Let's get started and review what day trading is and how it
differs from other forms of trading activity. Day traders by
definition do not hold positions in securities overnight.
Typically, the day trader makes and holds trades for only minutes at a time,
most commonly for less than an hour. Operating in this fashion requires a very
disciplined approach that includes accepting loss as part of the cost of doing
business. It is not possible to make every trade a winner. In fact, I know of
people who make lots of money being right only half the time in the trades
they make.
The key to making money while day trading is limiting your losses
and taking profits when you can. Not only does this take a
methodical approach, but the approach must be based on the reality of what is
happening to the asset you hold, not the hope of what may happen to it in the
future.
For those who have held investment accounts, concepts such as
doubling down, which may work well for longer-term trades, are
potentially disastrous in day trading. Doubling down is the practice of buying a
security, and if its price falls, you buy more in order to lower your average
cost. That way, you can make money even if the security does not get back to
your original purchase price. When day trading, these types of tactics fall
more into the hope than the reality column, and they definitely do not
contribute to a disciplined approach. As I will say again and again,
discipline is the key to survival and profitability in the day-trading game.
Making an investment decision to trade in securities that are then
held for years at a time generally comes as the result of fundamental analysis
of a company's business. You then apply some sort of valuation
model to the share price and become convinced that the share price should be
higher. The day trader cares nothing for this sort of analysis. Day traders
only care about finding imbalances between supply and demand, and taking
positions in securities that take advantage of those temporary imbalances.
