What Are The Most Popular Day Trading Strategies?

Last Updated June 26th 2019
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If you read our previous article about the possibility of making a living trading forex, you are probably wondering exactly how this can be done. To make a profit from the frequent, small price movements in the market, it is essential to follow a clear day trading strategy. Successful day traders use a combination of charts, patterns, indicators and in-depth technical analysis to develop a strategy which has the potential to earn a profit.

This guide will take you through some of the best day trading strategies, from those suited to beginners, through to more complicated strategies which have been developed for the most experienced traders.

Trading strategies for beginners

The world of trading is complex, but if you are new to trading there are strategies which can simplify the process. It is not always necessary to follow a highly complex strategy to make a profit, the important thing is that the strategy is effective.

Although the market is extremely fluid by nature when day trading, there are patterns which can help you locate potential income opportunities. Although a change in the market may seem unusual, any markers are useful indicators when planning trading activity for the day.

Understand the basics

understanding the basics of day trading strategies

There are some basic aspects which need to be incorporated into every strategy. Before you begin trading you will need to decide how much you can afford to willingly risk. The most successful traders will only risk a maximum of 1% of their total capital, using careful money management to manage both the small losses and profits.

It is also important to consider time management, as success will largely depend on your ability to monitor the markets for trading opportunities. It is essential to start small when building a strategy, by only trading a maximum of three times a day. Gradually learning the basics and making a small profit is much better than lots of trades with high losses.

Once you begin to understand the market, the next step is to stay up to date with any events in the news, which could have an impact on the value of your asset. There are a variety of resources which can keep you educated in developments across the world, but resources with an economic focus are particularly useful.

The hardest part of building a strategy is often remaining consistent. There can be hours spent following markets waiting for the right trade and it can be tempting to make a risky move, but it is important to always follow your strategy. The most volatile times are when the market opens each day, instead of rushing in, hold back and wait - there are still many hours left in the day.

People also read: Can You Make a Living trading Forex?

The key components of a successful strategy

Whatever the stage of your day trading journey, your strategy needs to consider three vital components; volume, liquidity and volatility. It is these components which will help you decide which stocks to purchase so that you profit from small movements in price.

The volume measurement will help you understand how many times the stock has been brought or sold within a period of time. Day traders tend to refer to this as the 'average daily trading volume'. A high volume of trades will show that the stock has a significant level of interest, which could indicate a rapidly approaching increase of decrease in price.

Understanding the liquidity of a stock will help you make a decision about when to enter and exit the trade at a profitable point. When combining this with the volatility of a stock, it is possible to calculate the potential profit range. The higher the level of volatility, the larger the level of profit or loss.

The following strategies tend to emerge in the various markets each day, so it is possible to see at least one of the following opportunities over the course of a trading day. By understanding the indicators and the potential strategies available, it is possible for a trader to take advantage of the market to earn a profit.

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Breakout strategy

A breakout strategy focuses on achieving a specified level, as the volume increases. As a breakout trader, the strategy is to enter into a long position after the asset breaks above the level of resistance. However, there are some traders who choose to opt for a short position when the stock falls below the support level.

Once the asset trades beyond the pre-defined price barrier, the market volatility increases, and prices tend to move in the direction of the breakout point. To practice this strategy, it is important to find the right stock to trade, as the frequency on the price reaching support and resistance levels will be important to your overall trading.

The entry points in a breakout strategy are simple when compared to more complex options. Choose a bearish position when prices are set to close above resistance levels, or a bullish position when prices are set to close below a support level.

The exit point should be based on its recent performance while allowing you to attain a reasonable target level. It is possible to use chart patterns and the recent average price swings to decide upon a target. A sensible target is when the average price swing is set three points over the last few price swings. Once the target is reached it is time to exit the trade and benefit from the profit.

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Scalping strategy

The scalping strategy is one of the most popular methods of day trading, especially in the forex market. The strategy takes advantage of small price changes by capitalising on the number of stocks acquired. The strategy does attract traders looking for fast and exciting trades, but it is worth remembering that it does carry a higher risk.

The key to success is maintaining a high level of trading probability to balance out the low risk against reward ratio. Traders should look for the most volatile stocks with high levels of liquidity. This does require a lot of time, as the market will need to be monitored at all times so losing trades are closed as quickly as possible.

Momentum strategy

The momentum strategy is popular among traders who are just starting out, as it is based on knowledge gained from news sources and large changes in price trends. Every day there is likely to be one stock which moves up to 30% over the course of the day, which provides a great profit opportunity. To benefit, a trader should maintain their position until the market shows signs of changing, at this point it is important to exit quickly.

Although, the strategy can also be used to fade the price reversal, which involves setting the price target to kick in as the price begins to fall. The momentum strategy is simple, but it can be very effective when implemented correctly. The key to success when using this strategy is to maintain a close eye on the news and trading announcements, as a few seconds can make a large difference in the levels of profits.

Reversal strategy

reversal strategy

Reversal trading, pullback trending, or trend trading as it is sometimes known is popular, but it carries a high level of risk when used by beginners. The strategy seems to defy logic as the aim is to make trades against the trend, by successfully identifying the potential timing and strength of pullbacks.

Some traders use a technique known as the ‘daily pivot’, which focuses on buying and selling the low and high reversals each day. To be successful when practising a reversal strategy requires considerable experience and an in-depth knowledge of the current market.

Pivot point strategy

A pivot point strategy aims to identify a point of rotation in the market, by analysing the prices of the previous day, including the high and low points alongside its closing price. When calculating a pivot point using information over a very short time frame, it can be difficult to achieve a reliable level of accuracy.

The first step to calculate a pivot point is:

Central pivot point (P)=(High+Low+Close)/3

Once the central pivot point is identified the support and resistance levels can then be calculated, using the following formulas:

First resistance (R1)=(2*P)–Low

First support (S1)=(2*P)–High

Second Resistance (R2)=P+(R1-S1)

Second Support (S2)=P–(R1-S1)

In most cases, within the forex market the trading range will often take place between the calculated pivot point and first resistance and support levels, as the largest number of traders will be involved within this range.

Impulse to consolidation breakout strategy

In most situations, a trading session begins with an initial move known as the impulse wave, when the market moves in one specific direction. The impulse wave tends to happen each day in the first 15 minutes of the market's opening. Gradually the price begins to stall and consolidate, where it can move sideways for a few minutes. This point of consolidation can occur at any point during the consolidation wave and can see the price falling below the opening price.

To profit from this point in the market, monitor the direction of the impulse move and wait for the point of consolidation in the same direction. For example, if a price rallied when opening but then pulled back above the point of consolidation, it would trigger a long trade, by entering one point above the high point of the consolidation.

Try to ensure that the consolidation is low compared to the impulse way before, as the pattern could become less effective. Always look for a distinct impulse wave, pullback and point of consolidation during the pullback, as this will improve your chances of finding an effective profit-making pattern.

This pattern is easiest to spot in the opening period each day, it can occur in all time frames and within most markets. Although, being able to spot and trade the first move of the day using the strategy will usually carry the highest levels of profit. Any pattern which occurs later in the day will tend to involve smaller price moves, so the level of potential profit will be lower.

See also: 3 Trading Tips That Can Boost Your Profit

Reversal and consolidation breakout strategy

In the strategy outlined above, we explained how impulse moves can be followed by a pullback and consolidation, but sometimes there can be a larger move in the opposite direction straight away, known as a reversal.

If this pattern occurs, you should focus on your most recent significant move. For example, if the price drops £0.20 from the opening point, but then rallies by £0.30, you should not be distracted by the first small drop. The first dip is no longer significant because the impulse move is now climbing, so your focus should be on waiting for the price to pull back slightly before consolidating.

As described in the impulse to consolidation breakout strategy, you should be waiting for a pullback in price which moves in the opposite direction of the impulse move. The pullback must be lower than the impulse, so once consolidation happens we can look for a breakout in the impulse move direction.

Reversal at support or resistance strategy

reversal at support or resistance strategy

When analysing the moves over the course of the day, if the price shows a reversal at least two times this is a representation of a support or resistance area. When searching for a potential trade near this area, the setup should occur either slightly above or below the level of support or resistance.

If you notice one of these areas it could indicate that a reversal or breakout is about to happen, so you can then wait for a consolidation point. If the price then breaks above the consolidation point in the support area or below a consolidation point in the resistance area, this is a clear signal to trade.

There are times when a reversal signal happens, in this situation make the trade when the price moves by one point either side of the support or resistance areas. The price is likely to bounce off the support or resistance areas, but if the price breaks above or below the major sections of support or resistance, pull out of the trade straight away.

Strong area breakout strategies

Although this strategy is very popular among day traders across the world, it can be very challenging. However, If you are beginning to understand the technicalities of the market, understanding this strategy can be useful if the ideal situation arises.

The strategy involves watching the market for levels which repeatedly push the price back in the opposite direction. For example, a price could rally to £25.35 before falling several times, as it is unable to break through this high price level. Once the price has reached this point at least three times over the course of the day, other traders will begin to notice this pattern and the price will suddenly reach £25.36, which will signal a change in the pattern.

The pattern occurs when other traders push the price back to the high level, which eventually breaks, despite the pushback in price on multiple occasions that day. The strength of the traders which push the price back up to the level shows a higher power than the traders which push the price downwards in the opposite direction.

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False breakout strategy

By understanding the pattern of false breakouts, it can help other day trading strategies become more efficient. For example, if the price fell rapidly during the opening 15 minutes, and you are trading a strategy which relies on the price falling again, a false upside breakout would confirm this trading strategy for you.

There are occasions when the price may be struggling to climb, but if it breaks out of the bottom point of consolidation you can chase a short trade. By understanding this strategy, it means any loss from the false breakout in the initial impulse during the downturn is prevented.

Another example of correct use of the false breakout strategy could occur when a price is expected to fall because the price fell during the last impulse wave. The price could consolidate but there might be a false break above the highest point of consolidation if the price then falls below the bottom point the false breakout would confirm the possibility of a short trade.

If the price is continually attempting to climb in one direction but is unable to maintain a level, it will probably go in the opposite direction eventually.

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Forex trading strategies

Forex trading strategies will always carry a high level of risk, as by nature they require traders to accumulate profits in a short period of time. All of the strategies described above can be applied to the forex market.

Cryptocurrency trading strategies

The unpredictable, fast and exciting nature of the cryptocurrency markets provide a wealth of opportunities for a knowledgeable day trader. There is no requirement to understand the intricate technicalities of Bitcoin or Ethereum, instead, use the more straightforward strategies above which will help you profit from this highly volatile market.

Stock trading strategies

The principles of day trading stocks rely on many of the strategies outlined above, although a specific strategy for trading stocks is known as the moving average crossover strategy. This strategy involves the identification of three moving average lines; the fast-moving average, the slow-moving average and the trend indicator.

A buy signal is generated when a fast-moving average line crosses over the slow-moving average line. With a sell signal generated when the fast-moving average line crosses below the slow-moving average. The idea is to open when the moving average line crosses in one direction, then close when It crosses in the opposite direction. If the price bar stays either above or below the 100-period line, there is definitely a trend.

Learn to limit the losses

learn to limit losses with day trading strategies

As most day traders will be using a margin, it is vitally important to learn how to limit the level of losses. Although trading on a margin provides a potential for high levels of profits, it does mean traders are particularly vulnerable to quick movements in prices which could lead to large losses. The most successful traders never risk more than 1% of the total account balance. So, an account containing £2750.00 would only risk £27.50 per trade.

To limit losses, it is possible to use the stop-loss control method, which protects against recent highs, lows and market volatility. For example, if a stock moves by £0.10 each minute, a stop-loss control can be implemented £0.30 away from your entry point, in the hope that the price moves in the expected direction.

Many traders choose to set up two stop-loss points, with the first at a specific price point which is based on the capital which you can afford to risk. The second is a mental control, which you can choose to place at the exact point of your entry criteria becoming breached. This provides protection against unexpected changes in the market so that a quick exit can be made.

Check this article out: 5 Golden Forex Tips for Newbies

Another method which can be utilised to protect against losses is to establish the ideal position size. The term ‘position size’ refers to the number of shares which a trader takes within a single trade. For example, if the entry point is £14.00 and the stop-loss is £13.80, the risk is £0.20 for each share. Once you understand the risk associated with each trade, the next step is to decide how many shares you can afford to take. Based on the figures above the £27.50 should be divided by £0.20, to calculate the maximum number of trades to stick within a 1% limit.

If you are planning on trading full-time to earn a regular income, it will be challenging but is achievable. To succeed it is important to understand and stick to a strategy, develop an effective risk management process and maintain excellent capital management. The profit levels available will depend in each instance on your own sense of discipline and the strategies you employ.

It is worth remembering that technical analysis will help when validating the accuracy and potential of your own strategy. To ensure you understand the key aspects of technical analysis our next article will take you through everything from calculating entry points to controlling the levels of risk.

If you would like to find out more about day trading strategies, we have a variety of insightful articles available. Alternatively, our team at Trading Education are always available to answer your questions.

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