Michael Douglas made quite an impression on eager movie-goers with Gordon Gekko. But while Hollywood’s interpretation of the average stock trader did plenty to titillate audiences, the insidious inside trader did little to enlighten the public to the true nature of day trading. In fact, it is a safe assumption that the majority of people who saw Wall Street and it’s highly hyped sequel know less about trading than they do about Douglas’ love life.
But we’ve got you covered. Despite silver screen suggestions that the market is a giant casino rife with power-hungry power ties, trading is actually a highly calculated and analytical business that requires equal parts smarts, savvy, discipline, and resources. Let’s take a look at some of the basics and clean out the misconceptions in the process.
Day trading is a highly challenging and exciting occupation that plays stock trades to financial benefit. Unlike long-term investments like mutual funds and futures, stocks positions are opened and closed by traders within the span of a single day. The rare exception is what is called “swing trading” in which a trader leaves a position open for a slightly longer period of time in order to make a calculated gain.
This rapidly changing marketplace means a couple of things for aspiring traders. First of all, the nebulous nature and volatility of stock values over the course of a day requires equal parts analytics and mental discipline in order to profit and mitigate loss. If executed correctly, the volatile nature of stocks offers the potential for large gains, following the market axiom of “high risk, high reward”. For this reason, statistics and up-to-date information are the tools of the trade.
Since market prices can react rapidly to news events, product releases, natural disasters, and regulatory murmurings, staying on top of the wave of information is the first hurdle. Through sophisticated stock trading platforms, some with built in analytics and news feeds, day traders with a high speed Internet connection can base their stock moves on current events and a thorough understanding of their fiscal repercussions.
The ability to analyze copious amounts of data on the fly to take advantage of stock movement is an important asset. Traders use powerful computer setups with multiple monitors and high-speed Internet in order to quickly and accurately gauge the market. This setup is crucial to the success of day traders, since even milliseconds can mean the difference between a bargain and a bust.
But, as stated, trading is not all about luck. The market moves quickly, but traders use key indicators to make profitable moves and guide their financial ship through doldrums and squalls. These analytics may include resistance, moving average convergence/divergence (MACD), volatility, and price oscillators to paint as accurate a picture as possible when making decisions. Reliance on these analytics is key, since financial positions of day traders often involve leveraging large amounts of capital.
With so much on the line, one intangible quality has become a fundamental piece of the traders toolkit: discipline. Exercising temperance when stock earnings soar and a level head when trades tank has become an essential key to surviving the financial market. Resources like trade stops can be implemented to help mitigate loss before over-their-head traders are left with only hopes and prayers of a turnaround.
Discipline, combined with analytics and an attentive eye can help formulate a stock trading strategy that is the linchpin of any successful trader. Having a strategy based on market research and intelligent analysis can help preserve a trader’s discipline when times get challenging. Most importantly, effective strategies should be adhered to for long spans of time, not abandoned in pursuit of gimmicks. Trusting a sound and well-researched strategy can lead to profit and stability in the long run.
An integral part of any good strategy is market research. Stock trading requires rudimentary analytical and research skills in order to see trends and make intelligent trades. Through research, discipline, and a coherent strategy, savvy traders can hook their wagons to profitable horses and see real dividends as a result.
But without starting capital, little can come of the aspects listed here. Day trading relies on leveraging large numbers of positions at once on the basis that doing so will result in sufficient returns so as to cover trading commissions and bear profit. Without sufficient capital to make these trades, even the most ambitious tycoon can find him/herself drowning in fees and well in the red.
In addition, knowing the market is an essential part of playing the market. Along with a sufficient bank of capital with which to trade, experience in financial markets will go a long way in seeing the big picture, recognizing trends, and understanding the analytics. Young upstarts can certainly get in on the game, but no one has ever questioned the value of some time-tested, hard-earned wisdom.
The remainder of the stock trading picture lies in implementation of all these resources in the manner described. Stock trading is fast-paced and not for the faint of heart. But with some education, some capital, and a sound demeanor, savvy traders stand to make a great deal of profit from the marketplace. While Gekko’s story makes a compelling narrative, the reality of stock trading is that it is an occupation that, like any other, thrives on intelligence, insight, and the character and wisdom of good, honest people.