DTT Buzz

Successful day trading is about more than simply spotting entry and exit prices for trades. It is also about controlling risk. Yes, it is great to make fast profits--we love doing that. Unfortunately there isn't always a market environment that allows for big, fast profits on day trading. In fact, more often than not you will find yourself in a market that has a fairly undefined trend--consolidating in a sideways trend channel.

In these situations, it is absolutely critical to control your risk, because breakouts from a consolidation pattern WILL occur at some point, and if you are too heavy in the wrong direction it can destroy the profits that you have built up for the entire week.

One of the best methods of controlling risk and enhancing profitability in consolidating markets is through trading of pairs. By this, we mean finding two stocks in the same industry that are behaving with opposite trend patterns that day. For example, you can see from the chart below that AMZN and GOOG have had a very different trading day today:

As you can see from the chart, around 10:30 AM both GOOG and AMZN were down on the day, but AMZN was outperforming considerably. With a pairs day trade, you would BUY AMZN (because it is showing relative strength) and short sell GOOG (because it is relatively weak). This gives you an overall market-neutral stance (and neutral on the internet sector as well) for your online stock trading, but positions in individual stocks that are showing trends in your favor.

By being both long and short at the same time, your risk on a major breakout of the market in one direction or the other is almost zero--it's very likely that the profits from one position will more than make up for the losses incurred on the other position.

On the other hand, if the markets continue sideways (as they did today), it is likely that you will actually profit on BOTH positions, because the trendlines and relative strength dictate that AMZN is likely to get stronger through the day and GOOG weaker through the day if all external factors remain quiet.

This day trading strategy can significantly reduce risk AND increase profits, and is recommended for consolidating or sideways trending markets.

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