Day trading rule
The stock market is the mother of all roller coasters, lifting day traders to hair raising highs, then dropping them to the lowest lows, with no regard for their screams. Day trading, the not-so-gentle art of buying and selling stocks during a brief time period, is exploding as a profession, and savy traders are making big bucks. The resultant volatility has encouraged a growing number of people to forsake the "bur and hold" rule of investing. Instead, they are turning their portfolios over quickly and trading in and out of the market to take advantage of the wide price swings.
II. DAY TRADER?S DISPOSITION :
Day traders serve one and only one function. They are middlemen in the buying and selling of stocks. As middlemen, day traders are not worried about the same things as investors. Day traders could not care less about the issues of market i.e., whether the stock market overvalued, undervalued or fairly priced at levels, which stocks are good investments etc., because they are not concerned about the next six months, they are concerned about the next six minutes, and even the next six seconds.It does not matter what they are buying and selling, stocks, bonds, cars, stereos, or coins, the product is not what is important for the middlemen to think for successful operation. Middlemen should not care if the goods they are buying are expensive or cheap. Only one thing matters, is selling the goods at a higher price than what they bought for. That is all middlemen are ever concerned about. So long as they can do this, they will put food on the table and the same is true of day traders.
Day traders look for supply and demand. In short term, the stock market is very inefficient. Second to second, minute to minute, it is in a constant state of flux. When the stock market moves in any one direction, it is to rectify an imbalance between buyers and sellers. For every buyer, there is a seller. When buyers and sellers agree, the stock trades. When they do not, the market readjusts its prices under they do agree, it is that simple.Within that framework, day traders look to make tiny profits on these microscopic supply and demand imbalances. Day traders are nothing more than middlemen. Day traders make a living by taking the other side of the buying and selling of the general public. Day traders do not make a living on huge one-time gains. Instead they are razor-thin profits. These profits do not seem like much, but they may add up to hundreds of thousands of dollars at the end of the year. Small profits keep day traders in business, the secret behind this, is the key to trade at high volume i.e. 2,000 or 3,000 shares at a time.
III. ALLOCATION OF TRADING CAPITAL :
As a day trader, the single most important tool one has is the trading capital. This is the lifeblood of the business. Obviously, we cannot trade without it. The problem is that the allure of day trading for a living is so strong that many people who are currently day trading are simply financially unfit to bear the risks involved. This can be a recipe for disaster. There are several considerations that must be taken into account before deciding as to how much money can be allocated toward day trading. The first step is to make realistic assumptions abut the lifestyle and the personal finances.
Obviously one must first determine exactly as to how much trading capital he can afford to set aside for trading. This has to be considered as risk capital. Though this risk capital does not mean gambling money, the idea is that, over time, the trading capital to grow untouched. When getting more experience and the level of skill improves, the profits will start to build up so long as the trading capital remains in the account. This increase in trading capital gives substantial leverage to add to the gains. To become a better trader, profits will increase exponentially as the trading capital builds. This enables to increase the profits month after month, even the most profitable traders, if they have to draw from their accounts continuously to meet expenses, will have difficulty doing this. In other words, risk capital must be money which can afford to lose. Under no circumstances should the trader take rent money, credit card debt, or money needed to live on and allocate it toward day trading. Even through trading capital is real, hard-earned money, trader must deal with it as if it were "play money", merely a tool used to achieve success. Successful day traders take food out of the mouths of the Wall Street firms that trade against them.
IV. RULES OF TRADING:
The specialist earns a livelihood by buying and reselling stocks, just as the used car dealer buys and resells cars. The rules that give priority to a customer over the specialist at the same price create a situation exactly like being able to step in front of the owner of a used car dealership and have first crack at the car, at the exact same price the dealer is willing to pay. Think of the amazing possibilities for profit that this rule would allow.
If this could happen, and enough people knew about it, eventually the car dealership would go out of business. The customers would be taking food right out of the owner's mouth by intercepting his or her profits. The customers, not the dealership owner, would now be the middlemen in the buying and selling of cars. Although this rule does not exist in the world of used car dealerships, it does exist in stock trading. Specialists are able to stay in business as most people do not try to exploit this rule for their own profit. That is why the day trader who knows how to exploit this rule can make a small fortune.
There are rules in place that force specialists to give priority to customer orders over their own. On the New York Stock Exchange, these rules essentially let day traders take the same side of the trade as specialists in filling customer buy and sell orders. This allows day traders to trade just like specialists and to gain all the advantages of the house edge by participating with the specialists in taking the other side of customer orders.
V. SUMMARY:
Day traders are in a very precarious situation, they rely on their own abilities to beat Wall Street at its own game. Although day traders have the rules on their side, they are able to exist, survive, and prosper only as far as their trading ability takes them, because the odds are not with success, but against it. Day traders are going up against much bigger forces possessing deeper pockets and more information. Undoubtedly, the colossal amounts of money Wall Street firms are capable of making in a single year, the same reward is there for a day traders. It is just a matter of going out and staking a claim to it.
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