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7 Common Day Trading Strategies Explained

“Professional” day trading can be a very lucrative career for a tiny fraction of those who try it. 

  • Day trading involves opening and closing your market positions within a single trading day, aiming to profit off intraday price changes (Of course, you can always leave trades open for longer depending on the strategy, but the principle is the same - these are all very short-term trades).
  • Day trading requires a time commitment, a wealth of knowledge, and sizeable starting capital.
  • There are many different techniques and strategies that day traders use, each with its fair share of critics (but the main criticism is that most won’t work consistently for anyone, far less an amateur trader).

What Are Some Common Day Trading Strategies?

Below are seven of the many strategies that day traders use when deciding when to buy or sell a financial asset, sometimes in combination with one another.

Day Trading Strategies

1. News Trading

Financial asset prices react quickly to the news. The stock price will usually fall if a company announces retrenchment or releases an annual report with woeful financials. Similarly, if a country seems to have political struggles or a riot breaks out, the forex market will probably have a field day. By keeping an eye on business news, day traders can "predict" the short-term price movements, and maybe long-term ones as well, depending on the severity and impact of the situation. 

However, because news travels quickly, news traders need to be at the top of their game. You don’t want only to hear the news and register what to do when the price movements have already finished. As such, these day traders need to have quick or even instant access to both business and non-business-related news, a skilled mindset to instantly recognise the implications of said news, and the ability to act quickly. It is important to watch for when a stock does NOT move in reaction to breaking news or even moves in the opposite direction as this will reflect actual expectations in the market (i.e. the news is said to be "priced in.")

It is important for all traders and investors even to keep an eye on the news as news can inadvertently affect market prices. Thus, even if you’re not practising news trading, you still need to pick up (or log onto) that newspaper!

2. Momentum Trading

Momentum trading simply involves riding the wave that is observed. If you see the price of the asset rising, you may expect it to continue rising, so you would take a long position (i.e., buy it). Likewise, if the price is falling, you’ll take a short position in the asset. Of course, just because the price is currently moving in one direction doesn’t mean that it’ll keep going in that direction after you take a position... pretty much the only "guarantee" you have is that it won't keep going in that direction forever (other than companies going bust with the share price going to zero)... the trick, of course, is to close your position before it turns. You need to be both smart and lucky with choosing the right time to ride a momentum trade.

These are some typical signs momentum traders look for before opening a position:

  • A major move in price driven by a catalyst (from the news)
  • Price movement of about 30% to 40%
  • Moving averages (simple moving average or exponential moving average)

3. Pullback Trading

Prices don’t ever follow a straight line. When a price increases, it typically follows a wave motion, going up and down, but the ups go higher, creating an overall upward trend. These downs are known as pullbacks, or correction waves, that will occur throughout the upward trend. This is similar to a price decrease, where the downs will be larger in magnitude, and the ups will be the pullbacks.

A chart that shows pullback trading 

Pullback trading involves looking for a financial asset that already has an established trend (i.e. already rising or already falling in price) and buying your position during the pullback to have a more optimal entry price. For example, if the price is on an upward trend, wait for a pullback to buy or add to a long position in the asset at a cheaper price. If the price is on a downward trend, wait for a "pullback" to sell or place a short position at the higher price.

In both an uptrend and a downtrend pullback, the key question is, "Is this the start of the turn?" Some investors out there are selling (hence the pullback), so either they are locking in profits or have decided that valuations are too rich or, possibly, know something that you don't that will negatively impact the share price going forward. Maybe they have quietly initiated a short position and now want everyone to panic out by triggering technical sell signals... or perhaps a big institutional shareholder is just facing redemptions and is selling across a portfolio which includes this particular stock. Or... any number of other scenarios. You probably won't know for sure now and will only find out in hindsight!

This strategy is usually used hand in hand with momentum trading. 

4. Breakout Trading

Another technical (or chartist) indicator. To understand the concept of a breakout, you must first understand the concept of resistance and support lines. In any given timeframe, there may be a certain price where the market price never tends to go beyond or under. This price is known as the resistance or the support, respectively.

A chart that shows breakout trading

If the price ever exceeds the resistance by a significant amount, that is considered a breakout and breakout traders will begin taking a long position. Similarly, if the support line is ever broken and the price drops below by a significant amount, that is considered a breakout as well and breakout traders will take a short position. 

You should also pay attention to the trading volume, instead of just the price, when the price is dancing at the resistance of the support line. A higher volume indicates a higher likelihood of a breakout. Traders perceive that a breakout "has legs" if the breakout is supported by accelerating volumes.

Note that technical indicators (traded volumes very much included) may, especially in more thinly traded shares, be manipulated. Typically using the most commonly used signals (like range breakouts, head-and-shoulders formations, trendlines, crossing MVAs), trading patterns can be manipulated to trigger a move in the desired direction. It's not good (or even legal), but it's the reality of what you need to watch out for.

5. Scalping Trading

The scalping strategy is one that encourages you to close your position the moment a profit can be made. This reduces the risk of the position reversing and making a loss (but is, of course, no guarantee - a disciplined stop-loss strategy is essential in this case). The concept behind this is simple: many small wins make a big win, despite the numerous fees that will be incurred with the numerous trades. Note that each trade may last only a few minutes or even seconds. Hence, only traders who are quick-thinking, attentive, and disciplined should take on this strategy.

6. End-Of-Day Trading

Some traders only trade near the closing hours of the market. This is because when the market is going to close, volumes are typically higher, due to many day traders wanting to close their positions. Hence, prices can be more volatile during this period compared to the rest of the day, making it less time-consuming as it "frees up" the rest of the day. The danger then comes in also having to close this position before the end of the trading day!

7. Candlestick Patterns Trading

Candlesticks refer to one of the more popular types of graphs that traders use when studying price movement. Instead of simple line graphs, candlestick graphs give more information such as the opening and closing prices of a single time interval, as well as the highest and lowest prices reached in that interval. 

Candlestick patterns trading

If the interval is set to 1 minute, then each candlestick will indicate a 1-minute time frame. A green candlestick indicates an overall price increase in a specific time frame, while a red one indicates a price decrease. 

The candlestick box shows the opening and closing prices of that time frame. For a green candlestick, the bottom of the box is the opening price and the top is the closing price (hence, a price increase in that interval). For a red candlestick, the top of the box is the opening price while the bottom is the closing price (hence, a price decrease). (It's pretty obvious if you look at it, but if it's in black and white, white "candles" are up and black "candles" are down).

The end of the stick at the top of the box shows the highest price reached in the time frame, while the end of the stick at the bottom represents the lowest price reached.

An explanation of the red and green candlesticks on the stock chart

Some traders use specific shapes and patterns of candlesticks as indicators of future price movements, using historical data to back up their predictions. 

Each of these trading methods has its fair share of supporters and critics. It is up to you as a trader to determine which best suits your trading style and which produces, on balance, the best results.



  5. Header photo from Pexels