- 1). Define liquidity and volatility. Liquidity is measured by the difference between the bid and the ask price for a stock; the more demand there is for a stock, the higher the liquidity. Liquidity allows traders to enter and exit a trade at a good price. Volatility is measured by the difference between the daily range for a stock. The greater the range or price fluctuation, the higher the volatility and the potential for profit or loss.
- 2). Identify entry points. A good day trading system will provide you with tools to help determine these. The most common tools used for day trading are Candlestick Charts, Level II (real-time) quotes, and real-time news. Candlestick Charts are used to spot trading patterns and trends in the price movement of the stock. Level II price quotes and real-time news updates help traders monitor volume increases and decreases in demand.
- 3). Identify a price target. Use a day trading system to help identify a price target; that is, a point to exit or "unwind" your trade. Two common strategies are scalping and fading. Scalping involves selling immediately after a trade becomes profitable. In scalping, the price target is the point just after profitability. Fading involves selling a stock just after a rapid move up. In fading, the price target is based on the assumption that the stock is overbought.
- 4). Determine a stop-loss. A good day trading system will automatically identify a stop-loss for your trades. A stop-loss is an automatic order to get out of your trade if it reaches a certain degree of loss. Depending on the system, these can be physical and/or mental. A physical stop loss is an actual order to get out of a trade at a certain level of risk. A mental stop-loss is not a real trade, but a mental note that helps the day trader quickly gauge profitability; these are usually set at the point of initial entry.
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