment for a certain period of time. 

Unlike investing, day trading for a living doesn’t involve trying to hold onto your cash. In fact, if you’re day trading for a living you need to be buying and selling on the same day, and no matter what anyone has told you, it’s not an easy process. Of course there is plenty of money to be made with day trading, but there’s also a chance that you could end up losing a great deal of money. 

Okay, so why don’t more people become involved with day trading for a living? The simple answer is that not everyone is cut out for it. Remember, everyone is different, and while some people may be highly successful when it comes to day trading for a living, others simply fail to grasp the concept altogether.

You need to take into consideration just how much effort is required in order to be successful with day trading for a living. Also, you need to bear in mind that day trading can in some cases involve large amounts of money, and for this reason, some people are better off not getting involved. 

If you feel you have a knack for the markets and you’re confident enough to begin trading, then of course it is possible for you to make a huge amount of money. You can be rest assured that there are some people who have begun day trading with virtually no money at all, only to end up making millions of dollars. Admittedly, this is certain not the case for everybody, but at least you can look to these people for inspiration if you’re currently sitting on the fence with regards to becoming involved with day trading.

The great thing about day trading for a living is that you don’t require much money to start. In fact, if you’ve never traded before then you should definitely start out with a minimal amount of money so that you can first gain some experience, without having to risk too much.  

No, day trading for a living is certainly not a good choice for everyone. If you feel that you’re simply not cut out for it then you’d be better off avoiding it altogether. If on the other hand you find the idea of day trading appealing, then of course you should at least give it a try, because after all, the truth is that you could very well end up making a huge amount of money.

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The market’s reaction to support and resistance can happen in a lot of different ways …

As you take your technical analysis training, the following are some patterns that can be observed when this shows up in the market.

One that may be called touch and away as if the market is trying to reach on for some level of support and resistance, and once it comes close, it reverses suddenly and retreats , like there suddenly was released some built up pressure . This is an exhaust . Resistance level holds in this formation . It’s a pattern that looks like it’s trying to get on through, by “chewing” or “worrying” the support or resistance level like a dog might chew a bone , but it ends in failure , and it doesn’t get through , and then the market makes a turn in another direction .

Yet another way that support/resistance is able to give way is when prices jump through the anticipated level of resistance and continue on higher . The gap, or as we call it, the “pop” can occur quickly and can take a trader by surprise . In these days of 24-hour markets and electronic trading platforms we see fewer gaps like this because there is continous overnight trade and there is not a long time without trading . Nevertheless gaps are sometiems seen, and we need to know how to trade them . The thing to keep in mind in your technical analysis training course is that once broken , support can turn into resistance and resistance can turn into support. Usually the previous support and resistance will be tested by the new prie level and then will go on up in the pop’s direction.

Way number three that there is a breakdown of support and resistance is when prices slice on through the barrier that is anticipated as a knife cuts through soft butter, like there was no support or resistance even there …. and this really is what happens. Price quickly scoots right on through . We see this most often when support or resistance is anticipated on a time frame but there is nothing to back it up on a higher time frame . If, for example, we see resistance on the daily but there is nothing yet on the weekly chart – we should keep our eyes open .

This is a really important point in your technical analysis training course – when in reality, the phenomena you believe is there, really isn’t. This is a particular situation where the lower time period technical analysis shows support , but it does not exist in the real world , or if it does exist in the real world it is slight and weak and there is no real market effect . The trader that is multiple time period will realize what is happening because setting up in the area there won’t be higher time period tools . The great thing when this happens is that it quickly can be seen and you can quickly see the negative pattern and there is not any resistance or support occuring in the area.

One of the most popular technical analysis indicators is the simple moving average also known as SMA, if you learn how to use these correctly they can be a very useful tool to help you to make good trading decisions.

The 50 simple moving average, or 50 SMA, is simply the sum of the last 50 readings for each period, divided by 50, this is a moving window, as time moves on so does the average. Notice that I used the term period because this indicator works on any time period in exactly the same way.

It can be used on monthly, weekly, daily, hourly, 30 minutes, 10 minute and on whatever time period you want to monitor and trade. Although the SMA is the most widley used there is also the exponential moving average or EMA. This is a weighted version of the formula using the mathematical exponent function to give more weight to the more recent values, this has the effect of making it a much faster average that many traders like.

The reality is that it probably does not matter if you used the SMA or the EMA, what does matter however is that you use one or the other and then be very consistent with it. Do not switch between them, it is more important that you trust your chosen indicator then a slight difference in its value.

The SMA is oftern used to determine what the trend of the stock is, depending on the value used it could be a short term, medium term or long term trend. An important point to note is that moving averages are really only useful when the stock is trending, if the moving average is flat, i.e. horizontal on your chart it can become very choppy, this is a good time to stay out of the market.

The general rule is that if the current price is above the SMA the trend is up, if below the trend is down. This is very important to know because it forms the basics of trend trading and trading with the trend.

For the short term trend many traders like using a 5-8 SMA or EMA, here is a trading secret, never trade again the direction of the short term tend, this is really just common sense when you think about it.

Moving averages often act as support or resistance, many traders use the 15, 21 or 30 SMA for this purpose.

There are a number of other very important moving averages that you need to know about, these are the 50, 100 and 200 SMA, and this mainly applies to the daily and weekly charts. A lot of big players in the markets, like the the mutual funds, investment banks etc use the 50 and 200 SMA as support and resistance, if they decide to buy or sell based on these you need to follow suite, the 100 to a lesser extent. These are very useful averages to watch if you trade EFT’s like an Oil ETF.

A useful tip is that when a stock breaks through one moving average it will often move all the way to the next, for example, if a stock breaks the 30 SMA it may move to the 50 before finding some support or resistance.

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