New Trading Systems and Methods, Fourth Edition

CHAPTER 16

Day Trading

A day trade is a position entered and liquidated during the same trading day. Day trading reached a peak in popularity along with the top in the stock market at the beginning of 2000. High volatility and a clear bull market made day trading look easy, but that period did not last long. While trading for a living is always difficult, day trading puts more restrictions on the rules, requiring you to extract a profit during a limited time period. Price moves are smaller during one day than during the combined period of a few days or a few weeks. Intraday prices respond more to noise than to fundamental factors. They jump up and down following economic reports, large orders from funds, earnings statements, and the flow of gossip on the financial news networks. The fact that the economy is strong or weak, that creeping inflation requires raising interest rates, or that the budget deficit is steadily growing has little impact on a trade that targets a 1-hour period during the day. Day trading is highly focused on price patterns, noise, and volatility.

Gaps, time of day, and various daily patterns discussed in the previous chapter are easily applied to day trading. Day traders often look for extremes and a predictable pattern that follows. Day trading requires extreme discipline, excellent planning, anticipation, and concentration. The need for a fast response to changing situations tends to exaggerate any bad trading habits; as in other fields, the shorter the ...