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| Some Definitions about Day-Trading / Part 2 |
What is "ECN" ?
ECN stands for electronic communications networks. ECN's are essentially computerized order matching systems. When an order to buy or sell
a stock is sent to an ECN, the order is usually executed at a lightning-fast speed (less than a second is possible). Before regular investors and day
traders could trade via ECN's, only institutions could do so through Instinet. This allowed institutions to buy and sell stocks outside of regular stock
market hours (when most earnings announcements took place), while the small investors could only sit and wait for the market to open. This unfair
scenario lasted until 1997, when an ECN by the name of Island finally opened its doors to the public. As a result of this and the creation of other
ECN's, the stock trading landscape was changed forever. The growth in trading volume via ECN's has been so dramatic, that Instinet and traditional
NASDAQ and NYSE order execution systems have lost a significant amount of business. Due to their speedy executions and transparency, ECN's
have always been day traders' favorite choice when executing a trade. Even though the forex market is more liquid than the stock market, ECN
systems for trading currencies have not reached the same level of popularity of stock ECN's.
ECN stands for electronic communications networks. ECN's are essentially computerized order matching systems. When an order to buy or sell
a stock is sent to an ECN, the order is usually executed at a lightning-fast speed (less than a second is possible). Before regular investors and day
traders could trade via ECN's, only institutions could do so through Instinet. This allowed institutions to buy and sell stocks outside of regular stock
market hours (when most earnings announcements took place), while the small investors could only sit and wait for the market to open. This unfair
scenario lasted until 1997, when an ECN by the name of Island finally opened its doors to the public. As a result of this and the creation of other
ECN's, the stock trading landscape was changed forever. The growth in trading volume via ECN's has been so dramatic, that Instinet and traditional
NASDAQ and NYSE order execution systems have lost a significant amount of business. Due to their speedy executions and transparency, ECN's
have always been day traders' favorite choice when executing a trade. Even though the forex market is more liquid than the stock market, ECN
systems for trading currencies have not reached the same level of popularity of stock ECN's.
What is a "STOP-LOSS" ?
A stop loss is the short name given to a stop loss order that is used to limit the potential loss in a trader's existing position (in a stock, currency,
future, etc.). Using stop losses while trading is ESSENTIAL. It is the only way that a day trader can limit his losses in the market and avoid potentially
catastrophic losses. Since no trader is infallible, a stop loss acts like an insurance policy when the UNEXPECTED occurs. Even though some
traders claim to trade using "mental" stop losses or "mental stops", it is important that beginning traders get used to placing a physical stop loss
order every time a new position is initiated. This will help day traders develop the discipline they need to succeed in day trading by desensitizing
them to the "pain" of taking a loss. "Where should a stop loss be placed ?" is a commonly asked question in day trading, and its answer depends
on the type of trading strategy used and the volatility of the market being traded.
A stop loss is the short name given to a stop loss order that is used to limit the potential loss in a trader's existing position (in a stock, currency,
future, etc.). Using stop losses while trading is ESSENTIAL. It is the only way that a day trader can limit his losses in the market and avoid potentially
catastrophic losses. Since no trader is infallible, a stop loss acts like an insurance policy when the UNEXPECTED occurs. Even though some
traders claim to trade using "mental" stop losses or "mental stops", it is important that beginning traders get used to placing a physical stop loss
order every time a new position is initiated. This will help day traders develop the discipline they need to succeed in day trading by desensitizing
them to the "pain" of taking a loss. "Where should a stop loss be placed ?" is a commonly asked question in day trading, and its answer depends
on the type of trading strategy used and the volatility of the market being traded.
What means "Support and Resistance" ?
Support and resistance are probably the most important ingredients in technical analysis. Support is a price level at which a financial instrument
(stock, bond, currency, future, etc.) will likely stop falling and resistance is a level at which the price will likely stop rising. Support and resistance are
not exact. More than specific prices on a chart, support and resistance can be considered price bands or ranges where the price will probably stop
falling or rising respectively. Nevertheless, due to their widespread use throughout the history of all financial markets, support and resistance
frequently work. As a result, many day traders use support and resistance exclusively to trade. Support and resistance levels can apply to a short
period of time in a chart (like days) or to a much longer time frame (months, or years). As a result, not all support or resistance levels are as strong
and a day trader must take this into consideration when trading near support or resistance areas.
Support and resistance are probably the most important ingredients in technical analysis. Support is a price level at which a financial instrument
(stock, bond, currency, future, etc.) will likely stop falling and resistance is a level at which the price will likely stop rising. Support and resistance are
not exact. More than specific prices on a chart, support and resistance can be considered price bands or ranges where the price will probably stop
falling or rising respectively. Nevertheless, due to their widespread use throughout the history of all financial markets, support and resistance
frequently work. As a result, many day traders use support and resistance exclusively to trade. Support and resistance levels can apply to a short
period of time in a chart (like days) or to a much longer time frame (months, or years). As a result, not all support or resistance levels are as strong
and a day trader must take this into consideration when trading near support or resistance areas.
What is "Technical Analyse" ?
Technical analysis is the study the past price behavior of a financial instrument in an attempt to determine what the future behavior might be.
Technical analysis involves the use of (mathematical) indicators and interpretation of price patterns on charts. In day trading, technical analysis is of
utmost importance. Day traders do not care about fundamental factors that can affect the price of what they are trading. They simply react to price
changes on their charts based on their technical analysis studies. The principles of technical analysis apply to long-term as well as short-term
charts. A good day trading platform to trade currencies, stocks, or futures should have technical analysis built in.
Technical analysis is the study the past price behavior of a financial instrument in an attempt to determine what the future behavior might be.
Technical analysis involves the use of (mathematical) indicators and interpretation of price patterns on charts. In day trading, technical analysis is of
utmost importance. Day traders do not care about fundamental factors that can affect the price of what they are trading. They simply react to price
changes on their charts based on their technical analysis studies. The principles of technical analysis apply to long-term as well as short-term
charts. A good day trading platform to trade currencies, stocks, or futures should have technical analysis built in.
As opposed to technical analysis, fundamental analysis does not involved the study of charts, price patterns, or technical indicators.
Fundamental analysis tries to discover what "should" happen to the price of a stock, currency, future, etc. by studying financial conditions,
economics, political environments, etc. Technical analysis, on the other hand, assumes that all these factors are already reflected in the chart of the
financial instrument in question, so a study of the chart suffices. Fundamental analysis is a lot more difficult to perform than technical analysis and
involves knowledge of economics, politics, accounting, etc. Although there are eternal arguments as to which method of analysis (technical or
fundamental) should be used to make a buy or sell decision, both methods are useful. Fundamental analysis is better for longer-term investing by
helping the investor better determine an investment's possible "intrinsic" or "real" value, while technical analysis can be better used for day trading
and short-term trading. Despite this fact, many investors and traders use a combination of both methods in implementing their financial strategies.
Fundamental analysis tries to discover what "should" happen to the price of a stock, currency, future, etc. by studying financial conditions,
economics, political environments, etc. Technical analysis, on the other hand, assumes that all these factors are already reflected in the chart of the
financial instrument in question, so a study of the chart suffices. Fundamental analysis is a lot more difficult to perform than technical analysis and
involves knowledge of economics, politics, accounting, etc. Although there are eternal arguments as to which method of analysis (technical or
fundamental) should be used to make a buy or sell decision, both methods are useful. Fundamental analysis is better for longer-term investing by
helping the investor better determine an investment's possible "intrinsic" or "real" value, while technical analysis can be better used for day trading
and short-term trading. Despite this fact, many investors and traders use a combination of both methods in implementing their financial strategies.
What is "Nasdaq Level II" ?
NASDAQ Level II provides a list of all buyers and sellers for a given stock. Buyers (Bid's) are arranged by price from the highest to the lowest price
(best to worst) and sellers (Ask's) are arranged from lowest to highest price (best to worst). NASDAQ Level II allows a stock day trader to determine
the depth (size) of the market and thus, better control in executing his order. In order to use a level II system correctly, a trader must understand how
each participating system and market maker in the level II screen operates. Without this knowledge, it will be difficult for a trader to know which
participant to send the order to for the best execution. Although not simple to use, a direct access trading system that incorporates NASDAQ Level II
is essential for day trading or actively trading stocks.
NASDAQ Level II provides a list of all buyers and sellers for a given stock. Buyers (Bid's) are arranged by price from the highest to the lowest price
(best to worst) and sellers (Ask's) are arranged from lowest to highest price (best to worst). NASDAQ Level II allows a stock day trader to determine
the depth (size) of the market and thus, better control in executing his order. In order to use a level II system correctly, a trader must understand how
each participating system and market maker in the level II screen operates. Without this knowledge, it will be difficult for a trader to know which
participant to send the order to for the best execution. Although not simple to use, a direct access trading system that incorporates NASDAQ Level II
is essential for day trading or actively trading stocks.
What means "Direct Access Trading" ?
Direct access trading (DAT) means trading with a system that allows the order to buy or sell to be sent directly to the market. The term "direct
access trading" is usually used when referring to a NASDAQ Level II trading system like RealTick. With a direct access stock trading system, a
trader needs to select where to route his order. This could be to an exchange, a computerized system known as an ECN (electronic
communications network), a market maker, etc. The stock trader could achieve direct order execution through a direct access broker. Direct access
brokers can execute orders much faster than online brokers and that is why they are essential for traders with active day trading or short-term
trading styles. Even though advancements in technology in the late ninetees brought down the commissions of direct access brokers to a level that
is comparable to that of online brokers. Currency trading platforms are typically free to use and have execution speeds comparable to direct access
stock trading systems.
Direct access trading (DAT) means trading with a system that allows the order to buy or sell to be sent directly to the market. The term "direct
access trading" is usually used when referring to a NASDAQ Level II trading system like RealTick. With a direct access stock trading system, a
trader needs to select where to route his order. This could be to an exchange, a computerized system known as an ECN (electronic
communications network), a market maker, etc. The stock trader could achieve direct order execution through a direct access broker. Direct access
brokers can execute orders much faster than online brokers and that is why they are essential for traders with active day trading or short-term
trading styles. Even though advancements in technology in the late ninetees brought down the commissions of direct access brokers to a level that
is comparable to that of online brokers. Currency trading platforms are typically free to use and have execution speeds comparable to direct access
stock trading systems.
| Go to page 3 : Click here |
| Trader : Herman Bogaerts -- Tradersname : Freedom E-Mail : Herman.Bogaerts@Wanadoo.fr OR Admin@DayTrader-Generation.com |
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