Day Trading Strategies – Introduction
Day trading is tough. Studies have shown clearly that of millions people who try day-trading, only 10% of them make it. The rest lose all their funds. This can be prevented if most of those traders took time to: study about the financial market, define their strengths and weaknesses, and do due diligence before trading. Having a strategy is also an important method of building confidence. I should also mention that the 10% of the traders who make it have also experienced a period of losses or diminishing returns. In this article, I will highlight 4 trading strategies you can use as a trader. There are however thousands of other strategies you can try.
Day Trading Strategies – Arbitrage
Arbitrage is a jargon which simply means pairs trading. Arbitrage is when you buy an item while concurrently selling another item. A good example is when you buy dollars while at the same time shorting gold. The idea is that when the dollar goes up, investors will convert their gold to dollars. On the other hand, when gold weakens, investors will move their dollars to gold. This happens because of the inverse correlation that occurs between the two.
There are a number of types of arbitrage but the concept is the same; buy an asset while selling another one. Merger Arbitrage happens when there is consolidation. For instance, when two companies are merging, chances are that the buyer will pay a premium to the existing shareholders. As a result, the shares of the company being acquired will go up while of the acquirer will go down. Therefore, you can buy and sell these companies when the announcement is made. However, you should only keep the trade open for a short period of time because the company being acquired might reject the offer leading to its shares falling.
Day Trading Strategies – Scalping
Most day traders are scalpers. Scalping is a strategy where you open a trade and close it a few minutes later once it makes a profit. Scalpers don’t care about the company they are buying. They don’t do the deep fundamental analysis which could include cash-flow analysis, and the discount cash-flow model. They are interested in making a few pips after opening the trade. Most scalpers use the one-minute and the five-minute chart to make their investment decision. They are not interested in long-frame analysis tools such as the commonly used 200-day moving average. A number of scalpers are also known for trading economic data. They only trade when major economic data is released.
Day Trading Strategies – Fading
This is another common strategy day traders use. Fading is when a trader shorts stocks, commodities, or currencies after a rapid upward move. The main assumption is that after a continued upward move, the ‘asset’ will ultimately come down. When that happens, traders assume that the ‘assets’ are overbought. Also, they assume that the traders who have benefited from the sudden movement will ultimately exit to take profits. Finally, traders assume that the bulls might be scared of a reversal. In many cases, this strategy works for day traders. For long-term traders however, the strategy can fail to work especially in a bull market.
Day Trading Strategies – Momentum
Momentum trading is another strategy you can try. This is when you trade on news releases. Also, it involves trading strong trending moves which are supported by high volumes. For instance, in an earning season, when a company – say Facebook – beats on both EPS and revenue then lifts its projections, chances are that the share price will move up. As a trader, you should buy the company and exit at a period in time when the share price starts to diverge. To make a better decision on this, you should consider using momentum indicators which are provided by your trading platform.
Day Trading Strategies – Daily Pivots
This is another common strategy used by traders. It is based on the principle that stocks (and other ‘assets’) will always be volatile. Therefore, a trader will attempt to buy at the low of the day and then sell at the high of the day. The secret here is to find the reversal points. If you are able to spot points when a trend is starting out and then moving up with it, chances are high that you will make good money. Technical indicators such as the ADX and using the double exponential moving average can help you identify these areas.