Day Trading Strategies

This is an overview of the most popular day trading strategies.  There are many specific variations of these strategies that a trader may develop, the key is to find one that works for you, hone and refine it as far as you can, and stick to your discipline religiously.  These are a few of the most popular strategies in broad terms.  Of course to make money consistently a trader will have to to develop a more specific set of rules.

Scalping Strategy

A scalping strategy is a very short term strategy designed to capture very small price movements with a high degree of accuracy many times, or with large size.  A scalping strategy looks for an entry at the beginning of momentum, where the scalper will quickly be in the money.  A scalper typically will not hold a position out of the money for long, because one large loss will offset many successful trades.  Typical spots for a scalper to look for momentum are when a stock is breaking an intra-day high or low, the breaking of significant price levels such as an area of support or resistance, or when a large buyer or seller is spotted on the tape.  A scalping strategy may look for gains as small as a penny, or even a fraction of a penny, and a position will not typically be held for more than a few minutes.  Scalping is good for its high winning percentage, but for a scalper to be successful he will need to be very mindful of fees and commissions.  Using limit orders and a brokerage that uses direct market access with pass through ECN rebates are good ways to control costs.

Also using binary options to increase return can be very effective for successful scalpers.  Binary options pay out very high returns for winning trades, but expire without value for losing trades.  If a scalper can take winning trades on a relatively consistent basis, he may make a much higher return using binary options as a trading instrument.

Momentum Strategy

A momentum strategy is normally held slightly longer than a scalping strategy.  Momentum positions may be held from a few minutes to a few hours typically.  Momentum traders will look for news or heavy volume to create a strong directional move.   A momentum trader will stay in the trade until the price action is no longer moving in his or her favor.  Momentum trading requires traders to be very timely with their trade entries since the price is likely moving very quickly, but profits can be exceptional in a very short period of time when done correctly.  This type of strategy really requires traders to subscribe to news services and monitor volume and price alerts constantly to be profitable.  This strategy was more popular before 2007.  Today HFT traders have power computer algorithms plugged into news services ready to strike, and they will always beat day traders to the very first liquidity.  A trader can still be profitable with a momentum strategy but it has become much harder to get the best entries as automated volume has become a bigger percentage of total market volume.  To be most profitable a trader must trade with the best tools available and always maintain strong discipline with early entries.

Fade Strategy

A fade strategy involves taking a position after a large momentum move.  The theory behind this is that during a rapid high-volume price swing, momentum usually will move the price too far, and there will be some correction back towards the pre-move price.  The reasoning behind this is some early entrants to the trade are ready to take profits, and the regressive movement will scare others out of their positions, adding pressure back towards the original price.  People who trade a fade strategy look to exit when the price moves back in the direction of the original momentum.  Taking fade positions is very lucrative when done correctly, but it is not easy for beginners.  It can take a lot of experience to correctly identify the entry and exit points as they are not always clearly defined. There is also a large risk in taking a position in the opposite direction of strong momentum, so a trader must keep losses as small as possible and not hold positions out of the money when using this strategy.

Technical Trading

There are a number of technical indicators that a trader may use to define entry and exits.  A technical trader can look at bar charting time periods from between one minute and one month, so positions can be held very short to years.  Some indicators used include Fibonacci ratios, stochastic indicators, volume weighted moving average (VWAP), relative strength indicators, and many others.  If a trader notices a pattern of a stock’s price action being defined by a technical indicator, he  may decide that it will be profitable to trade with.  The problem with this method is that these public indicators have been around for a while in most cases, and very well known by market participants.  If making money trading technically was as easy as following public technical indicators that everyone is aware of, everyone would do it and be rich.  Usually these are not profitable over time. There are still some traders using technical indicators in conjunction with their own filters, but it will take a lot of losses and a lot of experimenting for a trader to become profitable, if ever. The danger in using these strategies is that they may be profitable for a short period of time, but over time the trader would likely end up paying more in commissions than is being made in profits.

In the end no matter what strategy a trader uses, it will take work to perfect.  It is best to test a strategy with a practice account before using real money, and then slowly integrate larger size with a live account.

Daniel Major

B.S. Degree in Economics and Finance. Professional day trader. Live and work in Manhattan, NY, NY.

Page Updated: November 21, 2013

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