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Day Trading Strategies
Here are some tips for anyone buguru interested in trying their hand at the high-risk, high-stakes world of day trading. You’ll learn about seven day trading strategies that could work with a whole lot of work and a little bit of luck. You’ll also learn seven important risk management strategies to help keep you in the game.
You can try them all out if you’re looking to make cash buying and selling stocks within one day — but don’t expect to succeed right away. And always remember that if you’re a day trader, you’ve got to have the risk tolerance to lose all that you trade.
1. Momentum Trading
With a momentum strategy, an investor jumps on a stock whose price is moving up or down. The idea is to get in and out before the stock price hits the top or bottom. Momentum stocks are rare and hard to find.
2. Scalping Strategy
The philosophy behind a scalping strategy is that small wins can add up to a lot of money at the end of the day. The scalper sets buy and sell targets and sticks to these predetermined levels. The scalping strategy is fast. It’s not uncommon for several trades to be made within a few seconds, or for the trader to buy and sell the same stock many times over the course of a day.
3. Pullback Trading Strategy
The first step in the pullback strategy is to look for a stock or ETF with an established trend. Next, monitor the trend until there’s a price decline from the trend. If the established trend is upward, then the downward price movement — or pullback — is an entry point for the day trader to buy.
Fidelity recommends looking for an uptrend with at least two successive high price movements before the pullback or price decline. Or, if shorting the stock, you’d look for two decreasing prices in a row. The idea is that the longer the trend, the more likely it is to continue.
4. Breakout Trading
A breakout trade takes place when the stock price rises above the former top resistance price. Breakout trades on high volume are more likely to be sustainable at the new higher price than those breakouts with less volume, according to Fidelity. Lower-volume breakouts are more likely to decline below former resistance levels, making it more difficult to profit.
In most cases, the stock will retreat after hitting the resistance level until there’s a catalyst for a stronger price movement. Above this specific price, there are more sellers than buyers, preventing the price from rising further.
5. News Trading
You’ve probably noticed that stock prices are heavily influenced by sentiment, which is driven by news reports and current events. By keeping an eye on the business news, day traders can capitalize on popular daily stories.
If bad news is out, you might short a stock during the day by “borrowing” shares of the stock from the investment firm and then selling those borrowed shares. If the stock price declines as expected, then you buy the shares back at the lower price and profit from the difference less a commission payment. If the news is good, you could “go long,” or buy the stock outright, and sell the shares after the price rises.