Momentum

A share price’s momentum is found by taking the difference between the price on day X and the price 12 days prior. It gives an indication of the amount by which the price has changed over 12 days and thus the underlying rate of change in the price. High momentum (positive or negative) illustrates high underlying power behind a price move (up or down). If a share’s price is trending up while its momentum is falling off (a negative divergence), that can be seen as an indication of an impending reversal. The same is true for a share price that is falling off while its momentum is trending upwards – a positive divergence or convergence.

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Source: IT Finance

And that’s it! Of course there are many more tools in the technical analyst’s box – but you should realise by now that if you just use the above simple indicators with discipline it is possible to predict the future with enough consistency to profit handsomely from day trading. It’s not rocket science, and it may even be more lucrative. However, it would be irresponsible to end things without a word or two on the importance of capital preservation. No one has ever called 100% of trades correctly, professionals included.

Capital Preservation

When placing a trade it’s natural to focus on the profits that could be made. It’s optimism. It’s human nature. However, it’s also prudent to consider what you could lose on the trade before deciding whether it is worthwhile. The best day traders (or any kind of trader, in fact) always consider the worst-case scenario for each trade, i.e. how far the price could move against them. While we tend to be quick to set automatic exit points (limits) to close a trade in a profit, it’s equally important for traders to consider doing so at the other end (stop losses) to limit the
possible damage from a bad trade, while if a profitable trade wants to become more profitable, why not let it? Trailing stop losses can be used to lock in rising profits.

Day trading is all about getting in and getting out within the day. Getting hurt by risking too much and taking too many costly losses along the way is best avoided. To find out how to assess your trade ideas, see our educational piece on Risk vs Reward.

Trading is as much about capital preservation as it is about capital accumulation – Trade Smart!