Locus Trading

Day Trading: Using Volatility and Liquidity to Make a Profit February 18, 2010

If you are new to the day trading scene, then the words “volatility” and “liquidity” probably seem foreign at this point; however, if you are to become successful at day trading then these are definitely two words that you will want to learn and study as they have a lot to do with day trading if you want to make a profit.

First, let’s start by defining both of these terms.  Volatility, in short, refers to the risk or uncertainty that is involved in the security’s value that comes from changes of the size of the value.  Liquidity refers to being able to convert the asset into cash easily without a price discount being involved.

These two terms are necessary for a day trader to know.  When trading throughout the day, one should pay close attention to both the volatility and liquidity of the security.  As a day trader, you want to be able to leverage large amounts of capital in order to take advantage of even the smallest price movements of stocks or indexes that are highly liquid.

You will need to study the different stocks that offer both the ability of being highly liquid while making sure that the volatility falls within your risk level.  (Typically, the higher the volatility, the better chances for profit; however, it also means that there is a greater risk of loss.)  Once you are able to pick out stocks that meet the requirements stated above, you will need to learn how to pick an entry point and an exit point in order to capitalize to the full potential.

There are typically four different strategies that are commonly used by a day trader when trading in this aspect.  They include:

• Scalping:  when you sell immediately after the trade has made a profit.
• Fading:  this is when you short a stock after it makes a rapid move upwards.
• Daily Pivots:  this is when you try to buy at the low of the day (LOD) and then sell at the high of the day (HOD) through utilizing signs of reversal in the price.
• Momentum:  is usually influenced by news and trends, and the buyer usually jumps aboard to ride the flow until signs of reversal start to form.

Once you find a system that works for you, it will still need tweaking.  Why?  Well over 50% of day traders fail, but it’s not because of the lack of trying.  It’s because of being uninformed and uneducated about this field.  No matter what you do, you will always need to analyze it every so often in order to determine where you stand.  Then, making adjustments or performing a few tweaks here and there will become evident.  By doing this, you are sure to become one of the successful day traders.