Daytrading stocks requires discipline and strong nerves. Successful daytrading requires a plan and the ability to stick with it when it is working, and adjust it when it isn’t.
Some stocks trade in patterns that can be identified by looking at historical prices. A particular pattern relates to how stocks trade at the opening each day in relation to the prior day’s closing price.
On average over an extended time period, some stocks trade higher at the open than at the previous close, and lose value during the trading day. This is not a one day occurrence, but a general trend that yields profit over months.
A real world example can be found in the case of Yahoo stock. In two separate three-month periods, traders in Yahoo could have increased profit by following a simple strategy of buying just before the close and selling short after the open.
In the three-month period ending 11/27/07, Yahoo gained $2.05. During this period, the stock gained $7.80 from close to open, and lost $5.75 during the trading day. In the prior three months, Yahoo lost a total of $6.13. Only $0.52 of that loss happened from close to open, with $5.61 occurring during the trading day.
Over the six-month period, Yahoo stock lost a total of $4.08. By recognizing the pattern and making just two trades a day (buying at the close and shorting at the open), a trader could have gained $18.64.
Using intuition and gut feelings may produce short term daytrading gains, but for continued successful results, traders need to identify patterns and take advantage of them. The real-world pattern in the price movement in Yahoo stock is a great example of how a exploiting a pattern can produce above average results.