In this article, we will explain why day trading is popular including Forex and Stock market trading. In addition, we will have a look at how we can prepare with the day trading. We will cover technical analysis vs fundamental analysis. We will also cover mean reversion strategy vs momentum strategy. When people have grown up savings in their bank account, people will start to look for some investment opportunity. We know that saving account is just locking up your money in your bank. However, 10 years later, the money will not grow enough to catch up the actual living expense at that time, due to the inflation. Hence, we are living up with investing. Choice of investing is everywhere from stock market, funds, property, real estate, running your own business, and investing to your friends and family. Among available investment alternatives, Day Trading is probably popular options. Here are the few reasons why they are so popular.
1. Easy to cash up
Think about property or real estate investment. How long it takes to sell or buy one. Even though you have the good ROI, still cashing them up is time-consuming process. In day trading, you can almost immediately cash out your position.
2. Start with little cash
With day trading, you can start up with relatively small cash comparing to other alternative investment. Buying house or running your own business will typically requires large sum of own money + borrowing money from your bank. With day trading, you can start with as much as you can afford.
3. Small Management Cost
When you are decided to run your own restaurant, this will not guarantee you the success. Say that you are successful with about 20% return on your investment yearly. This is good return for any restaurant owner probably. However, amount of management cost is high. You have to manage people, paper works, customers, recipes, your sales, etc. High management cost means headache for us. Day trading does not have much management cost. You just need to trade by yourself. Often skilled and disciplined day trader can readily break the 20% ROI or even 30%.
4. No discrimination
Market is fair to everyone. No gender or age matters in day trading. This means that once you are skilled in day trading, you can take it as your long running career.
Preparation for Day Trading
You can make money only if you are prepared in day trading. Firstly, you need to have some disclipline to make a buy or sell decision. To start with, you can have a look at the two disclipline including technical and fundamental analysis. Technical and fundamental analyses are the two main schools of thoughts for financial trading and investment. Technical analysis assumes that price discounts for everything. For example, technical analyst believe that at a given time a stock’s price reflects everything that could affect the company including company’s fundamental factors, economic factors and market psychological factors. Technical analyst also believes that history tends to repeat itself. Therefore, they can predict the future. Technical analysis only leaves the price as the main subject to study. For fundamental analysis, traders study the intrinsic value of the company. For example, they make their trading decision based on growth potential of the security. They are more concerned with basis like sales, earnings and management of the company. In general, fundamental traders are considered as the long term investors whereas the technical traders are considered as the short term investors. However, there are short-term fundamental traders too. For example, some news traders do not hold their position too long. On the other hands, there are technical traders basing their trading decision on monthly timeframe. Those technical traders can hold their position for several months to few years too.
When you look at the technical trader, there are two dominating trading strategies. For exampel, mean reversion and momentum trading are the two dominating trading strategies used in the Forex and Stock Market. Most of trading strategy we can think of will fall under a category of mean reversion or momentum trading. These two trading strategies show completely different market timing. For example, momentum trading tries to take the entry when the price shows a strong directional movement. Momentum trading is often considered as the trend following strategy. On the other hand, mean reversion trading tries to take the entry when the price is far from the mean. Mean Reversion trading is often the core trading principle behind “Buy Low and Sell High” strategy like value investing. In momentum trading, the trader tries to pick trend whereas in the mean reversion trading, trader tries to pick the turning point.
Among the trading community, the preference between the mean reversion trading and momentum trading are completely different. Some trader uses the mean reversion trading better and some trader uses the momentum trading better. To find out which trading style you are good at with, you need to try both trading strategies. In fact, mean reversion and momentum trading can explain the water and fire elements of the human characteristics. Mean reversion trading explains the human characteristics of being “Cautious” or being “Realistic” like water. Momentum trading explains the human characteristics of “Impulsive behaviour” or “Heard Behaviour” like fire. However, the wise trader will not view these two trading strategy as two different subjects because one comes after the other. For example, mean reversion will come after momentum. Likewise, momentum will come after mean reversion. Therefore, the legendary trader like Jesse Livermore emphasized to observe the turning point, where the market shift its major direction. This does not mean that you have to trade against the large momentum in the financial market. This means that we need to buy the stock or currency as low price as possible near the turning point before another momentum is established. Once the momentum is established, it is not easy to ride on the momentum because the price move too fast. The heard or impulsive behaviour in the market can push the price in the shortest possible time. If you enter them too late, then you are likely to end up buying the stock or currency in high price. You will either make a thin profit or loss. For this reason, you need to find a way to enter the market between the turning point and the momentum. In doing so, you need to become familiar with the turning point as well as the trend. Therefore, you need to learn the methods of identifying the turning point and trend.
Resource to Learn Day Trading
In fact, making a good buy and sell decision can take up the large portion in the day trading activity. Decision making approach in the day trading activity can be divided into two categories incluidng the React to Market or Predict the market direction. Which one to use is all depends on your understanding and capability. We provide a free day trading education to help you success.
In addition, we provide a decision making tools and software to help you with either to react to market or to predict market direction. These automated tools and software can help you to perform you the technical anlaysis in the most intuitive way.