. . . . . . . .Day Trading: . . . .Scalping and Swing Trading. . . . .
Selecting a trading style that best suits you could be the best investment you can make. A number of day trading and swing trading styles have evolved over the years. And with the increase in technology and access to real-time trading information, variations on these basic styles are developing every day. Certain trading styles are better suited to certain personality types than others. Likewise, people think in different ways. So it can be advantageous to select a trading style that corresponds to the way we think. We will explore each of these, while becoming familiar with the different day trading techniques.
Near-term trading styles are broken down into two main types of day trading; Scalping and Swing trading. Any trade that has a minimum holding period less than one day is considered to be day trading. These descriptions are not intended to be textbook definitions, as we are not in college here, nor are we studying for a test. So there may be some generalizations made, and overly simplified explanations.
SCALPING
Fraction Scalping. . .[long or short-sell]
Trading in and out in seconds to gain a 1/16th or an 1/8th gain in the same stock. By learning to read movements in that issue, large amounts of money are placed on the issue for the purpose of multiple minute gains, which over the course of the day, yield substantial results. This is repeated, usually with the same stock issue, each day, like a job, with as many as 30 round-trips within the same issue in a single day. A typical scalp may last as little as 10 seconds in and out. So it is imperative that this type of trading be done with sophisticated trading equipment and reliable internet connections.
Anomaly Scalping . . [long or short-sell]
There is also a form of scalping based on minute anomalies in trading patterns based on the odds that a stock will return to its historic pattern. The stock or mutual fund is bought or shorted based on the mathematical difference between where it is currently trading and where it "should" return. The bet is placed according to its historical trading or volume patterns and strict pre-designated exit points are established. This trading style requires very sophisticated computer assisted scanning and is reserved for the very experienced technical and analytical traders. Very few traders use this technique.
Momo Scalping. . .[long or short-sell]. .
Finding momentum plays with wild volatility. . [and preferably a small float]. . .and jumping in as the buying begins. . then jumping out BEFORE the buying slows. Can play on the short-side too. . . shorting near the highs and covering before it bounces. Company fundamentals are not considered in momentum scalping. A round-trip momentum scalp can last between 5 seconds and 2 minutes. This is the type of scalping that the media calls "DAY TRADING," while warning against it. Fortunes are easily won and lost momentum scalping. And it is by far the most addictive of day trading techniques, due to the large positions that are taken and the wild volatility that the stock undergoes as players enter and exit.
SWING TRADING
Event-Driven Swing Trading. .[long and short-sell]
This is the most emotional [right-brain driven] type of day/swing trading. It is also the style where perhaps the most money is lost. This is typically due to inexperience and allowing too much emotion to enter into the trade. A stock is selected based on pending news. . .CNBC CEO appearance. . .a rumor. . .an upgrade or downgrade. . .or other such info that should make the stock react. Getting out early is imperative, or one may find themselves buying the day's high.
Event-Driven Swing Trading is the trickiest type of trading, because the traders are generally unfamiliar with the issues trading idiosyncrasies. And because there are long and short-selling swing traders trying to play at the same time, there is added risk. This is often due to rapidly developing stories in relatively unknown issues. It is difficult to predict how an unknown stock will react, so knowing when to get in and out takes experience; a keen eye for reading volume and understanding the float; good predicting of the amount of float that is consumed; estimates of short interest; and one eye on technical indicators.
Depending on the float, an event-driven swing trade can last from 2 minutes, for a stock that pops on a CNBC mention or upgrade [almost same as Momo Scalping] to a 5 day hold, for a blue chipper. . . [In early spring of 1999, I called A.T. and T as a swing trade, which led to a 10 point gain over 5 days on magazine coverage. But the average event-driven swing trade is overnight. And the event-driven swing trader is happy to sell on a gap up. They buy on rumor and sell on news..
Technical Analysis Swing Trading: [long or short-sell]
After a strong education in technical analysis [mostly left-brain] and a long history of successful paper trading, the TA swing trader can jump on a technical bottom and accurately predict an exit point. . . then follows the plan with military precision. Again, depending on volume and float, this trade can last from a few minutes to a few days, yet still be considered a swing trade.
Beyond a few days starts the many varieties of position trading, which requires a deeper due diligence. One can see by reading these descriptions that certain thinking/personality characteristics in traders match with certain trading methods. Right-brainers may gravitate toward emotionally driven trading, while left-brainers prefer technical analysis trading.
SIDEBAR 1:
Musicians make good stock pickers, traders and thinkers, due to the well-developed union of left and right hemispheres of the brain. Playing an instrument requires many years of practicing reading, analyzing, counting, following and coordinated movement of both hands. While at the same time, it requires stylistic interpretation, attention to tone, pitch, volume, phrasing and musicality.
The hundreds or thousands of hours of practice in this manner, establishes "thinking pathways" and develop a "flow" via the nerves that join the two hemispheres of the brain. Non-musicians have fewer opportunities to practice simultaneous usage of both hemispheres for hours on end. According to scientific studies that show brain activity evenly dispersed during a musicians performance of written music.
So force those music lessons on your kids. They might hate you for it, until they understand how it helps them to develop brain, nerve and thinking patterns. But remember that hemisphere dominance is thought to be developed at an early age.
SIDEBAR 2:
For those interested. . .I use equal hemispheres and favor the frontal lobes. . . some scientists classify this "Intuitive Thinker" or "Cerebral Creative." Yes, I read music and play many instruments. . .but much prefer composing and producing it. 90 percent of all the music I have was hired to supply for television, video, advertising and records in my career, I composed, arranged, produced, wrote lyrics [if needed], performed all instruments and engineered.
That may help explain why I read the charts, study the historical patterns, discuss the news, read the Edgars, watch the trading patterns, then day trade, swing trade or position trade based entirely on instinct. And the better I envision the future, the more conviction I can place in a trade.
Incidentally, I don't recommend others to follow this method, but rather develop what works best for you.
WHICH ONE ARE YOU?
Those that tend to see the glass as half-empty and have a cynical view of the world. . .generally prefer short-selling and are uncomfortable holding stocks long.
Those that tend to see the glass as half-full and have an optimistic view of the world. . .generally prefer playing long and are uncomfortable with shorting.
The most successful traders drink the water and sell the glass. They have a realistic view of the world. . . and are comfortable holding both long and short positions. . . even simultaneously within the same stock.
So if we find ourselves in a style of trading that is not consistent with our personalities or thinking characteristics. . . perhaps we will have better results by changing to a trading style that better suits us. On the other hand, don't change what works. So the trading style that works best may imitate our personality and brain patterns and may even describe us.
There are numerous tests available to help determine what sort of personalities we have. Other tests help determine the way we think and solve problems. The tests are fun and quite educational. But more importantly, they may be helpful in the selection of trading styles that are suit us best. . . an investment in time that everyone can afford and none should ignore.
Rande Is
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