Trading Systems and Methods, + Website, 5th 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. The opening range breakout, buying a new high after the open and selling on the close, was the strategy du jour, 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 very short time period. Intraday prices respond more to noise than to fundamental factors. They jump up and down following economic reports, large orders from funds, earnings statements, upgrades and downgrades, and the flow of microanalysis 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 (time patterns can be found in Chapter 15) are easily applied to day trading. Day traders often look for extreme price moves and a predictable pattern that follows. Day trading requires exceptional discipline, excellent planning, anticipation, and concentration. The need for a fast response ...