Why is day-trading so popular? Is it possible to make money by buying and selling securities on the same day, sometimes within seconds?
The truth is, day trading isn’t as easy as advertisements show it. There is a huge possibility you’ll lose a lot of money if you don’t approach this trading method with caution. On the other hand, many sophisticated investors choose this active trading type to gain profit, and they successfully do so.
Since there are many pros and cons, the secret to profit from day trading is to develop deep knowledge of the market, choose the right strategy, and constantly monitor the asset and everything that can affect its price.
That said, let’s see some strategies for day trading and their most important points so that you can decide whether they’ll work for you.
Strategies for Day Trading
You should know that there are numerous strategies for day trading. Each of them exists because a trader or traders had used it before and managed to profit. The strategies result from successful stories, meaning they may not work for you.
Penny stocks
Trading penny stocks is very popular among day traders. Penny stocks are securities under $5 per share. Usually, these securities come from relatively new companies with a low market capitalization.
Penny stocks are popular because they’re cheap. This attracts traders, as they don’t need a large capital to open a position.
Conversely, penny stocks come with a higher possibility of a 100% return. This is only logical because a $1 stock needs to gain only a $1 value for a 100% return, while a $100 stock needs another $100 for a 100% return.
Considering the required capital and the potential gain, penny stocks can be good for day trading. However, they come with disadvantages too.
They typically have a higher level of volatility. Thus, they have a higher reward/risk potential. Not only can you lose your capital, but you can also lose more than that if you buy on margin.
Other disadvantages associated with penny stocks are the low liquidity, lack of information about the company’s record, and high probability of fraud. Here are some tips for trading penny stocks:
- Avoid pink sheet
- Go for liquid penny stocks
- Use stop loss.
Momentum strategy
The momentum strategy is based heavily on volatility. You find an uptrend opportunity, buy it, and sell it when it loses momentum.
This strategy can be used for both day trading and regular buy and holds. That’s because the trader must understand the market to decide when they should enter the position, how long to hold it, and when to exit. Sometimes, these points don’t happen on the same day.
Now, if you want to use the momentum strategy for day trading, the first thing to do is find the right stock. Since you have to buy and sell within the same day, you can’t hold it for a longer period and wait for it to reach a peak. So, you need a stock that moves.
You have to pick the right moment to enter the position, carefully calculate the period you’ll hold the security, cautiously monitor the movements, and make a profitable exit. The key is in the perfect timing. Therefore, check out these tips:
- Don’t jump in/out of a position too soon/late - wait for a momentum confirmation; leave before saturation has been reached
- Monitor changing trends, reversals, and news constantly.
Gap trading
The fading strategy is widely known among day traders. However, to give you a better explanation of a fade, we have to start from the beginning. Or should we say, from the gap?
The simple definition of what gaps are is that they are spaces on a chart. When a financial instrument moves up or down, and there are little or no trades in-between, the chart will show a gap.
Gaps happen because of fundamental and technical factors. One company’s stock may increase if its earnings are higher than expected. This means that they can open higher than the previous day’s close.
If a gap is filled, it means that the instrument’s price is back at the previous level. Fading the gap is one of the two approaches to trading gaps, while the other one is following the gap.
The former is used by traders who believe the gap will be filled. The latter is used by traders who believe the price will continue to move.
Gaps based on movement
Gaps can be divided into several categories. They can be full or partial gaps, and they can go down or up.
For instance, you can find a long full gap up, meaning the financial instrument opens higher than yesterday’s close. Plus, the price is higher than yesterday’s highest price.
Conversely, a long full gap down would be when the instrument’s price goes below yesterday’s lowest point.
We have a similar situation with partial gaps. Long partial gaps up occur when the opening price is higher than yesterday’s close. However, in this case, the price doesn’t go higher than the previous close’s highest point.
Categories
There’s another way to group gaps into categories. Gaps can be breakaway, exhaustion, common, and continuation gaps.
Breakaway gaps are recognizable because they occur at the end of a pattern. They may signal the start of a new trend.
Exhaustion gaps may signal the end of a trend. The market has reached the limits of the current downtrend or uptrend. The gaps may show the final attempt for a new price hit in a particular direction.
The runaway or continuation gaps may signal that the ongoing trend will continue. They usually occur in the middle of the pattern and indicate that many traders have the same opinion about the instrument’s future direction.
Fading strategy
Fading the market is a strategy with one significant thing in common with day trading - risk. Using this strategy means trading against the trends.
What does it mean to go against current trends? It means the trader sells when the security’s price rises and vice versa. The reason why some traders use this strategy is that they believe a particular trend is still active because there are traders who react slower.
Since this is a contrarian strategy, it needs an ongoing trend to go against it. That said, fading the news is the most popular category of fading. This one is easy to understand.
The trader buys or sells after a news release. The news can be about economic news, including activity, reports, interest rate announcements, new launches, etc. The securities move when the market expects a news release and traders start speculating.
This leads to trends where particular securities go up or down. Contrarian traders go against the trends.
Although there are various fading strategies, day traders usually use news releases. That’s because if the market overpriced the security based on expected news, the price would change shortly after the release. Until then, the day trader may profit.
Scalping strategy
Out of many day trading strategies, scalping can be considered one of the least risky styles. This strategy involves buying and selling financial instruments that have small price movements.
Scalping is considered safer than some other strategies because, generally speaking, smaller price changes occur more often than large jumps. Scalping as a trading style can be divided into three major categories.
As a trader, you can try the strategy known as market making. To profit from the market-making technique, you must simultaneously submit bids and make offers for the same instrument. The spread between the bids and the offers is the profit opportunity.
Another way to profit from scalping is to buy shares and then sell them when they make a small price move. Remember that these small moves can be as little as a few cents. You’ll profit by buying a large number of shares.
Finally, you can also profit from scalping by entering a position and setting an exit strategy when the trade is near a risk/reward ratio of 1:1.
The third technique belongs to the strategies for day trading. Still, it may not work entirely if the trade doesn’t hit the stop within one trading day.
Price action trading
As you already know, day traders base their decisions on various types of analysis. Price action trading is a trading style that it’s based on technical analysis. However, the traders don’t use conventional indicators for research purposes.
In short, traders base their decisions on previous price changes. The trader uses various technical indicators (tools) to read and analyze the market, focusing on the price movements and making a decision.
Unlike other strategies for day trading, this technique doesn’t include vast analyses but only monitors recent and current price movements. Also, the trader doesn’t make a fundamental analysis, which is an unavoidable part of other trading styles.
Trading the news
We already mentioned that traders, especially day traders, often take advantage of market changes caused by expected economic or other news. Now, news that can shake and shape the market is divided into regular (periodic) and unexpected (one-time).
In the first category, you’ll find interest rate announcements, quarterly earnings reports, economic data releases, etc. These announcements are expected, and they move the market.
The second group includes unexpected moves that can greatly move the market. For instance, terrorist attacks, geopolitical disputes, medical or violent outbursts, etc.
Now, whether small or big news, they all have an impact on a particular financial instrument or even the entire market. Traders take advantage of this impact by buying, selling, and speculating to profit or reduce losses.
Given that there are many important factors and each trader can have a unique position, it’s crucial to approach the trading-the-news strategy carefully.
For instance, if the trader is holding a huge long or short position on a stock, they must carefully analyze the situation before deciding on their next move, even when the expected earning reports are positive.
Is Day-Trading Risky?
The short answer is yes. There are multiple reasons why day trading is risky and even not recommended, especially to beginners.
For starters, you need a large capital, and you have to be prepared to lose it. Then, it’s crucial to have deep knowledge and understanding of the market to be prepared to take action.
Further, you’ll probably need various software programs and alert services to analyze the market for you and inform you about every movement. Don’t underestimate the power of these programs, as even the most experienced traders rely on their accuracy.
Another reason why day trading is risky is the fact that there are many internet scams promising millions to new traders. This is why it’s crucial to make double checks when picking a service.
The professionals have different opinions. However, many money managers, economists, financial practitioners, and even long-term traders agree that while day trading may result in massive profits, those rewards don’t justify the risks.
Day Trading Process
There are many factors day traders consider to profit from day trading. We already mentioned that they usually invest huge capital in the trades. In order to do so, the traders invest their capital, but they often use leverage.
This adds up an additional risk because if the trade doesn’t turn out favorably for the trader, they will lose their own money and end up in debt.
Another factor that day traders consider is the liquidity of the financial instrument. This is rather logical, as buying and selling a security that’s not liquid enough is difficult.
The volatility of security also plays a huge role. Day traders always consider volatility as high volatility may result in profit. It means the market is unstable, and the trader can sell the security at a much higher price than they have bought it.
Financial instruments used in day trading
Traders can buy and sell various types of financial instruments, such as stocks, currencies, options, and cryptocurrencies.
What’s the Most Effective Day Trading Strategy?
This is a tricky question because it has many correct and wrong answers. If we analyze successful day traders, we’ll notice that every trader employs a different strategy. Often, experienced traders combine multiple methods during a trading session.
Following a trend can be considered the most popular trading technique. That’s because it’s safer than the other methods. On the other hand, numerous contrarian traders go against the current trend and make massive profits.
The same applies to every other trading strategy. It may work for others but not for you. That’s why the most important thing is to gain experience before trying to day trade. Start low, and invest in advanced analyzing tools.
Can You Day Trade Options?
Yes, you can! Day trading can be employed for various financial instruments, including options, futures, stocks, currencies, cryptocurrencies, etc.
As you saw above, most strategies for day trading have a similar principle. They’re based on market volatility and often use even the smallest price movements to gain profit. Options day trading includes the same strategies.
When it comes to financial instruments, many traders consider options more challenging to trade than stocks. That’s why almost all options traders use various tools, software, and services to monitor, analyze, and stay informed about the market.
One such service is Foolproof Options which operates as an options-alert platform. One of the things that make Foolproof Options superior to the other alert services is its price.
For only $97 per month, you’ll get at least three trade alerts per week that will include the ticker symbol, the trade type, the price target, the suggested trade idea, and the estimated time for the trade to pan out,
Also, this company believes it has the right recipe for options trading. That’s why it offers a 200% guarantee if you prove you didn’t make a return after following the alerts.
Can You Day Trade Options for Income?
Yes! A seasoned options trader who understands how options function and how to build a good options strategy can try to day trade options contracts. We say this because options can be both easy to trade but also come with risks.
After you establish a solid strategy and start to make profits out of options contracts, you can level up and try to set up your day trading strategy. Whether this will be easy or challenging depends on your level of expertise in options and the tools and services you're using to monitor the market.
As for which strategies are the best for options day trading, there isn’t a right answer. Every trader considers various factors when choosing an asset and how they will approach the trade.
For instance, scalping works for many traders who buy weekly options and sell the contracts within the same day. Of course, you’ll need a larger capital if you want to profit using this strategy.
That’s why it’s important to research and consider all crucial factors before building your trading style!