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Day trading is speculation in securities, specifically buying and selling financial instruments  within the same trading day.
Strictly, day trading is trading only within a day, such that all positions are closed before the market close for the trading day.

Trend following is an investment strategy based on the technical analysis of market prices, rather than on the fundamental strengths of the companies. In financial markets, traders and investors using a trend following strategy believe that prices tend to move upwards or downwards over time. They try to take advantage of these market trends by observing the current direction and using this to decide whether to buy or sell.

There are a number of different techniques, calculations and time-frames that may be used to determine the general direction of the market to generate a trade signal (forex signals), these including the current market price calculation, moving averages and channel breakouts.

Traders who employ this strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it. Due to the different techniques and time frames employed by trend followers to identify trends, trend followers as a group are not always correlated to one another.

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Trend following is used by commodity trading advisors (CTAs) as the predominant strategy of technical traders. Research done by Galen Burghardt has shown that between 2000-2009 there was a very high correlation (.97) between trend following CTAs and the broader CTA index.

Example

A trader would identify a security to trade (currencies/commodities/financials) and would come up with a preliminary strategy, such as:

  • Commodity: soybean oil
  • Trading approach: long and short alternately.
  • Entrance: When the 50 period simple moving average (SMA) crosses over the 100 period SMA, go long when the market opens. The crossover suggests that the trend has recently turned up.
  • Exit: Exit long and go short the next day when 100 period SMA crosses over 50 period SMA. The crossover suggests that the trend has turned down.
  • Stop loss: Set a stop loss based on maximum loss acceptable. For example if the recent, say 10 day, average true range is 0.5% of current market price, stop loss could be set at 4×0.5% = 2%. Conventional wisdom on stop losses set the risk per trade anywhere between 1%-5% of capital for a single trade; this risk varies from one trader to another.

The trader would then backtest the strategy, using actual data and would evaluate the strategy. The simulator would generate estimated number of trades, the fraction of winning/losing trades, average profit/loss, average holding time, maximum drawdown, and the overall profit/loss. The trader can then experiment and refine the strategy. Care must be taken, however, to avoid over-optimization.

It is possible that a majority of the trades may be unprofitable, but by “cutting the losses” and “letting profits run”, the overall strategy may be profitable. Trend trading is most effective for a market that is quiet (relative low volatility) and trending. For this reason, trend traders often focus on commodities, which show a stronger tendency to trend than on stocks, which are more likely to be mean reverting (which favors swing traders).

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In addition to quiet low volatility markets, where trend following strategies perform well, trend trading is also very effective in high volatile markets (market crash). Trend traders “short” the market and benefit from the downside market trend.

Check out now the next Day Trading Technique – Contrarian investing

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