Category: Trading Types
Investing as a day trader
These investors are buying and selling the instrument within a day and at the end of the day they usually close their positions. A day traders daily executed trades depends on his trading strategy. It is possible that a day trader executes only one trade a day, but he can make dozens of trades, too. A day trader usually uses a leverage, so the daily movements of the instruments can generate huge losses and gains for them. Trading as a day trader is difficult, because the news have a great impact on the instruments price. Several statistical analyses determined that about 80-90% of day traders loose their money or do not generate enough profit to pay the transaction costs.
| Scalpers are those day traders, who do a lot of trades a day to get profit from the bid-ask spread. Scalpers usually hold their instruments for a very short time, sometimes only for minutes or for seconds. The scalper executes the trades very quickly, sometimes it takes only milliseconds to open or close a position. These investors realize their small profit because of risk decreasing (closed positions does not have any risk). Their gains are very small, but the end of the day these small gains together can add up to a large gain. |
Market maker companies are doing the same thing as scalpers. They do benefit from the spread. For example, the market maker company offers a price of eurodollar at 1,5684-89 to their clients. The company gets a price of eurodollar at the same time at 1,5686,5-87,5. So when te client buys eurodollar at this time he must pay 1,5689 and the company can buy at this time for 1,56875. So the market maker earns at this transaction 2,5 points when he can pass the seleced instrument.
News trading is another type of day trading. The basic strategy is that the investor buys the stock when good news appear and the investor short sells the stock when bad news appear. The problem with this trading srategy is that many investors estimates and forecasts influence the price of the stock. Before the news the stocks price move strongly in one directon, because of the heavy buying (or selling) of the stock. When the news appear, the price of the stock does not move so much when estimates are correct. So the day trader can not split profit (or not enough to cover the transaction costs) from the movement of the price of the stock. When estimates are incorrect then the trend of the price of the equity can change direction or go on the same direction hardly. In this situation when the investor is “on the right side” of the market he can gain money.
| A technical trader is an investor who looks back in history to predict the price of the instrument in the future. These investors use several indicators and patterns. They usually use a few of these indicators together, because there is no only indicator, which is going to predict the price of the instrument in the future. In this section we are going to introduce a few technical trading patterns. |
The Moving Average
Technical investors use the moving average to identify area of possible support and resistance. A typical signal is, when for example the 15 day moving average (MA 15, blue line) crosses the 50 day moving average (MA 50, green line). When the short term moving average is over the long term moving average, it is a buying signal and when the short term moving average (MA 15) is under the long term moving average (MA 50) it is a selling signal.
The Relative Strength Index
The relative strength index is a momentum oscillator, which has been developed by J. Welles Wilder. This index shows the strength of the actual price of the instrument. It turns the price movements into numbers between 0 and 100. To calculate this index, only one parameter is needed, the number of time periods. J. Welles Wider recommends to use a 14 day time period. Over 70 (the red line) the instrument is overbought, which is a sell signal and under 30 (the green line) the instrument is oversold, which is a buy signal.
The Keltner Channel
This indicator has been founded by Chester W. Keltner, who published this technical analyses tool in his book How to Make Money in Commodities. Technical investors use the Keltner channel to predict the price of the instrument in the future. The central line is a moving average and the lines above and below the central line are moving averages of the past 10 days trading ranges. Investing signal is when then closing point of the chart is”outside the channel”. A buy signal is when the candlesticks closing price is over the upper line (red) and a selling signal is when the closing price of the candlestick is under the lower line (green).
