How to Generate Day Trading Signals

 Day traders - the elite of market participants, who buy and sell stocks, options, commodities or currencies quickly throughout the market day, aiming for fast and regular profits. To these fast guns, reliable day trading signals are their business' lifeblood.

How does the successful day trader generate his or her signals? It probably won't come as a surprise that there are as many different approaches to generating these trading alerts as there are day traders. The same is true when looking at swing trading signals or other systems for entering and exiting positions, but many strategies which produce strong options trading signals, currency trading signals, or stock market signals will be completely useless to the day trader.

Most notably, fundamental analysis of companies and their stocks is almost entirely useless to the day trader. When it works at all, FA focuses on large issues (balance sheets, imbalances in macro-economic forces, or changes in consumer trends) which take months or years to play out. From that perspective, price action which takes place over the course of minutes or hours is nothing but noise and FA offers no insight into how to enter or exit a trade of such short duration.

Setting aside the glacial pace of fundamental forces, how can we identify upcoming moves in a stock which will provide real profit potential? There are three tried-and-true angles we can approach this from:

1) Structural scalping. In his book, "Day Trade Online", Christopher Farrell did a good job of talking about this approach. Here, the day trader is NOT trying to forecast stock movement; in fact, he spends a lot of time showing readers how to AVOID stocks that move a lot! In place of stock movement, this group of traders look for stocks with a healthy bid/ask spread and use that room to buy low and sell high. True, high and low are only separated by a few pennies, but when trading thousands of shares at a time, this can add up. Unfortunately, there have been a number of changes in the market place which make scalping much more difficult than when Farrell published his book: moving from eighths and sixteenths to pennies, and greater liquidity driving bid and ask closer together are two examples of how this has become more difficult. However, 'more difficult' and 'impossible' are not the same thing, so you may want to explore this avenue before rejecting it.

2) News shock. Almost every stock traded on the American bourses has a number of people following its every up and down move. People who follow and intimately understand the operations of the company that issued the stock. These people - mutual fund and hedge fund managers, pension fund managers, and amateur traders - have spent a significant amount of time getting a handle on exactly what kind of results to expect from that company and its management. And every day at least some of those people get a really BIG surprise. An unexpected law suit... better than hoped for results in a drug trial... one company buying another... every day, a handful of companies will report something that completely changes how the market looks at their shares.

The alert day trader, with the proper broker and equipment, can identify and take advantage of these systemic shocks. Upon finding a stock whose normally placid shares suddenly sky-rocket or go into a tail spin, the nimble day trader can jump on board the action and ride it until a new balance point is discovered by market activity. This kind of trading is very exciting - and as such, it's a bit dangerous: the market participant who uses this activity as a surrogate for a trip to Las Vegas will certainly have some fun, but will also almost as certainly lose a lot of capital. Don't trade this way unless you have a solid sense of your own motivation and that it does NOT include going for a thrill ride.

3) Technical Analysis. This will be the most familiar to the typical trader looking into day trading. All the usual favorites can be employed here: moving averages, MACD, RSI, ADX, etc. You name it - if it is an indicator which can be shown as a line or a bar on a chart, day traders will use it to issue trade alerts.

When day trading, technical analysis can be used in much the same way swing traders or longer term technical traders take advantage of it. The primary difference is in the amount of noise an individual stock can exhibit in a day - protective stops will get hit much more frequently. The successful technical day trader will need an overall plan which accounts for this and uses it to his/her advantage.

Each of these three approaches, and any variations which might be found, can produce good results. Developing a system [http://www.articlesbase.com/investing-articles/how-to-generate-day-trading-signals-in-a-swing-trading-context-3062430.html] which depends on reliable day trading signalsis crucial to any hoped for success - BUT, it is only a small part of what the day trader needs to profit regularly. A complete trading plan - a full blown business plan - is an absolute necessity if you are to make a living (or even just supplement your income) through day trading. Check out the Timorous Trader Blog [http://timoroustrader.com/blog1/2010/08/18/how-to-generate-day-trading-signals-in-a-swing-trading-context/] for more thoughts on day trading signals and making your own trading plan today!