Best day trading strategies and techniques
What is a day trading strategy?
Day trading is a trading style where traders buy and sell financial instruments within the same trading day. They attempt to profit from short-term price movements in various markets from stocks, and currencies to commodities and fixed income.
A trading strategy is a set of rules that helps traders make decisions - when to enter and exit trades and how to manage them. While strategies can differ greatly in complexity, they usually consist at least of an entry/exit signal and some trade management and risk management rules. While some traders rely purely on technical analysis, others may use fundamental analysis or mix both of them together.
Various trading strategies can be applied when day trading and the choice of strategy will depend on several factors, from the trader´s risk tolerance, experience, and personal preferences.
Best day trading strategies
1. Breakout trading
Breakout trading is a popular strategy that can be applied to a variety of timeframes - including day trading.
It involves identifying key support and resistance levels and taking advantage of the momentum once a specific level is breached.
Traders will be looking for a decisive move above resistance or below support. These can come in the form of classic support and resistance lines or patterns such as triangles, wedges, channels, or even Fibonacci levels and pivot points.
Once a breakout occurs, traders will enter a position in the direction of the breakout. For example, if the price of an asset breaks above a key resistance level, traders will go long. If the price of an asset breaks below a key support level, traders will go short.
While some traders buy/sell as soon as the breakout occurs, others prefer to wait for a confirmation signal to avoid a false breakout.
2. Range trading
Range trading is a strategy that attempts to profit from price movements within a defined trading range, i.e., the price of the instrument is moving back and forth between well-established support and resistance levels.
Range traders must first identify the range by determining the key support and resistance levels. They will then be looking to buy when the price nears the key support level (lower boundary) and to sell when the price nears the key resistance level (upper boundary).
Traders will typically set the stop loss just below the lower boundary or above the upper boundary.
Technical indicators can be used for additional validation - for example, buying only when the RSI is signalling oversold conditions or selling only when the RSI is signalling overbought conditions.
3. News trading
News trading or event trading is a strategy with which traders aim to profit from price movements generated in response to important news events or economic data releases. News or economic data can trigger significant volatility in markets and news traders try to profit from those rapid price movements.
News traders will first identify the key events that could significantly move the markets. This typically includes central bank meetings and key economic data such as jobs reports, inflation data, and GDP numbers.
Traders must also be familiar with the historical data and the forecasts for the upcoming release. This will help them understand if the actual release is below or above expectations.
News traders will also need a plan that defines the entry/exit and risk management rules. Markets can be extremely volatile during news releases, so having a stop-loss order in place to limit any potential losses is crucial. News trading will sometimes also require intuition and quick decision-making as a trading opportunity could vanish within a minute.
News trading can be challenging due to the high volatility and the risk of slippage when entering/exiting trades. Markets might also not always react in the way traders would expect them to do - for example, a poor employment report out of the United States could logically be seen as bad news for the domestic stock market. However, if investors believe that the worse-than-expected employment data might prevent the US central bank from raising interest rates further, they might react positively to it and push stocks higher.
4. Scalping
Scalping is a popular day trading strategy in which traders try to profit from tiny price movements over a truly brief period of time. Trades might be held for as little as seconds, and traders might try to catch as little as 1-2 pips in profits.
Scalpers typically utilize short timeframe charts, such as one-minute or five-minute charts. As they try to profit from small price movements, they generally open many trades per day - some scalpers may open/close more than one hundred trades a day.
Key requirements for scalpers are fast execution, a reliable trading platform, and minimal slippage. Even the smallest slippage can have a significant impact on the profit/loss of a scalper. Scalpers also tend to focus on markets that are highly liquid, as these have tighter spreads and are less likely to see sudden price gaps.
5. Algo trading
Algo trading makes use of algorithms to identify trading opportunities. These algorithms could potentially execute hundreds or even thousands of trades per day and are particularly popular for day trading due to their speed.
Traders skilled in coding might develop their own strategy, while others might decide to buy it from a provider. The benefit of an algo is that it can execute trades faster than humans and can follow rules consistently without emotions or biases.
However, algos can fail and if you are not the person who built it, you will end up relying on others to optimize it, which could take time and cost you money.
How to choose the best day trading strategy
Choosing the best day trading strategy will depend on several factors.
First of all, you need to assess your risk tolerance. If you are risk averse, you can find a trading strategy that is more conservative. On the other hand, if you seek higher risk, you can find strategies that are more aggressive.
Secondly, you need to take into consideration your personal preferences. Will you trade during a particular trading session? Or only during news events? Deciding how your trading day will look will help you find the right strategy. Not every trader will have the time to dedicate 8-10 hours per day to trading, so they may instead focus on a particular session or trade only specific events (news trading).
It is also important to take evaluate your experience and what trading style suits you best. For example, if you struggle under intense pressure and make decisions within seconds, news trading may not be suitable for you. There are day trading strategies that do not generate a large number of trading signals, and they can be applied to instruments that are less volatile, giving traders more time to react to market movements. Some traders will seek high volatility instead and are able to manage their emotions well.
Backtesting your strategy and practicing on a demo account is a safe way to get a feeling for your preferred trading style and to test various day trading strategies without risking real money.
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Images are for illustrative purposes only. The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your personal objectives, financial situation, or needs into account. Readers should seek their own advice. Past performance is not indicative of future results, and any forecasts about future performance may not occur.
FAQ
What is the best day trading strategy?
There is no "best" strategy as it depends on factors such as your risk tolerance, trading style and personal preferences.
How do I know which day trading strategy is right for me?
Determine your trading experience, risk tolerance, trading goals, and preferences. Backtest different strategies and practice using a demo account.
Is day trading more profitable than other forms of trading or investing?
Day trading can be profitable but can also be riskier and time-consuming. Day trading is not inherently more profitable than other trading styles such as swing and/or position trading. Eventually, it all depends on the trader.
Do I need a lot of capital to start day trading?
Leverage enables traders to start trading with a small amount of capital. However, the higher the leverage, the greater the risk.
What is the difference between day trading and swing trading?
Day trading involves buying and selling assets within the same trading day, while swing trading involves holding positions for several days to weeks.
Should I use technical analysis or fundamental analysis in day trading?
While technical analysis generally plays a bigger role in day trading, traders might also use fundamental analysis or trade specific news events.
How do I manage risk in day trading?
Risk management is always crucial, regardless of the trading style. Have clear rules and predefined entry/exit levels in place and avoid overtrading.
Is day trading suitable for beginners?
The fast pace of day trading might not make it suitable for all beginners. Beginners can use demo accounts to practice if this trading style suits them.
Do I need expensive trading software or tools to day trade successfully?
Expensive tools are not necessary. Many day traders rely purely on charts, which are provided for free by their brokers. Traders trading news events or using fundamental analysis might use some premium products or subscriptions.
What should I do if my chosen day trading strategy is not working?
If your trading strategy is not functioning as it should, take some time off from trading and try to identify where things went wrong. Once you made the necessary adjustments, you can spend some time evaluating it in a demo environment before returning to live trading.
