Every investor has his or her own trading strategy. Some long term investors hold undervalued securities for a long period and roll over their capital by reinvesting the compound interest (cash dividends or stock dividends); Others, however, are keen on making profits from daily market fluctuations through short-term operations. Day Trading is a common method used by many short term traders.
In this article, ZFX will explain the common strategies and techniques of day trading.
What is Day Trading?
Day trading usually refers to the practice of purchasing and selling security within a single trading day. A day trader chooses to open and close all his positions on the same day. He/she usually uses numerous trading strategies and technical analysis to predict the market trend, and profit from price fluctuations in a short period of time via leverage. Successful day traders also need to have a lot of self-discipline.
Day Trading Strategies and Techniques
Fighting your way in and out of the market, earning profits on every market move, is the dream of every day trader. However, statistically, about 72% of day traders lose money and only about 20% can make money. What makes this 20% different? It is not difficult to understand that the most important factor must be excellent trading skills and strategies. Of course, psychological quality is also important. Here are the trading strategies for three common chart patterns:
1 / Range trading
In general, the market trend is either up or down, but occasionally the market will vacillate, a situation known as consolidation or correction. Often, experienced analysts or traders would advise you to avoid big moves where the trend is unclear to prevent losses from market volatility. But in fact, if the trader is familiar with, or has a good grasp of the range to trade, he can sometimes take advantage of the swing to trade spread, which is also one of the favorite movements of some traders.
Figure 1: Traders can buy at support and sell at resistance by taking advantage of the consistent market moves within the range to earn profits with the day.
As shown in the figure above, the previous correction of oil prices between 39.73 and 40.66 means that aggressive traders can make use of the volatility of prices within the range to buy at support and sell at resistance, which is a typical range-trading strategy.
Strategies and techniques of range trading
- Grasp market moves with the range through technical indicators such as Bollinger band, ATR, etc
- Make good use of the trend line to set the range
- In terms of strategy deployment, use stop losses to avoid market breakout
2 / Trend trading
Trend trading refers to the practices of taking positions along the direction of market momentum. For example, if short-term volatility is dominated by an uptrend, it is reasonable to assume that going long in the short term seems to have a higher winning rate and we can make easy profits by going long. In addition, the analysis required for trend trading is the lowest among all trading types. Therefore, learning how to trade with the trend is the most important lesson for the newcomer who wants to be a day trader at the beginning.
Figure 2: Where the market is dominated by an uptrend, moving average tends to provide superior performance by following trends, so day traders can also use it to find a decision point for short-term buy.
As shown in the figure above, if there is a clear trend in the market, the best strategy for the trader is to follow the trend. Therefore, technical indicators tracking the trend can be used as the decision point for short-term trading.
Strategies and techniques of trend trading
- Identify the general trend of ups and downs with the help of technical indicators, such as moving average, Ichimoku cloud, etc
- Take “each wave is higher than the last wave” and “each wave is lower than the last wave” as the general principle of the trend
- In terms of strategy deployment, add how to capture the breakout
3 / Countertrend trading
Countertrend trading is the opposite of trend trading, in which the trader actively anticipates the current trend will reverse and takes a countertrend position. For example, the trader can predict when the market is about to reach its peak and create a short position upon trend reversal. If the trader is right, he can make huge profits.
Figure 3: The appearance of a breakout to the upside signals that the market has bottomed so the investors can go long against the trend
However, since trading against the trend requires the most rigorous technical analysis, traders will often lose money if they are not proficient in technical analysis. Therefore, it is not recommended for beginners to do countertrend trading. It should be the last one of all trading types to learn.
Strategies and techniques of countertrend trading
- Predict trend reversal via technical indicators such as RSI, stochastic oscillator, etc
- Identify the top and bottom by using trend line, trend pattern and K-line diagram
- In terms of strategy deployment, the inverse operation often needs a firm grasp of market condition and identification of the entry and exit points of the market quickly
CFD (Contract for Difference): The common Financial Instrument Used in Day Trading
All kinds of assets, including commodities, bonds, stocks, options, and so on, can become the object of the day trading as long as it is profitable and the amount of capital is sufficient. Sometimes, traders may be unable to trade high-priced stocks or bonds because of the size of their funds. Then, this is a good time to use CFD, which has been very popular recently..
CFD is highly leveraged, allowing traders to trade large contracts with small amounts of money, and is therefore welcomed by retail investors. Nevertheless, while the profits from high leverage are attractive, the risks associated with them are high. Even if the trading rules and capital requirements of CRD are retail-friendly, traders shall have sufficient risk awareness and psychological preparation.
Learn more about CFDs: What is CFD? Learn how CFD Trading works with Examples
Important Things to Note on Day Trading
As a day trader, the most important thing he cares about is whether there are trading opportunities during the day. As a result, traders tend to choose assets that are prone to significant fluctuations. More volatile assets often have to satisfy the following two requirements: liquidity and information.
1 / Liquidity of the Trading Instruments
It would certainly be easier to trade the EUR/USD than INR/USD or USD/INR because euro has more press exposure and demand relative to the Indian rupee, so there must be more traders involved. With large liquidity, it is easier for the euro to form a trend or generate market momentum so that traders can formulate a good trading strategy.
2 / News & Data Release
Among the many economic data released each month, there are a few relatively important ones, including the commonly heard US retail sales, US non-farm payrolls, and the interest rate decisions of the central banks. Each week, the U.S. initial jobless claims and U.S. API and EIA crude oil inventory reports will also be released. When these data are published, they can often create opportunities for large swings in particular assets.
You can check our Economic Calendar for the upcoming economic data release.
As a result, traders who have confidence in their ability to judge fundamentals can take advantage of these high volatility opportunities and make profits. However, market reactions to these fundamentals are not always consistent, so traders should also pay attention to risk control.
Finally, we would like to remind the readers who want to step on day trading that day trading attaches great importance to the precision of technical analysis and trader’s mental quality due to its high operating frequency and short operating cycle. It is easy to get lost in a trade if you are not mentally mature enough, which can result in big mistakes, so it is advisable to carefully measure your ability before doing day trading
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
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