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What are Some of the Best Day Trading Strategies?

Reducing stress in trading

What is Day Trading? 

Intraday trading refers to buying and selling stocks and ETFs on the same day during regular business hours and is most common in the foreign exchange and stock market. Day traders attempt to profit off of small, short term movements and there are many strategies to do so. This article will first set up good habits to have and keep in mind as you begin your journey as a trader and then move into various trading strategies. 

What are Key Things to Keep in Mind as an Intraday Trader?

Instrument Selection

For starters, your market selection plays a significant role in trading, and if you have a poor selection or don’t improve your selection as you learn and as the market changes your earning chances will remain weak. Select instruments that have good volumes and are not super volatile, this will allow you to buy and sell larger amounts without affecting the price. In a rising market look to buy bullish instruments, and in a falling or weak market look to sell bearish instruments.

Depth is also critical. Depth reveals how liquid an instrument is at various price levels. These levels can be both above or below the current market bid and offer. Since intraday success depends on daily price movements, select instruments that experience a price movement almost every day. Some experts suggest choosing instruments that move at least 3% per day on an average, while other experts prefer instruments that move by at least Rs.150 on an average day. Lastly, when selecting instruments, choose according to your risk profile and not based on the returns they generate. 

Risk Management and Over Trading

Risk plays a significant role in all trading, but especially in intraday trading. It’s not guaranteed that you will profit every day or on all your trades no matter which strategy you use. However, regardless of your strategy a stop loss is objective and should be applied to minimize your risk. 

Don’t over trade and rather than making 5-10 trades a day consider minimizing it to the right amount you can concentrate on properly. Risk assessments, position-sizing, starting small and trading modestly can be the key to success. Even if you are profitable for 6 months, you can always lose more than you profited from in previous months. The market is brutal and extremely volatile and you don’t want to bet what you cannot afford to lose.

Emotions

Controlling your emotions while trading and being practical is vital and that’s why implementing a stop loss comes highly recommended. Small loss can be covered in the next trade, but if it becomes more prominent, you can’t survive with low capital. 

Greed can turn ugly too and a steady balance between fear and greed should be kept. You don’t want to be in a position where you did not book a profit on time and therefore lost it. However if you do find yourself in that position do not average. Averaging your losing position or trade can eat up your entire capital. It calls for a worse exit because when you increase the quantity you increase the risk as well and you won’t be able to book the loss. Cut the loss, move forward and learn from it. 

What are Profitable Day Trading Strategies?

Scalping

Scalping is when you sell almost immediately after the trade becomes profitable and is geared towards profiting on minor changes in price. Those who use this strategy believe that small moves in price are easier to find than large ones. Scalping is performed intraday and uses larger position sizes for smaller price gains in small holding periods. The goal is to buy or sell at the asking price and then sell moments later at a slightly higher or lower price for a profit. In order to buy low, sell high, or buy high and sell higher or vise versa, scalping requires precision, timing and proper execution. Scalping is considered a high risk style of trading. 

Fading

The fade strategy is used to trade against the existing trend. Fading is deemed a high risk strategy and assumes that the market has already factored in all relevant information. Someone who fades buys on a dipping or falling price and sells when the price rallys or is rising. Traders usually fade major economic news releases and although a volatile strategy it has potential for significant short term gains. 

Breakouts

Breakouts are a common trading technique used by many traders. The strategy is simple, when analyzing a company’s chart you can see where the market might have a clear resistance price level. When the price breaches the resistance level it is considered a breakout. Many traders look for this type of strategy where the instrument is showing strength. Another common type of breakout is when an instrument reaches new highs. When using this strategy keep in mind the instruments support and resistance levels. The more frequent the price hits these points the more important they become. Furthermore when considering entry points, prices set close to and below a support level require a bullish position, while prices close and above resistance levels require a bearish position. 

Momentum

Using momentum would entail trading on news releases or finding strong trending moves supported by high volume. Some momentum traders buy on news releases and ride the trend until they see signs of reversal. Alternatively, you can fade the price drop. To ensure success while using this strategy make sure you are informed of all upcoming news and earnings announcements because just a few seconds can have a major impact on your profits. 

Reversal

Reversal trading is also known as trend trading, pull back trending and a mean reversion strategy. With this strategy you aim to trade against the trend. To do that you must be able to accurately identify possible pullbacks and predict their strengths. This requires extensive experience and is not recommended for beginners. 

Daily Pivots

Daily pivot is considered a special case of reverse trading. The basis of this strategy is profiting from the markets daily volatility by trying to buy the low and sell at the high of the day. 

Range

Another common strategy is known as range trading which occurs when a security trades between consistently high and low prices for a certain amount of time. To determine buy and sell decisions, range traders use resistance and support prices which represent the top and bottom of the range. When the instrument hits the resistant price, the security is sold and when it hits the support price the security is purchased. 

Trending Line

There are instruments that make clearly defined trends in their chart. After analyzing a chart you realize that every time a certain instrument hits a particular price level or trend line the instrument moves right back up. A trend line can be seen as a support line, many traders draw their own well defined trend lines or can also use moving averages as the trend line. Let’s say market XYZ has been trending for the past 3 months using the 20 simple moving average as the support line, all this means is that for the past 3 months every time the market hits the 20 simple moving average line it jumps right back up. Trend lines create a clear entrance and exit strategy for many traders.

Instruments in News

Some recommend avoiding instruments that are news or data-driven if you are a risk-averse trader because while they can give big movement, they can result in big losses as well. So stay cautious in this kind of movement. 

Conclusion

As you begin your journey as a trader, there are many good habits to keep in mind including selecting markets that have good volumes, are not super volatile and experience price movement everyday. Additionally, don’t over bet and only “eat as much as you can chew”. Controlling your emotions while trading and being practical is vital and that’s why implementing a stop-loss comes highly recommended. 

In terms of trading strategies some of the most common ones include scalping which is geared towards profiting off of minor changes in price. Another one is fading, which is a risky trading strategy that involves trading against the current trend. Breakouts are another popular trading strategy where traders look for a breakthrough in an instrument’s price and or resistance level. Lastly, using momentum would entail trading on news releases or finding strong trending moves supported by high volume.

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