The following is a guest post by Alexander from daytradingz.com
It has been proven that long-term money investments offer the best returns concerning the time expenditure associated with such investments. However, even speculative investments with a very short time horizon can generate profits. Day trading is one of the most popular speculative investment strategies. In this article, you will learn more about the different types of day trading.
Scalping is an intra-day trading strategy, and it is applied by traders who attempt to complete round trip trades with the aim of making profits within very short periods, typically within seconds or minutes (a round trip is another word for buying and selling the whole position).
Scalp traders focus more on short time frame charts of between a few ticks and one minute. As a result, the profits also tend to be lesser as compared to other traders.
Consider an example of a scalper who purchases 1,000 shares of company XYZ at $10. Suppose the trader sells the same shares within a time duration of two minutes at a price of $10.05, he/she makes a profit of $0.50 per share which results into a total gain of $50.
Similarly, the value of the shares can drop by the same margin ($0.05) resulting in a loss of $50. It is essential to understand that scalpers and day traders may experience losses just as they may gain within the same period – as with any investment.
Day traders mostly focus on making profits with momentum trading. The primary goal for momentum traders is to make profits from more significant moves in the markets by taking advantage of intra-day trades mainly in the stock markets.
Momentum Traders aim to profit from the current momentum that a price move has. Especially during the earnings season, stocks tend to move sharply. It is not unusual for these dynamic movements to generate gains of between 20 and 30 cents per share.
The most crucial aspect for scalpers and momentum traders is the fee structure of the online broker.
If your brokerage account is held with an expensive broker, you will never make profits scalping or day trading. The reason is, that the absolute return in dollars is too small compared to expensive order fees.
Swing traders act both, short-term and mid-term. Let’s analyze both separately.
Swing traders are quite similar to day traders – however, swing traders tend to hold on their stocks for longer periods. It is common to keep a position for a few days or even some weeks.
Swing traders also have the great advantage that they can use one of the best investment apps to buy and sell their positions. They can also use trading apps like Webull, Stash, Stockpile or Robinhood to monitor their positions from anywhere.
In case that the stop loss is hit earlier, swing traders also exit their open position. That’s why swing traders are sometimes short-term traders as well.
Swing traders conduct mainly enter and exit the markets based on price movements on the bigger time frames like the 60 minutes chart or even the daily chart.
Swing traders may decide to go for a price target of $20 using the 60 minutes, daily or weekly chart. The position size is calculated depending on the relation between the target price and the stop loss price. While scalpers and day traders can not calculate the risk reward ration within a few seconds, the swing trader can plan his trades accordingly. A good risk-reward ratio is 1:2 or higher. That means that the potential reward should be double as high as the risk.
For example, a swing trader enters the market at $10 with a price target of $2 per share and a holding period of 4 weeks. Then a risk-reward ratio of 1:2 leads to a stop loss at $9. So only 1 dollar away from the entry, while the target is 2 dollars away from the entry point.
Trading Style Hybrids
It is also common for speculators to apply a hybrid trading strategy.
Consider a swing trader who takes a position on 1,000 shares long and only takes gains from 700 shares leaving the rest (300 shares) as an intra-day swing position. Such a hybrid strategy allows a trader to spread risk over a more extended period.
Alternatively, it is also possible to open a position intraday with 1,000 shares, scalping for a substantial profit for 3/4th of the position, while holding the rest of 250 for a longer period.
However, I prefer not to mix up different time frames and trading styles due to the additional challenge to plan the risk and reward for the mixed hybrid trading style.
Speculative investing offers a lot of opportunities making profits within a short period. However, you should always be beware about the fact, that the risk is at least as high. Due to the brokerage fees the risk including fees is even higher than the potential.
So it is essential to plan the trading activities properly. Overtrading is one of the reasons many short-term traders fail. There can be days where you just do not any trade during a day. This is okay. There is no need to hurry. To trade where no good entry point exists is like buying consumer products you don’t need.