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A Primer on Day Trading Strategies

Updated on 2012-12-28 by Guest







The success – or downfall of a trader has a lot to do with the day trading strategy that he uses. Of course, there’s no one strategy that works for all. Often, the perfect trading set-up is one that involves the meeting of trader’s personality, skill and trading system. That said, most day trading strategies these days fall under these broad categories:


Scalping

Scalping strategies take advantage of small price movements. Scalpers think it’s ultimately more profitable to catch small price changes than to wait for big ones. Thus, they’re typically getting in on a trade for X amount of shares and they’d sell those shares after it moves a few cents higher. They do this many times during the trading day and profits – or losses, for that matter, can stack up to a significant amount at the end of the day.

This trading strategy can be very frenetic and it most definitely is not for everyone. Scalping requires the trader to stay glued to his monitor since the slightest price change can affect his trades. One downside to this strategy is the trading fees he has to pay. Since he will have to enter many trades and returns of each trade are small, paying commissions can eat up a considerable chunk of the profit.


Fading

Fading strategy is a contrarian method of trading the market. It requires the trader to bet against the trend; thus, he will go long when market is going down and go short if market is going up. This strategy is based on these premises:

• When market is rapidly going up, it may be overbought. If it is going down, it may be undersold. At which cases, a correction could be underway.
• If market is rapidly going up, early buyers may be feeling the tension and cash in on their holdings.
• Markets on a trend most often will not continue in its trend in a straight line; rather, it will experience some pullbacks before it goes back to its trend.

Fading, although very lucrative, is a very risky strategy. Traders have to have high risk tolerance and not get panicky at the first sign of negative P&L.


Range Trading

Range strategy takes advantage of daily market volatility to make a killing. When a stock is oscillating between the highs and lows of the day, range strategy is best put to use. Rules and parameters set in place for this strategy could vary. For example, some traders would bid on the day’s low and offer at the day’s high and set the price target at the next sign of reversal. The downside is that stocks could break out of a range and when they do at price levels that doesn’t have much trading volume, the stock could move in a very erratic manner giving the trader a very small window of opportunity to get out.

Another range strategy involves determining support and resistance levels. The trader will offer on the first resistance level and adds to his position on succeeding resistance levels. Likewise, he will also prepare and bid on the first support level and limit orders on succeeding support levels to add to his position.


Momentum

For traders using momentum strategy of trading, they’d have to choose assets that are clearly showing signs of strong trend with high volume and ride in on that trend for profit. One way of doing this is to look out for news releases. For example, company XYZ announces positive earnings for that quarter resulting in a rally of its stock price. A momentum trader will enter on a long position for that company and will milk his position for maximum profits until he sees signs of a reversal. Thus, the price target for momentum strategy is when bearish candles slowly appear or bids starts to thin out on level 2 and offers are starting to get thick. In many cases, traders can also try to protect his profit by cutting his position at different price levels.

Day trading strategies is as much about the exit strategy as it is about the entry. That’s why stop-losses should be very much a part of any of those strategies discusses above. After all, every trader should keep his eye on the bottom-line – the profit. And fact is, while entries set up the precedent, exits are where profits are made.









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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.