Basics of How Professional Day Traders Make Money in the Stock Market
Today’s financial system is significantly more complex than it used to be even 10 or 20 years ago.Why the stock market exists is because companies need money to grow. After a company gets to a certain point they need more money to grow. A private company turns into a public company and that is when a company first appears in the stock market.
The stock market can be compared to eBay. EBay is the 21st century version of a garage sale, we have things we don’t need that still have value and we want money for them.
Every company needs money to grow. At some point of time they do not need to lend money from their close allies because they are substancially large now. Now they go public to raise cash for their expansion. Once a person invests in the compnay by buying its shares he or she will bcome part owners of the company.
Stock markets deal in shares of stock. If there are 100 shares of Relaince and I buy one share I therefore own 1% of Relaince.
Every compnay is listed like the items in a supermarket. If you need furniture you will go to the furniture section similarly if you need electronics you will go to the electronic section , same way the compaies which deals in the same sections are comprised to their respective indices.
So once a company goes from private to public we begin to invest in it. The left over shares have value and the general public decides what that value is based on the stock market. With anything that has value one can determine a future value. This is the reason why the stock market exists and the fundamental way that professional day traders really make money in the stock market.They buy and sell stocks based on their future value.
Fundamental vs Technical Analysis
In order to determine the value of a stock or company traders and investors used two typical models, fundamental analysis and technical analysis. It is important to note that these two types of analysis are the main forms of investing/trading in the stock market.
Fundamental analysis involves someone understanding concepts like the health of a company via its competition, revenue and profit, it’s management, and potential for future growth (think Warren Buffet). The concept here is to understand a company is in a good position to grow and increase value.
Once a company increases its value it pleases investors and professional traders.
A trader or investor would have purchased the stock at a lower price and since the company has a higher value (higher priced stock) it makes a person money.
Technical analysis does not include any of the above. Technical analysis strictly involves looking at a chart with a set of indicators and recognizing patterns. One random example would be if a certain company goes up during a certain time of year.
If we assume that Apple will make more sales during the holiday season then we may be able to assume that its stock price will go up during that time of year. A professional trader that is looking at Apple stock might look for patterns in changes in price during a specific date or time of year.
Technical analysis does not involve analyzing the company’s financials or management. It simply involves looking at a chart and making decisions.
Professional day traders have advantages and disadvantages with both types of analysis but it also depends on what kind of trader a person is.
If one is looking to invest in a company long-term we may look more at fundamental analysis. I prefer strictly a technical analysis approach due to the uncertain economic times we are in. I simply prefer to not have my money in the markets when something erratic or volatile can happen.
It also takes a lot of work to look at news and connect the dots with all of the different opinions and news sources online. Instead I turn on my computer and begin looking at a chart, do a few minute pre market analysis, and begin trading.
Most people that we call day traders look at the market which strictly technical analysis. They are normally classified into three different types of traders; scalpers, intraday traders, and swing traders. All three types of professional day traders are looking to do the same thing, make a profit based on a different in value. The only difference between the three is the amount of time they are involved in positions.
Scalper Traders
Professional day traders that make money in the stock market with high frequency and lower profit are called scalpers. The goal is to take advantage of small inconsistencies in the market in addition to quick movements (changes in value in a matter of seconds or minutes).
A scalper may only be in a position for five or 10 seconds or possibly a minute. A scalper also tends to place a higher frequency of trades and as their profit is normally lower per trade. A higher frequency of positions (entering and exiting trades) is needed in order to make higher profits.
Intraday Traders
Professional day traders that make money in the stock market on a daily basis are considered intraday traders. An intraday trader never holds a position overnight hence the term “intra-day”. Intraday traders are typically in positions from within a few minutes to possibly a few hours. Intraday traders are typically not as high frequency as scalpers but due trade more often than swing traders.
Swing traders
Professional day traders that make their money swing trading involves a much longer period of time. A swing trader uses fundamental or technical analysis but stays in trades over a few days or even weeks. To compare the differences between a scalper or intraday trader, a swing trader may be in a position for a few days or weeks whereas an intraday trader never holds a position overnight.
This swing trader term infers that someone plays the swings in the stock market rather than the quicker movements.
There are also much longer term day traders called position traders which hold trades for several weeks or even months. We won’t highlight these kinds of traders on today’s post.
Conclusion
The whole basis of a professional trade day trader making money in the stock market involves accurately gauging the value of a stock. A stock of a company is in essence the price at which the general public says it’s worth.
Since the financial system has changed it has become more complex and there are more investment vehicles than just stocks to invest in. These can be stocks, futures, options, and even forex (currency fluctuations). The basic premise of making money in the stock market is simple, gauging the value of something and making a profit when your estimation was correct. (Check out the Day Trading Academy YouTube to see how we actually trade)
One of the most important things to understand is that a day trader can make money when the market goes up or down. If we are estimating the value on something we can also estimate that the value is going down and make a profit on it.
Day traders can actually make more money when the market is going down, when the economy is in a recession, or when there is a crisis. One of the reasons I love to make a living day trading is because we actually make more money and an economic downturn and a crisis than we do when things are going well. I do still hope the best for you!
So there you have it! A bit of novice background of how I make a living day trading & traveling around the world.
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