Day Trading and Technical Analysis
If you are familiar with trading, you will know that many investors trade in stocks, commodities, currencies and even stock market indices.
With any one of these assets it is possible to trade them over the short, medium and long term.
Traders that want to benefit from longer term movements in the prices of these assets often prefer to become a swing trader or a long term trader.
A swing trader typically buys and sells assets over a period of days or weeks, while a long term trader usually tries to profit from price movements that take place over months or even years.
A day trader, on the other hand, is someone who generally prefers to buy an asset and sell it again the same day.
This can be for a variety of reasons. For example, some traders are wary of overnight price movements that can be based on events which occur whilst the trader is away from their desk.
Another key example is that financing fees for any borrowed money, or financially leveraged positions, are generally charged overnight. As a result, closing all open positions before the end of the trading day can reduce the investor’s costs for investors trading through spread betting and CFDs.
Financial Spread Betting and Contracts for Difference trading do carry a high degree of risk to your investment. The gearing on these investment formats does mean that you may lose more than the funds you initially committed. If you are investing through CFD trading and Spread Betting, please make sure you always trade with capital you can afford to lose. Before you start trading ensure that you recognise the risks involved. Be aware, CFD trading and Financial Spread Betting may not always be suited to your trading strategy. Where appropriate, seek impartial financial advice.
Day Trading and Fundamental Factors
Many long term and swing traders make use of so-called ‘fundamental factors’ to guide their trading decisions.
Fundamental factors typically reflect important news factors, such as company profits, inflation rates, economic growth rates, unemployment figures, and new product launches.
If a company should therefore declare record profits, these traders might believe that the company’s share price will react favourably to this and so buy stocks in that company.
Since a day trader works in very short time frames, fundamental indicators such as inflation rates and unemployment figures, often have less impact on their trading decisions because they are inherently longer term in nature.
As a result, many day trading investors prefer to use ‘technical analysis’.
Day Trading and Technical Analysis
The underlying principle behind any technical analysis is the belief that the past performance can be a guide to future price movements. It should be noted, however, that this cannot be guaranteed to be the case.
The basis of technical analysis suggests that, since most market players have access to all relevant information, the price of a share, commodity or currency at any given moment should already incorporate all of that information.
As a result, proponents of technical analysis would suggest that by the time a company declares a record profit, the share price will already reflect it and so it would be too late to buy its shares.
Technical analysis experts often do in-depth statistical analyses of the price movements of forex, commodities or shares over time and then use that information to make projections of future price movements.
One of the simplest examples of a technical indicator is the Moving Average which many financial traders use as a guide when making trading decisions.
Some investors use short term averages whilst others use six-monthly and even yearly averages. It is often suggested that if the price of an asset starts trading above its moving average then that is an indication that it may continue to rise.
Other popular technical indicators include price oscillators, momentum indicators and Fibonacci retracements.
Under no circumstances are the comments and the information provided herein to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice.
Neither CleanFinancial.com nor Financial Spreads or any contributing author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
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Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Day Trading and Technical Analysis' by DB, updated 17-Aug-11
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