When judging trade entry points for day trades the key variables to consider are: price and time.
Price is paramount. If you made a profit, then you picked a good entry point. It might not have been the optimal price level; you might not have built up your position to the target size and your trade management might leave a lot to be desired. But selecting an entry point is challenging so any profitable trading deserves credit. Post-trade analysis can help you learn and improve.
Time provides an extra dimension to your day trading activity. As well as considering price levels you need to consider the time of execution and the market conditions you will be trading in. The first 30 minutes or so after a market opens are associated with significant trading volumes as market participants take on positions. Trading at the open means investors have the rest of the trading day for strategies (such as OBR) to come to fruition and profits to be made. The run up to market close at the end of the trading day does see a similar spike in volumes but at that time of day the majority of people will be trying to close out positions rather than put on new ones.
Role of trading strategies
Different Trading Strategies generate their own ‘signals’ to buy and sell. The signals are specific to each strategy so one following principles of ‘Momentum Trading’ will for example generate different signals to a strategy based on ‘Scalping’. Post-trade analysis will help you quantify the degree of success. Question the entry points of both profitable and loss-making trades.
One of the risks associated with putting a trade on is ‘getting stuck’ in a position and having to trade out of it at a loss.
Liquidity risk is a major concern. Illiquid markets are associated with large bid/offer spreads. It can be daunting to execute a trade and see your P&L immediately in the red solely on the basis of the spread.
Does a trade have enough time to reach its price targets prior to market close? Might trade volumes and therefore price volatility drop away as the day goes on?
This occurs when an order to execute is sent at one price but by the time the trade is completed the price has moved away from what was originally reported.
Levels of market activity can drop off significantly at certain times of the year. Summer and national holidays are characterized by low trading volumes and ‘sideways markets’ which can be challenging for Day Traders.
The release of key economic data reports can impact the markets and ‘override’ the initial signals that initiated your trade. More importantly, announcements are often characterized by market prices that whip-saw momentarily and trigger stop losses even though moments later prices stabilize at the same levels they were at prior to the news release.
When putting on a day trade you need to be expecting, not hoping, that you can enter and exit the trade at price levels that make a profit. This involves getting the direction of trade right but also being aware of the obstacles that might get in the way of carrying out your strategy.