A day trader opens and closes several trades within a day; he uses timeframes as small as 5 minutes but no bigger than 24 hours. Daytrading capitalizes on small price movements existing in the market. This strategy can be quite risky, but it presents good opportunities for making enormous profits within the day.
Based on the profitable nature of day trading, this article focuses on six of the best day-trading strategies you can adopt to make trading profitable for you; click here to read more if you want to learn about the six best day-trading strategies discussed in this article.
- Momentum trading
- Scalp trading
- Pullback trading
- Breakout trading
- Range trading
- News-dependent trading
This day-trading strategy can be compared to jumping on a moving train. A trader monitors the market carefully for a stock or other CFDs whose price is on the increase. A stock is said to gather momentum if its price continues rising or falling for a given time frame without changing direction. This type of opportunity is often difficult to spot, but it can be detected with technical tools and indicators such as an oscillator.
Common indicators of momentum are price movement, volume information, and data analysis from Fundamental news like the US’s Non-Farm Payroll. In summary, a stock experiencing a steady and continuous upward or downward price movement is said to be gaining momentum; this can be a good opportunity to profit from price momentum if such an opportunity is spotted early enough.
Emily Norris of Investopedia defines scalp trading as a trading style that capitalizes on numerous small wins. It is a strategy that relies on a high volume of trades to make profits. Since the profit margin for a single trade is small, you will need to place multiple trades with tight exit strategies to prevent your small wins from eroding into loss with just one large loss.
To adopt this strategy, you will need direct access to an exchange or brokerage firm via a direct-access broker, live feed to keep you abreast, time, and stamina to place numerous small trades. Scalping is quite profitable if you’re a confident, decisive, focused, and disciplined trader who knows when to take profit or cut his losses. In summary, scalping is when you open and close numerous small trades (sometimes numbering hundreds) with 24 hours.
A pullback is a normal phenomenon in trading. Stock on an uptrend or downtrend price movements will experience pullbacks, thus giving you ideal opportunities to enter a trade. Pullback trading is the opposite of momentum trading; rather than jumping on a trade, you wait for the stock to experience a decline in its upward or downward price movement, which provides the best entry and exit points before picking up momentum (it’s like waiting to board a train ride). Stock prices do not experience a straight line upward or downward movement; rather, price movement often manifests as zig-zag patterns. Identifying a pullback is easy; monitor a stock’s uptrend until it experiences a slight price drop for an upward trend or price gain for a downward trend; that’s your pullback point.
Technical indicators are the best tools for monitoring pullbacks; it is often recommended that you watch out for an uptrend with a minimum of two successive high price trends followed by a pullback. If you’re selling, watch out for two successive price decreases followed by price retrace. In summary, stock prices will experience intermittent price decline or appreciation in an uptrend or downtrend; these can serve as entry or exit points for successful trades.
When not on an uptrend or downtrend, stock prices can hover between two price points, a high price point referred to as the resistant level and a low price point referred to as the support level. A ranging stock price will always bounce back up when it hits the support level (low price point) or bounce back down when it hits the resistant level (high price point).
Breakout trading strategy involves monitoring the support and resistance levels for a price breakout, which occurs when the stock price rises above the resistance level in an upward movement or falls below the support level in a downward price movement, representing a buy or sell opportunity. Recognizing breakout points is best done with the aid of technical indicators like trendlines, Fibonacci levels, Relative Price Index (RSI), etc., to identify breakout points.
Breakout trading can be profitable, but it poses a higher risk because a breakout can be false; hence you will have to be a seasoned forex trader with strong analytical skills and a good understanding of technical indicators to recognize and trade breakout points.
Range trading is similar to Breakout trading, but in the case of range trading, you’re trading within a given price range by buying at the support level and selling at the resistance level. The opposite is the case if you’re going short on stock. E.g., assuming the EURO/USD ranges between a high point of 1.1670 and a low point of 1.1614, you will go long by buying at the low point and selling at the high point.
As with Breakout trading, range trading requires experience in using technical tools and indicators. In summary, range trading involves oscillating your trade between two price points: a high point and a low point.
Market prices are subject to news breakouts, e.g., negative news from NFP can cause a drastic fall in the dollar’s value against other major currencies. This was experienced when the US dollar slipped against the EURO and YEN on 30th December 2020 due to the US’s twin deficit. In summary, economic news has strong positive or negative effects on market prices; therefore, keeping abreast of economic news is one way you can profit from day trading.
Day trading can be a very risky adventure; however, adopting any of the day-trading strategies discussed above, in addition to having a good understanding of the forex market and the impact of economic indices, can greatly improve your trading skills while cutting down on your risk to the barest minimum.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.