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Strategies

4 Day Trading Strategies That Any Trader Should Master

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Trading without having a clear strategy in mind is like going hunting without a rifle. Day trading, momentum, oscillators, and moving averages may seem daunting, especially when you’re just starting out. In this article, we reveal 4 day trading strategies any trader should know in order to succeed.

An effective trading strategy involves a lot of work, which comes down to thorough technical analysis, chart reading and interpretation, but above all, understanding price movements. So, what are the key ingredients of a successful day trading strategy?

The Essentials

First and foremost, every trading strategy should rely on the following essential elements:

  • Money management – Before you jump on the charts, think carefully and decide how much you would like to invest. Remember trading can be rewarding, but it also involves a high degree of risk. It’s important to determine how much you can afford to lose without impacting your lifestyle.
  • Time management – Don’t expect to make a fortune in one hour of trading. Trading requires time to study the markets, identify the sentiment and follow the trend (rather than trying to beat it), and find the best opportunities to enter the markets. And day trading is no exception.
  • Start with a small investment – While you’re still trying to figure out what moves the markets and what doesn’t, it’s best to stick to 2-3 asset classes only until you become more confident. Also, trading on your demo account may be a good idea in the beginning, and a good way to familiarise yourself with the platform.
  • Control your emotions – The excitement when you see the price alerts light up your screen cannot be compared to anything but think… and think carefully. If you invest all your capital in one go on a BTCEUR trade, you SOLD and Bitcoin tumbled 500 pips overnight, then what? You lose all your capital because you didn’t think things through. No, this is not the right approach. The right approach is to keep your emotions in check. Panic buying or selling can only hurt. Just stick to your strategy and don’t let your nerves, fear, or greed determine your next move.
  • Timing – The market is particularly volatile when it opens, and even more around high-impact economic events like the ECB (European Central Bank) monetary policy statements or the non-farm payrolls (NFP) report release. While experienced day traders may be able to quickly identify the trend and take profit, in the beginning, it’s best to take your time and wait for the trend to confirm rather than jump on the charts in the first 30 minutes of trading.

Key Elements of Every Day Trading Strategy

Whether you are a savvy day trader or just at the beginning of your journey, you will have to consider these key elements that any trading strategy is concentrated around:

  • Liquidity – This is vital, as it refers to the ease with which an asset is redeemed (or converted) into cash. Why is liquidity important in day trading? It is important because the more rapidly an asset “changes hands”, or in other words, the quicker it is bought and sold, the more liquid it is, and the easier it is for you to identify the best moment to enter or exit the market and take profit, if you choose to trade it.
  • Volatility – The more the price of an asset moves within a given period of time, the more volatile it is. Volatility is good for trading, as it gives you an indication of your potential profit or loss range. Cryptocurrencies, for example, are well known for their spectacular price fluctuations.
  • Volume – This measures the “popularity” of an asset which shows you exactly how many times the asset has been traded within a specific period of time. Day traders usually refer to it as “average daily trading volume”.

Popular Day Trading Strategies

Now that you know what day trading is about, let’s get down to strategies and how you can use them.

  1. The Breakout Strategy

As its name suggests, the breakout strategy focuses on identifying the moment when the price breaks or surpasses a specific level within a set period of time on higher volume. Usually, breakout traders open a long position after the price rises above the resistance level. You can also use the breakout strategy when you’re in a downtrend, in which case, you enter with a short position when the price breaks below the support level.

However, you need to bear in mind that when the price trades above or below the specified cap (e.g.: support or resistance), volatility rises, and prices will move in the direction of the breakout. Just pay attention to the resistance and support levels.

break above the resistance chart
  • Entry Points

These price levels will also determine your entry points in each case.  For example, when the price is set to close above resistance, your entry point should be bullish, meaning that you should open a long position. By comparison, when the price is set to close below support, you should open a short position or a bearish entry point.

  • Exit Points. Take Profit

So, now you know when to enter, but what about your exits? To plan your exits, you need to pay attention to the asset’s recent performance. If you use chart patterns, even better. Triangles, head and shoulders, flags can help you determine when it’s best to close your trade. You can then calculate the average recent price swings (significant movements over a short period of time) to create a target. For example, if the average price swing has been in the range of 3 points over the last price swings, this would be a reasonable target to set. Once the price reaches this level, you can enjoy your success.

  • Breakout vs. Fakeout

Fakeouts are a pain for day traders. Generally, they occur when prices open beyond a support or resistance level, but by the end of the trading day, they move back towards the previous trading range. To establish whether you are dealing with a true breakout, you need to wait for trend confirmation.

breakout vs fakeout chart
  • Setting Your Stop Loss

Usually, after a breakout former resistance levels act as current support and vice versa. This is vital as it helps you determine when the price has moved in the opposite direction of what you thought and where to place your protective Stop Loss. To do that use the old support and resistance levels as reference.

setting your stop loss chart

2. Momentum

Momentum is perhaps the most illustrative strategy when it comes to day trading. Among day traders’ favourite, this strategy involves buying securities when their price is rising and selling them when it has peaked. In a way, it illustrates the golden rule of trading “buy low, sell high”. To make day trading strategy to work for you, you need to find stocks that move around 20-30% on the day, or even more. The good news is, with so much going on in the markets right now, it’s impossible not to find at least 3 agile stocks, of which Tesla could be one (if not the leader of the group). However, to help you with your choice, here is what you could consider as a best practice:

  • Use stock scanners – These are software applications that search the markets for stocks based on the criteria specified by the user. Once the data is input, the stock scanner will constantly monitor the performance of your selected stocks and provide you with real-time data to help you make informed decisions on the go. Some of the criteria you could use to “scan” the markets include:
  1. Stock float. Every stock has a number of outstanding shares available for trading less the number of shares held by company insiders and employees. Generally, day traders focus on stocks with lower float (due to reduced liquidity), as these stocks are likely to move the most.
  2. IPOs. Needless to say that keeping an eye out for companies that are due to go public offers oodles of opportunities. Saudi Aramco  broke all records when it IPO-ed last year.
  3. Company earnings and corporate actions are invaluable sources of information and inspiration for day traders, as they serve as an indication of how share price could move in the near to a longer term.
  • Read the news – Staying up-to-date with corporate and industry news is crucial, as it will help you see the bigger picture, taking into account micro and macroeconomic factors.

3. Post-Gap Trading

Just like momentum, this day trading strategy is widely used for stocks and stock-based assets. As the name suggests, a price gap is required in order to apply the trading rules. Here is how it works:

  • The asset starts trading with a gap. Then, in the next 30-60 minutes, the price will try to stabilise from the jittery caused by the market opening.
  • Observe the price movements within this time frame and plan your first trade of the day accordingly. For example, if your selected stock starts trading with a bearish gap and within the next 60 minutes, the price fulfills the gap by moving upwards, then you have sufficient reasons to believe it will continue to rise. By comparison, if it moves downwards, then it will be safe to count on a bearish trend. If the gap is bullish, the opposite rule applies.
  • As a rule with this day trading strategy, you will constantly be using price action rules to determine exit points. Trendlines, candlestick patterns, and chart patterns are among the most commonly used. Volume will help you understand when the morning jittery has ended.
  • To protect your capital while trading the post-gap strategy, a safe place for your Stop Loss will be the opposite side of the gap. For example, if you have a bullish gap, you will place a Stop Loss below the lower point of the gap. By comparison, if you place a bearish trade, you should set your Stop Loss above the highest point of the gap.
gap chart

4. Ichimoku Kinko Hyo

Also known in the trading community as the Ichimoku Cloud, Ichimoku Kinko Hyo is, in essence, a smart price action indicator. Used particularly by advanced traders, Ichimoku is a great tool that can help you plan your next trade with confidence (once you’ve grasped the essentials of day trading). What sets it apart from other indicators is that it plots on the chart on top of the price action and it consists of five lines. Two of them form the cloud or the Senkou Span, while the third and blue line which helps you determine the trend is known as the Kijun line. The Ichimoku strategy can be used with any asset class, since it is trend-related. Here is how it works:

  • Open a position whenever the price moves out of the cloud. This indicates that the trend is likely to break the usual flat price activity. As a rule, day traders using Ichimoku hold the position until the price interrupts the blue Kijun Sen line or until the end of the trading day.
  • To cushion against any potential losses, use a trailing Stop Loss, as you expect a trend to take shape and the Kijun Sen line to follow the price. In this case, it’s best to set the Stop Loss at a relative distance so that it is always at the other side of the Kijun Sen line. If the price breaks the Kijun Sen line, close the trade. Don’t wait for the Stop Loss to take effect. The main idea of using a Stop Loss with Ichimoku Kinko Hyo (perhaps the most advanced of all the day trading strategies explained so far) is for it to be as close to the Kijun Sen line as possible and thus protect your capital against any sharp moves in the opposite direction.

Key Takeaway

While each of these day trading strategies may seem appealing and exciting to try, it is vital to be disciplined if you want to be a successful day trader.  A common pitfall of day traders is that they deviate from their strategy and hence, skew their chances of success. Jot down the principles of your strategy and stick to them. And most importantly keep abreast of the news. Feel free to practice any and all of these strategies on your demo account first. Don’t have one yet? Open one now for free, or start trading live with Trade360.

*Trading incurs a high level of risk and can result in the loss of all your capital.

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