The Different Methods of Day Trading

There are almost as many different methods used by day trader as there are day traders out there. Some are effective, some are not. It would not be true to say that any one method is the right one and will provide big profits for everyone who tries it. Two different traders may use the same method, but applied to different securities they may have drastically different results.

Contrarian and trend following methods are pretty much the exact opposite to one another. Here is a good example of how the same method can have different effects for different investors, or completely opposite methods can both provide profit for the investor. For the contrarian, the belief is that if the price of the stock has previously been rising, then it will tend to fall. If the stock price has been on the rise, it will then be more likely to drop. The trend follower on the other hand believes that the direction of the stock price will continue whichever way it is heading.

Spread trading is the practice of taking advantage of the difference between the buying price and asking price of a stock. It is more commonly referred to as Scalping. It is not completely unrelated to the guy selling tickets outside the concert; he takes advantage of different purchase price and selling price and makes a profit. The day trader does this in a much shorter time frame but the concept is still the same. There is less risk involved in this method, but of course not as much room for large gains.

Range trading can also be effective for some day traders. It follows the assumption that the stocks of a particular company will trade within certain range, with a price ceiling and a price basement. If the price ceiling is reached, the trader will sell, and if the basement is reached, it is time to buy. This is the buy low, sell high notion. It is easier said than done, as this is what all investors would like to do.

Some keep it simple and try to play the news. They watch for information in the media or tips from industry insiders that might give them some insight into whether or not a companies stock is likely to rise or fall in price in the near future. If a company is on the verge of announcing disappointing financial reports, this would be a good time to dump the stock and either lock in the profit that has already been made or to minimize the loss on that particular trade. This would be the most common practice among day traders. Most traders will use more than one strategy in unison or at different times depending on market conditions.

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