Although it clearly has its pitfalls and inexperience can cost you in certain circumstances, day trading can prove to be a profitable strategy, provided you are aware of the risks and employ some strategies that can help you to prevent the dreaded slippage.
Although it clearly has its pitfalls and inexperience can cost you in certain circumstances, day trading can prove to be a profitable strategy, provided you are aware of the risks and employ some strategies that can help you to prevent the dreaded slippage.
Taking a look at Tim Sykes review will give you a very useful insight into how others are faring and also demonstrate how some successful traders are earning a return from strategies like day trading.
Here is a look at some of the fundamentals so that you can hit the ground running with your day trading activities.
Volatility can cause slippage
Understanding what slippage is and how it can occur is one of the fundamental lessons that you need to get a handle on.
Slippage is where you have placed a trade with a specified stop loss order, but the price falls below the specified figure before the stop order can be executed. You can witness slippage in both stock markets and foreign exchange markets, and the principal culprit for this scenario, is volatility.
If the price happens to move in either direction at a rapid rate, it is possible that there will not be a buyer or a seller at your specified price, resulting in your trade suffering from an element of slippage when you try to close your position.
Limiting the damage
It is to be expected that there will be a percentage difference between the buy and sell prices being offered, as this spread is where brokers make their commission out of you, but slippage is where this difference becomes more exaggerated.
Your commission and exchange fees are pretty much fixed in general terms and there are no hidden surprises there, but your slippage is anything but fixed, and could vary quite dramatically in certain circumstances.
If you want to exercise a greater level of control over the effects of slippage, there are several key things that you can do to limit the damage.
No intraday trader should allow themselves to have any open positions at the end of the trading day, as this leaves you exposed to the possibility of the market gap widening by the time it re-opens, resulting in some unhealthy slippage on your trade.
Another good tactic to employ if you want to reduce the prospect of slippage, is to avoid having an open position on a stock where overseas markets could create a slippage scenario. For example, a major announcement in Europe could conceivably impact an American stock position you have, leaving you potentially exposed before you are able to take evasive action
Using a limit order
If you enter your trade with a “limit” order stipulation, this is a method of trading that dictates the need for your chosen price to be matched by the market, so that your order can only be filled at your specified limit price.
There is a danger that if the market is moving rapidly, you might just miss this target and there will be no trade struck, but if you do get your order filled, it will be without any slippage.
Using a limit order strategy will mean that you miss some trades, but that may not be such a bad thing and at least you won’t be cursing the dreaded slippage.
Caitlin Morrison entered the world of day trading a couple of years back. Keen to dispel the myth that trading is only for men in suits, Cat writes for lifestyle and personal finance blogs.
Day Trading Smarts: Strategic Steps to Prevent the Dreaded Slippage first appeared on Mompreneur Media
