Day Trading Strategies

Written by Erin Jones
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When you hear the phrase day trader, you probably think of someone who puts large sums of money into one stock, watches that stock nervously, and then sells out after the stock moves a few cents. This trading strategy, however, is the old trading mentally of equity investors. If you didn't learn any lessons after the technology crash of 1999, listen up--throwing all of your eggs in one basket is far too risky!

The New Day Trading Strategies

In our increasingly global economy, the markets are far too unpredictable to make bets in one stock. This is why I-shares developed. I-shares are baskets of stocks that trade like mutual funds and are designed to mimic a particular index. The mentality behind trading I-shares is that you're diversifying away some of your risk by trading an entire index, not just one stock.

That is also the mentality of trading a new type of security, called E-minis. E-minis fall into the futures category of investment vehicles. With E-mini futures contracts, you can speculate about the price direction of the Nasdaq, the S&P 500, the Dow Jones Industrial Average and more. Since E-minis are a relatively new investment product, however, it's a good idea to get some guidance before you begin buying and selling. There are online companies that specialize in helping investors with E-mini transactions.

Another benefit of index investing is risk diversification. For example, if a corporate fraud action suddenly came to public light, like it did in the Enron case, the stock price would tank within seconds and holders of the equity would suffer severely. This same scandal, however, would have much less of an effect on an entire index, spreading out company specific risk. In addition to corporate events, international events can also make holding one stock very risky. For example, very few investors know that six of the 13 major chemical companies are actually overseas companies. A large international commotion could dramatically affect a stock's price. Over the past few years, more and more investors have been turning to index investing products rather than relying on good stock picking.


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