Day trading can certainly be lucrative, but the field is full of traps that can cause you to lose money. Thus, before you begin trading stocks, it’s important to know how to recognize such dangers.
Two Type Of Traps
You can divide these traps into two basic categories: bull traps and bear traps. The terms “bull” and “bear,” of course, are essential to day trading. A bull market is one in which stock prices are generally rising or predicted to rise. A bear market, by contrast, is characterized by stocks with falling prices.
With those definitions in mind, let’s examine the two types of day trading traps. A bull trap involves the falling scenario: The price of a particular stock is trending downward but suddenly begins to rise. However, that upward tick is destined to be extremely short-lived because so many people immediately purchase that stock. As a result, the stock’s buyers soon outnumber its sellers, a situation that causes its price to go into a tailspin.
Therefore, to find a stock price that’s truly on the upswing, look for a stock that begins the day among the bottom one-fifth of all stocks in terms of price and ends the day among the top one-fifth. If a stock price manages to keep climbing throughout the day, the trend is most likely solid and reliable.
Now, a bear trap is basically the reverse of a bull trap. The price of a stock begins to drop, and many traders who bought that stock immediately start selling it — they want to unload it before they lose too much money. Because of this mass selling, that stock’s pool of sellers far exceeds its pool of buyers, and the price begins to rise.
There’s one basic lesson about trading stocks that you can draw from this examination of marketplace traps, and that’s the importance of avoiding rushed purchases and sales. Instead, keep a cool head. And always try to answer this question: Does a bump or a dip in the price of a stock represent a sustainable trend, or is it merely an abrupt and temporary incident?