Tuesday, August 14, 2012

The mindset of the day trader

Before you make your first trade, you must understand the nature of the markets and the special role of the day trader. Day traders server one and only one function: They are middle men in the buying and selling of stocks. As middlemen, day traders are not worried about the same things as investors. How is the market doing? What will it do over the next few days, weeks, and months? Day traders couldn't care less about any of these issues. Because they are not concerned about the next six months, they are concerned about the next 6 minutes.

Think of how successful middlemen operate. It doesn't matter what they are buying and selling. Middlemen should not care if the goods they are buying are expensive or cheap. Only one thing matters: buying and then selling higher. As long as middlemen can do this, they will make money. The same is true of day traders.

So what are day traders looking for? They are looking at one thing: supply and demand. In the short term, the stock market is very inefficient. Second to second, minute to minute, it is a constant state of flux. When the stock market moves in any one direction, it is to rectify an imbalance between buyers and sellers. For every buyer, there is a seller. When buyers and sellers agree, the stock trades. When they don't, the market readjusts its prices until they do agree. It's that simple. This is what I was talking about when I mentioned that the market followed the mass in the "Doing some day trading" post on my blog.

Within that framework, day traders look to make tiny profits on these microscopic supply and demand imbalances. How big are these profits? As little as 5 cents per share. How do day traders do this? By being temporary buyers when the market needs buyers, and temporary sellers when the market needs sellers. Remember, day traders are nothing more than middlemen.

Take my money,


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