After a recent live stream interview with two of the 1st place winners (Stocks and Options) of the Fall #1 Best Trader Competition, it was interesting to hear from them about what they learned, the strategies they used, and how they modified these strategies along the way to increase profitability and perform with success. One of these traders was a stock trader, swing trader, and eventually used stock options, landing this relatively new day trader to one of the #1 Best Traders in the competition. As a result, one would think it prudent to take a look at these different types of traders, how they differ from one another, and look at what generally defines their trading styles.
We’ll begin with prop traders, which are traders that trade stocks, commodities, bonds, currencies with a company’s money in order to make a profit for that company. Then there are your retail traders, or intraday equity stock traders, who are individual, part-time or full-time high frequency traders. These traders generally profit from volatility in the market, and thus, if the market is flat, make no profit.
Next, like our #1 Best Day Trader, we have swing traders. Swing traders often hold onto stocks over a period of time, from one day to a few weeks, but are not usually long-term investors. These traders have enough different holdings that they will not lose their entire volume overnight. Generally, they will have a good knowledge of the overall market situation – i.e., is it bullish, bearish, or neutral. They will often also look at company’s earnings, dividends, and earnings per share, etc., and commonly use limit orders when placing trades.
Now let’s look at day traders (who we will be solely featuring in the next and last competition of 2019). As a general rule, day traders NEVER hold positions overnight – they are intra-day traders, entering positions and exiting same day. These traders usually stay away from penny stocks as well as the OTC market. Dedicated day traders will use the pre-market scanners to see where the volume is and where there are large gap up and gap downs. They will look at the news to see if any announcements, earnings, or other significant news has come out that would be affecting the larger volume of a particular stock. Within this pre-market hour, day traders should create a short watch list of stocks to monitor throughout the day, and it is recommended that they go to trader chatrooms to discuss their findings with other traders and see what other traders are looking at. In general, they will take advantage of the highest volatility hours of the trading day, which is between 9:30 and 11:00 am. A profitable day trader will have a good setup and manage risk with a proper share size and stop loss. They also, of course, have to practice a sound method of reasoning and have their emotions under control, knowing and accepting loss, and knowing when to get in and get out. In other words, they work to maintain the proper psychology necessary for this type of trading.
Lastly, we will look at options trading. An option is a contract giving the buyer the right, but not the obligation, to buy (or call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date. Options were really created for hedging purposes, thus giving them an advantage over the other traders previously discussed. Hedging with options is meant to reduce risk at a reasonable cost. A stock option contract typically represents 100 shares of the underlying stock, but options may be writing on any sort of underlying asset from bonds to currencies to commodities. Many of the repeatedly common stock options witnessed throughout the completion were in AAPL, NVDA, SPY, ROKU and more.
We will conclude with a few tips of advice more specifically geared for day traders and retail traders: first and foremost, profit comes with practice, patience, having the right tools and software, as well as ongoing education and revision of strategies to be more profitable. These traders cannot be impulsive or gamble – self-discipline and money management is essential, as the most common reason for failure and loss is trading emotionally. They should take quick losses and get out and perhaps come back later, as well as learn to be a good loser and accept loss without getting too upset or losing confidence. And vice versa: not becoming too overconfident with a good gain or profit. One way to significantly expedite the learning curve if you are new to day or retail trading is to trade in a simulator account, as so many do on our DAS platform. It was encouraging to see in conversations with many of the traders throughout the competition that many of them were using this opportunity to practice their active trading strategies in a serious manner and see how they were doing in comparison to other traders, learning from other competitors’ losses, profits, and activity, and then modifying their strategies in preparation for going live. We once again wish all our top winners big congratulations, but also commend those traders who, no matter their ranking, maintained frequency and consistency throughout the competition. It is, after all, a process of practice, patience, sound psychology, and education.
