Day Trading Strategies
Day trading refers to the trading (buy and selling) of financial securities within one trading day. Normally traders trade in the foreign exchange market, futures market and the stock market.
Before delving into day trading strategies, understand that the public space is flooded with trading systems that promise substantial wealth; pay for a trading system and you’re supposed to make a lot of money. Just like that!
By the way, these systems are not cheap.
Trading performance aside, most of these systems are extremely effective in marketing. Making money is a primal need and trading systems know how to exploit this basic emotion.
Understand that there is a substantial risk of losing money in day trading.
The norm is that traders use leverage (borrow money to trade) and utilize short-term trading strategies to profit from price movements. But when losses start piling up margin requirements become threatening.
Reality Check with Trading Rooms
General public has a lot of curiosity about the profitability of day trading. They want to know ‘how much can I earn with day trading?’ or ‘how easy it is to make money with day trading?’
One way to go about it is to look at live trading rooms. Simply Google “Live Futures Trading Rooms,” and you will easily find 200+ live trading rooms that you can see for yourself exactly what the trading universe entails.
The first thing you might notice in these rooms is that the majority have well established marketing programs, which is so intense that their actual trading performance gets buried under buzzwords and mouth-watering promises.
Strangely enough, if you dig deep into these trading rooms you will find that the trading rooms with the best performances have the least impressive marketing program, simply because they are more focused on actual trading than devising clickbait ads.
Futures trading rooms are easy to investigate since it is likely that these have a track record somewhere in the interface. The rooms that do not show their performance usually do not have anything impressive to show. Some might claim to be solely educational rooms which is another way to evade investigation.
Some rooms might post cherry-picked performance or misleading titles. Don’t get carried away when you read, ‘80% winning trades”. This information alone could mean anything, even a loss. Say, four times the trader won $100 trades and one time a $400 stop out loss. Which is only break even.
To evaluate day traders you need complete information; entry price, time, volume (number of contracts) and the final profit/loss (P/L) for that trade. If you are serious about this profession do check out trading rooms, as the majority offer free trials
Can I make a Living from Day Trading?
Only one out of ten traders are able to make a living from this profession. No doubt day trading seems charming which is why non-investors get attracted towards it believing that it will solve all of their money problems. But then the margin call (call from the broker to deposit money to bring the account up to the minimum requirement) serves gives the harsh reality check.
In a fair world, many traders would complain about losing money than bosting off about successful trades. Yes, most traders lose money than the ones that make money.
Before we discuss the strategies bear in mind that day trading is complex and carries significant risks, especially if you are trading on leverage. The risk is considerable enough that many financial advisors and money managers avoid it because to them the risk does not justify the returns.
Regardless, any day trader needs a trading strategy to generate consistent profits. And no one can write down the formula for successful trading because it doesn’t exist. The only thing the trader can do is to fine tune the trading methods.
Buying and selling based on news, swing trading and arbitrage are the common ways day traders make money. But when and how it’s done is upon the execution. Not all strategies carry the same amount of risk.
If you buy Amazon (AMZN) stock today, keep the position overnight and sell it tomorrow, that’s not a day trade, that would be ‘swing trade’.
What do I need to get started in Day Trading?
To get started you need proper education and software and money. Plus you will definitely need;
Minimum capital depending on what you are trading, you need around $50 000 for stocks and $100 000 for futures.
High-speed internet to promptly react to news and trends.
Competent broker with low spreads.
Efficient trading platform capable of trading on hotkeys.
Effective stock scanner to filter equities or commodity futures.
A helpful community of traders.
Trade the right instruments on real exchanges.
Trading Desk: traders who trade in personal capacity might not need such a sophisticated facility. Those who work for large institutions, handling accounts holding dozens of millions of dollars do need trading desks. Speed can be of great importance in this case since prompt execution matters in this high-speed chess. Those who react to the news before others usually make more profits.
Software: Technology has changed the face of day-trading in the past 15 years. With the introduction of broadband and better computational power complex analysis of numbers and companies has become lightning fast. But not all software is equal. Such services can be quite expensive, so much so that day traders have to take it into account separately.
For instance, a typical daytrading software assists traders by offering services such as pattern recognition, broker integration and backtesting.
A crucial part of day trading is to know when to exit. This part is so important that many traders would not trust their own emotional judgement and would have a strict exit plan before even entering a position. Either due to greed or due to stubbornly trying to recover a loss, the trader usually loses a lot more.
Hence, traders use trailing stops and profit targets to limit their losses, which is a small price to pay for effective risk management. Some of the strategies in this regard are;
Position trading is considered somewhat of a long-term buy and hold strategy. However, the principle here to discover trends in the market and take investing positions accordingly.
Scalping: it is the strategy of piggyback method. The trader buys a security and the moment it becomes profitable, he sells it. The profit is small but these profits can accumulate over time. The purpose is to make at least some profit on a trade.
Fading: When a stock moves up rapidly the trader would short it assuming that it’s overbought and it will fall.
Momentum: This strategy is reactionary to news, events and spotting trends of high volumes. Once a trend is spotted the trader would ride this wave until there is a concrete sign of a reversal.
Daily pivots: Here the trader keeps an eye on the ‘reversals’ for profit trades; buying at the low of the day and selling at the high.
Day trading can easily turn into a nightmare if you’re not careful.
In theory, these strategies might seem simple but it takes a lot of practice to get them right. Even experienced day traders make mistakes and as a result lose money. Reading simple chart patterns can be wrong as the market can perform in a haphazard way.
There are so many ways to manage your risk. Some strategies are more conservative than others. The following is a good guide for average investors.
Risk Management in Three Steps
Determine your max dollar/euro risk, which should not exceed 2%. Let’s call this ‘X’
Estimate max risk per share, let’s call this ‘Y’
Divide X by Y to find the max number of shares you can trade
For example, if you have a €50,000 account. You decide to be risk averse and go with 1% euro risk, which will give you X = €500. This is step one. Say, you buy a stock of ABC Inc. at €16 and want to sell it at €19, and keep your stop loss at €14.5, then your Y = €1.5 per share. This will be step two. Now calculate your share size by dividing X by Y, which gives you 266.
You should not buy more than 266 shares of ABC Inc.
Traders utilize candlesticks charts, technical analysis and trade volume to predict the price movements.
The psychology of the trader also comes into play. A risk-averse trader will be happy with scalping instead of spotting trends and profiting in bulk.
However, being an adventurous trader by o means refers to being reckless. One simply cannot be rash with capital. The personality of the trader needs to go hand in hand with risk management.
Say, a trader believes that he has spotted an upward trend and goes long, but it would be risky not to use the safety of stop-loss or similar risk management tools that can contain the loss in case the trader got it wrong.
The success of a trader also depends on the lifestyle. How many hours per day can the trader spend at the trade station?
Bear in mind that the skill level of the trader makes all the difference. In addition, the volatility of the underlying asset can play a big role in profit and loss for the trader. Becoming a day trader has its perks but it takes a lot of experience and hard work before one can generate consistent profits from it.