Last Updated on May 25, 2022 by Neera Bhardwaj
Day trading is no longer limited to people working in large financial institutions, brokerages, and trading houses. Online trading and the internet have made stock markets accessible to average individual investors who actively implement day trading strategies too. Novices should note that day trading is not a game of luck, but rather a complex strategy, requiring in-depth knowledge of technicals, and a high degree of self-discipline.
So, what is day trading? What are day trading strategies? Let us find out.
Table of Contents
What is day trading?
The process of buying securities and then selling them within a single trading day or market session, or even numerous times throughout the day, is known as day trading. To master single-day trading, you need to know how to take advantage of small price moves. Day traders use various day trading strategies to profit from small price movements especially in currencies and highly liquid stocks.
Even the most experienced day traders endure losses if they do not have a well-planned strategy.
General trading principles
Money management: This is the first step that you take as an investor. Examine and evaluate your willingness and tolerance to risk. Always remember that some losses are part of the investing journey. However, trading should always be conducted with money that remains after meeting regular expenses.
Time management: Rome was not built in a day, and one cannot make a fortune within an hour or two into day trading. So, if you have time constraints, it might not be a suitable option for you. But with sufficient time on hand, you can monitor the markets and look for trade opportunities. There is a reason it is called day trading; it means you need to dedicate most of your day to monitor the price movements keenly.
Know-how: It is not enough to only understand basic trading procedures and market intricacies. You need to be well-informed and stay abreast of the latest stock market news that can impact your assets.
Consistency: To make wise and sound decisions, you should not give in to emotions like greed, hope, and fear. Investors’ decisions should always be based on logic and strategy, and devoid of emotions.
Timing: The market usually gets volatile at the beginning of the session, and less so during the middle hour. Generally, towards the closing, price movements are maximum. Experienced traders are quick to pick up on these patterns. Novices should, however, study the market before making any bid.
Realistic profits: A strategy cannot always be a win-win. Statistically, most of the traders win only 50-60% of their trades. Define your entry and exit points, and ensure that each trade’s risk is confined to a certain percentage of your capital.
Essential components for day trading strategies
Before you venture into day trading, you need to understand the following components:
Liquidity: This allows investors to swiftly enter or exit a stock. For example, the forex exchange used for commodity trading is the most liquid market in the world. This means traders can open and close positions rapidly.
Volatility: This depicts the demand for an asset. The measure of the expected daily price range insinuates your potential profit range. Sometimes, high volatility can be detrimental to your portfolio. A common example of high volatility can be the commodity and cryptocurrency markets.
Volume: This component tells you the number of times the stock has been traded in a given period. It is commonly known as the ‘average daily trading volume.’ High volume indicates significant interest in the stock.
Common price target strategies
With breakout strategies, you can identify when the price clears a specified level with increased volume. A breakout trader usually takes a long position if the security has moved above resistance. You may also enter a short position when the stock breaks below support.
Volatility tends to increase after a security trades beyond the specified price barrier. Prices also trend in the direction of the breakout. When trading, it, thus, becomes important to observe the security’s support and resistance levels.
One of the most popular tactics is scalping. It refers to an immediate selling of the stock upon purchase when it becomes profitable; in other words, you profit from minute price movements, and quantity is your driving force. This is a fast-paced strategy that tends to be risky.
Momentum revolves around trading on news sources or identifying strong trending moves with high volume. Typically, there are stocks that move a good percentage offering you ample opportunity. One needs to hold on to their position until there are signs of reversal, and then they may choose to exit.
Just make sure you are abreast of news and earnings announcements.
Fading is considered a risky strategy that involves shorting stocks after it has moved upwards drastically. It is an extremely rewarding strategy based on the assumption that the stocks are either overbought, or there are early buyers who are ready to profit, or finally, there are buyers who plan to exit for any reason.
Reverse trading is a reversion strategy commonly used all over the world. It is, however, not usually recommended for beginners as it requires extensive market knowledge and experience.
In this strategy, you trade against the trend. Furthermore, you also have to anticipate pullbacks accurately and predict their strength.
This strategy focuses on profiting from a stock’s daily volatility. You may need to watch out for pivot points and buy at the low of the day and sell at the high. The price target for this strategy is the next sign of a reversal. A pivot point strategy is useful for identifying and acting on resistance levels and finds particular usage in the forex market.
Furthermore, range-bound traders use pivot points to determine important levels that must be broken for a move to be considered a breakout, whereas breakout traders utilise pivot points to seek key levels that must be broken for a move to be considered a breakout.
One cannot become a trader in one day. Ample time and research with a disciplined approach to markets are paramount. Traders follow different strategies in accordance with their risk appetites. Understand your financial objectives and risks and only then enter the world of trading. Use smart day trading strategies that suit your personal style and requirement instead of copying what others do.