Day trading is fast paced and ever changing, but that doesn't mean you can't have a strategy. Investors who trade without a strategy can be swayed by emotion and less organized in their actions, especially because trades happen so quickly. This leads to a potential loss of profit. Understanding common day trading strategies can help you learn to trade stock in a more systematic way.
These strategies often depend on tools to help you track the rise and fall of stocks and alert you to certain cues that signal it's time to buy or sell. There are many online day trading platforms, so check out our reviews to learn more.
Day Trading Strategies
Day trading consists of buying and selling securities, such as stocks, options, or commodities, in an effort to gain a profit in one single business day. It may seem counterintuitive that there are longer-term strategies, but these can give structure to your decision making.
Trend Trading relies on the belief that a stock price will continue in a specific direction, i.e., a stock that is rising in price will continue to rise, and a stock that is falling in price will continue to fall.
In essence, you act on the stock when it looks like it will divert from its trend – buying when the fall in price looks like it will reverse, and selling when the price seems to reach its peak. Investors utilize trend lines and resistance lines to predict when the price will divert from its current direction. Both of these tools are found in most of the stock analysis software packages.
In this strategy, you invest against the trend. Experts have noticed that a price accelerating rapidly in a particular direction will eventually divert from the trend and reverse direction. Investors rely on this phenomenon to predict the direction reversal and yield a profit. This counterintuitive strategy is a difficult one for beginning day traders, but seasoned traders have used it to great effect.
Range trading relies on selecting the expected range of a security's price in a given period of time. Experts advise investors to buy long when the price is at the lower end of the predicted price range. Alternatively, when the price reaches the higher end of the predicted price range, investors are recommended to sell short. To make this strategy work, you need to research your stocks and learn the normal highs and lows for it.
This strategy involves executing trades based upon small daily fluctuations in the market. With this method, an investor can earn a profit by buying a large number of stocks and selling them in several minutes or even a matter of seconds. However, to make scalping work, you need to trade in large volumes. You also need an online stock trading platform with analysis tools that include technical indicators, volume and support/resistance charts, and tools to determine when the market will experience profitable fluctuations.
Essentially this is trading based on current events. Stocks are volatile, meaning they rise and fall based on what is happening in the world and what the perception of a specific industry or company is. Therefore, with the news trading strategy, you keep an eye on the news and buy or sell depending on how you think a specific report will affect your stock. Streaming news sources are available through many of the stock analysis software tools and online brokers. Some stock analysis platforms also include tools to assist investors with analyzing volatility and predictions.
This is a market-neutral trading strategy, meaning it works well in a bull or bear market. You look for two related stocks, then go long on the underperformer while going short on the over-performer. The profit comes from the thought that eventually, the two will once again meet.
In other words, say Stock X and Stock Y make similar products, and their stocks generally rise and fall together. If Stock X starts going up while Stock Y stays the same, a pairs trader would sell Stock X and buy Stock Y. The trade is betting that Stock X will eventually fall while Y may go up some so that the two stocks again follow each other.
Advice & Rules of Day Trading
Day trading strategies can help increase your profits, but it also comes with risks. Exercise caution when employing day trading strategies. Be sure you know the rules and limitations of day trading before employing these strategies. Select a strategy that appeals to you and start slow.
Obviously, you'll need an account that lets you establish "day trader status." After that, you can complete only three complete trades every 5 business days. If you exceed this amount, you are labeled a Pattern Day Trader. Pattern Day Traders need to maintain a certain equity balance in their accounts or have their trading restricted.