I’ve been a professional stock trader for more than a decade. Following are the most common day trading strategies I have seen people employ. Note that “most common” and “most profitable” are two different things. :)
Mean Reversion - When a stock makes a sharp move, take the other side, expecting it to revert to its mean given enough time. The key here is to have a good way of segmenting which moves are likely to continue, which to stagnate, and which to revert.
Common ways of determining when a move is sufficiently abnormal to bet against it:
- Average Daily Range
- Moving averages
- Bollinger Bands
- Correlated stocks
Momentum - When a catalyst sparks a price move that may break into a trend, take a position that follows that price breakout and ride the ensuing trend. Again, you need to segment which moves are likely to continue, which to stagnate, and which to revert.
- Sector-wide move
- Economic number released
- Headline in individual name
- “Golden Cross” technical indicator
Support / Resistance - Stock prices may display inertia, trending one direction until they’re stopped. Then they have an opportunity to begin a trend in another direction. By identifying prices of considerable support or resistance, one may attempt to capture much of that price trend.
- Volume-Weighted Average Price
- Moving Averages
- Psychological figures ($10, $50, $100, etc.)
- 52-week high/low
- Chart patterns (“Head and Shoulders,” etc.)
Arbitrage - If you could sell something for $100 on eBay that you buy for $50 on Amazon, you might make a hefty profit. Sometimes this happens in markets: two prices that should trade together will diverge. Sometimes you take both sides of the trade, sometimes just one.
- Exchanges, divergence of price of one stock on two venues
- Derivatives, divergence of stock price and an instrument referencing stock price (like options or rights)
- Foreign stocks, divergence of listing on foreign and domestic exchanges
- M&A stock deal, divergence of target’s and acquirer’s stock
News - It takes time for news to disseminate in a stock. During that time, if you’re early to understand what effect that news will have on the stock price, you may be able to get in an excellent position before the rest of the market responds.
- Access the news faster than others
- Interpret the news better than others
- Infer impact of news on other stocks faster or better than other
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