Day trading strategies come in all shapes and sizes. There are millions because you can make minor amendments to every strategy and this changes each one slightly.
Choosing the right one, will come down to you, your preferences and your circumstances. It might depend on how much time you have to dedicate, your experience, confidence and your account size.
The common denominator is you, decide what you want and that’ll dictate your trading strategy. This article will show some examples of popular trading strategies to get you started.
What is day trading?
Day trading, it does what it says on the tin, it's trading during the day and not having open positions at night.
To start trading, beginners often lean towards day trading because holding trades over night can cause havoc with some peoples nerves. This again comes down to the individual but it’s why you tend to see more experienced traders and investors hold positions for longer.
Is day trading the same as active trading?
Day trading is classed as active trading because you’re actively engaging with the market to make a profit.
Active trading is considered to be relatively short-term trading. You’re not investing over the long term; you’re putting a percentage of your funds to work each day to find opportunities.
How to start day trading?
1. Open an online trading account and familiarise yourself with the platform
2. Create a day trading strategy
a. Trade setup - Decide the parameters that dictate the trade direction and where to enter
b. Risk management - Decide where you place your stop loss and profit taking orders and how much of your account will be at risk per trade
c. Execution - This is the trigger that will decide that the trade is a go
d. Trade management - Do you need to manage your stop loss whilst the trade is open (only reduce your stop, never extend it)
3. You’re ready to start day trading
Day trading strategies for beginners
Now we’re getting to the reason you’re here. To see some examples of day trading strategies.
We’ve selected some of the most popular types of day trading strategies and given a breakdown about how you would take a trade.
They’re perfectly suited for beginners because they’re simple and straightforward to implement. But don’t underestimate the power and relevance of simplicity. Some of the most profitable and proven strategies are often the simplest.
Before we jump into the strategies, you need a risk warning, it’s essential you go into trading with your eyes wide open.
Like all trading strategies, there are no guarantees of success. No method and trading strategy works all the time and has a 100% success rate. You have to recognise that managing your risk is critical and actually having an understanding about why traders fail, will also serve you well in your education. We also need to remind you that we are an execution only broker, which means we can’t give you advice. The following strategies are only examples, and you should always do your own research before making trading decisions.
Breakout trading strategy
A breakout trading strategy is identified by price impulsively breaking out from a trading range or channel.
Below is a step by step example of a breakout trading strategy:
Trade set up
1. Identify support and resistance levels. Ensure you find at least two levels above and two levels below the price.
2. Identify the daily trend direction; trade in the same direction of the trend. If the market is creating higher highs and higher lows, only take long positions. If the market is creating lower highs and lower lows, only take short positions.
3. Identify your potential entry and exit (stop loss and profit-taking) levels. This will be done using the levels you have previously identified. If the market is trending higher, place your stop loss below the support level and target the next resistance level.
4. Once entry and exit levels are identified, decide how much you will risk on the trade. For example, no more than 1% of your account should be at risk on any one trade. Click here for more information about risk management strategies.
5. Consider your total exposure, perhaps no more than 2% of your account gets risked at any one time.
6. Identify the breakout. When a candle closes with 50% of its body over the support or resistance level, price action has developed.
7. Place the trade with the correct lot size, ensure you place a stop loss and target into the market.
You can implement breakout strategies at any time of the day, essentially whenever you get a setup.
If you are day trading with a strategy like this, then you would usually look for trades in the morning to give them time to develop before you call it a day.
London breakout strategies are popular choices. This is where you try to catch the initial breakout of the London trading session. More often than not activity will increase during this time and the idea is that once the direction is decided (the breakout in either direction), you can trade it. Trading this strategy will normally mean your positions are closed by the afternoon or evening.
Momentum trading strategy
Momentum trading is taking a trade based on the strength of the trend. For example, in an uptrend, if there are enough buyers buying, there will be enough force behind the movement to keep it going.
Momentum trading strategies rely on volatility and volume. In this example, we will be using the RSI (relative strength index) indicator. Below is the step by step walkthrough of a momentum trading strategy:
Trade set up
1. Identify the trend direction. If the market is making higher highs and higher lows, the trend is up. If it’s making lower highs and lower lows, the trend is down. Only trade in the direction of the trend (with the momentum).
2. Wait until the RSI enters either the overbought (above 70 level) or oversold (below 30 level) zones, depending on the direction you’re trending. For an uptrend, you want the RSI to be oversold, and vice versa if in a down trend.
3. Using an uptrend as an example, if the RSI moves out of the oversold zone, we have our signal to enter the trade, we just need a price action confirmation.
4. Place your stop where the trade would become invalidated. If the market is trending higher, you will have identified the higher highs and higher lows. Place the stop loss below the previous low. If the market goes below that low, the trade is invalid as the market is no longer trending up. It’s in the consolidation phase and has no momentum.
5. Ensure you put no more than 1% of your account size on the trade.
6. No target level is placed because we want to stay in the trade for as long as the momentum is there.
7. As you have the signal in the trade set up, you now need price action to confirm the direction.
8. Wait for a bullish candlestick formation, whereby the candle is larger than recent candles and closes close to the high of the candlestick.
9. Move you stop loss up to below every new low created by this market. You will exit the trade once the market goes from a trending market to a consolidation market.
Reversal trading strategy
With reversal strategies, you’re looking for confirmation that the current trend is over and that the new trend is starting.
Below is a step by step example of a reversal trading strategy:
Trade set up
1. Identify the trend direction. If the market is making higher highs and higher lows, the trend is up. If it’s making lower highs and lower lows, the trend is down.
2. Identify support or resistance zones where a reversal could take place. These should be evident by the market having held there in the past.
3. Wait for the market to stall at a resistance level (if the trend is up and you’re looking to sell). If in an uptrend, the market has stopped creating higher highs and higher lows, perfect.
4. Wait for the market to create a lower high. Once this has been created, then your trade is set up.
5. Identify your stop loss level. If in an uptrend, this should be above the high of the uptrend.
6. Consider lowering your risk on this strategy because you are trading against the trend.
7. Instead of 1%, a 0.5% risk would be more appropriate.
8. Identify your target level. If in an uptrend, take the distance from highest low to the highest high, then project that below the highest low.
9. Place the trade as soon as the market breaks below the recent low after creating a lower high. This is now the market showing you that it’s in a downtrend because it has created a lower high and a lower low.
This is a traditional reversal strategy whereby you let the market show you the direction before you enter the trade. There are a huge number of reversal strategies, which use a host of different indicators. Some are for a quick reversal whilst others are for more prolonged moves.
Scalping trading strategy
Scalping is a term to define banking a small number of pips or points as profit in a short period. The name initially related to scalping the spread; you’d be looking to capture movements as low as a pip or point inside seconds. But over recent years the term has evolved to include any strategy that gets used to bank small amounts over a short period.
Scalping is a difficult skill because of your critical cost; the spread is continuously changing. Therefore, if you’re aiming for a two pip profit and the spread suddenly widens to two pips, your advantage is lost.
Which trading strategies get used with MT4?
The MT4 platform is perfect to trade any strategies on. It offers all the most popular trading indicators so that you can trade your strategy effectively. On top of that you can also use a vast amount of custom indicators that have been developed by the MT4 community. Any indicator you need for your strategy, you will be able to access it through MT4.
One of the reasons MT4 is so popular is because of its ability to automate trading strategies. Expert advisors (EAs) are programs that take trades based on the criteria you determine. In very simple terms, if A, B and C are all ticked, then it will execute your trade for you.
There is an extensive library of free trading strategies and trading indicators already built-in to the platform. Applying these to your chart is a simple drag and drop exercise.
Cryptocurrency trading strategies
Cryptocurrency trading strategies can vary from other trading strategies because cryptocurrencies are more volatile.
Over recent years it’s not unusual for cryptocurrencies such as BTC (Bitcoin) to fall or rise by 10% in a session.
Whilst you can still apply the same strategies highlighted above, you’ll need to make sure your risk strategy is in line with the asset you’re trading. Ensure that you have enough margin (available funds) to cover any unexpected volatility. The key to trading cryptocurrencies is managing your risk and exposure.
Forex trading strategies
Reasons why traders like forex trading strategies:
● Liquidity. It’s very easy to enter and exit at the price you want to therefore planning your risk levels are considerably easier.
● 24/5 market. It’s open from Sunday night to Friday night, which means there are ample trading opportunities.
● Low costs. Due to the large volumes and liquidity, you pay some of the lowest spreads when trading the forex market, which means your bottom line is better.
Share trading strategies
Share trading strategies will differ significantly, depending on your aims.
If you’re looking to buy and hold as an investment, you need to consider whether you trade on leverage and what the additional costs might be to holding for prolonged periods.
If you’re looking to day trade shares (also referred to as equities or stocks), you again need to take into consideration whether you trade on leverage. Also you need to be aware that shares often move in more extensive ranges in comparison to equity indices or FX pairs.
They are known for gapping, where the market jumps past certain prices without trading there. This plays a huge role in your risk management strategy because there is a high risk that the market might jump over your stop loss.
This would then lead to you having more risk on a trade than you originally had planned. Not a position you want to be in!
Which strategy should you choose?/ Which is right for you?
All trading strategies will have winning trades and losing trades. You have to be patient and allow any approach to be used over enough time to judge its effectiveness. Some strategies will work for you, and some won’t. Trading is a personal thing, pick what you find works.
You also have to select a trading style, a method and a strategy that fits in with your lifestyle and work-life balance.
So how do you find which one is for you? Here are a couple of pointers to start you off.
● Lots of available time? With more time to dedicate, you could try day trading.
● Not much available time? You could look at the markets once a week and try swing trading.
● Always thinking about the trade? Might be better to stick to day trading and not keep yourself up all night.
● Enjoy analysis? Consider using primary and secondary indicators. You can add oscillators like RSI and MACD to help confirm your trades.
● Which strategy to try first? There are three main strategies; trending, countertrend, and range trading. Maybe look into trend following strategies first.
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