How Much of Day Trading is Actually Regular Stock Picking?
In the world of trading, the line between day trading and regular stock picking can often be blurred. It's crucial to understand the nuances of each to determine their roles in a trader's strategy. This article delves into the nature of day trading and its overlap with regular stock picking, exploring the similarities and differences.
What is Day Trading?
Day trading proper means engaging in trades that end at the close of the trading day, with no overnight exposure. The core principle is short-term trading minimized to limit the risk associated with black swan events. While day traders can employ various methodologies to choose their trades, this form of trading contrasts distinctly with long-term investments. Different traders have varying methods for stock picking, and the same can be true for day trading.
The Mix of Day Trading and Regular Stock Picking
Say you pick a stock, like XYZ, and hold 10,000 shares while simultaneously trading it with a 200-share leeway, holding between 8,000 and 12,000 shares. This combination involves both regular stock picking and day trading. In such a scenario, you're likely focusing on different criteria for each aspect of your trading strategy. While the initial stock pick is made based on some criteria, the subsequent day trading activity typically follows a different set of parameters.
The Paradox of Day Trading
Despite its technical nature, day trading is often characterized as something that begins with a measured, disciplined approach. However, a common misconception is that all day traders engage in what is colloquially known as "twitch" trading. This involves quick, reactionary trades based on intra-day news and market movements, often without a well-thought-out strategy. While some traders might act on impulse, many day traders, including myself, approach the market with a specific plan and use rigorous technical analysis to inform their trades.
Technical Analysis vs. Fundamental Analysis
The shorter the time frame in trading, the more critical technical analysis becomes. Technical traders often don't care about fundamental metrics such as P/E ratios, short loads, or debt levels. Instead, they focus on technical indicators like float, volume, and previous day's price movements. For me, as a technical trader, I rely on scanners that highlight patterns and trends to predict upcoming price movements. I use my charts to mark up entries, stop-losses, and targets, engaging in a detailed and reasoned approach to each trade.
The Reality of Day Trading
While day trading can appear to be a high-stakes game akin to Call of Duty, it is fundamentally about making reasoned decisions based on technical analysis. The preparation and discipline required are similar to those of longer-term traders. One of the key differences is the speed at which decisions are made and trades are executed. A day trader may identify a trade and execute it within minutes, while a longer-term trader might take days or even weeks to set up a position.
Conclusion
While day trading and regular stock picking are distinct, they can coexist within a trader's strategy. The extent to which each plays a role depends on individual trading philosophies and market conditions. Day trading, when approached with discipline and a well-thought-out plan, can be a rewarding and profitable venture.