Stock prices go up and down. It would seem that it is simple to make a fast profit from day trading. You need to buy stocks after a price drop and sell them after some time with a profit. Unfortunately, this is a minus sum game. Bad stock selection can easily kill you. The faster you trade, the faster your losses become large. Every transaction has a cost: bid-ask spread and brokerage commissions. Very tiny profits will disappear in a long run when you take into account these transaction costs.
Nevertheless, day traders still exist and many of them are very rich people. How did they do that? If you are a professional and trading on the floor of the exchange you can look for micro trends and catch the leaving train right on time. Big capital and zero commissions allow you to make micro profits constantly.
These notes are for nonprofessionals. Can you make profits by short term trading? Yes, you can. You should be very selective when buying stocks for trading and try to anticipate the stock price moves before professionals. Is this possible? The answer is yes. Let us show how to do that and what is the risk of short term trading.
We will consider trading stocks. We suppose that you are using on-line discount brokers and you are paying small commissions (10 dollars or less). We also suppose that you are able to watch stock quotes a few times a day and you are able to buy or sell stocks during the trading day.
These notes are not about day trading. Our time frame is 2 - 5 days. Computer analysis and our own experience has shown that this period of stock holding is long enough to make profits with reasonable risk level.