Day Trading Strategies For Beginners
Filed Under: Active Trading, Technical Analysis
When people use the term "day trading", they mean the act of buying and selling a
stock within the same day. Day traders seek to make profits by�leveraging large
amounts of capital to take advantage of small price movements in highly liquid
stocks or indexes. Here we look at some common day trading strategies that can be
used by retail traders.
Tutorial: An Introduction To Technical Analysis
Entry Strategies
Certain stocks are ideal candidates for day trading. A typical day trader looks for
two things in a stock: liquidity and volatility. Liquidity allows you to enter and
exit a stock at a�good price (i.e. tight�spreads and low slippage). Volatility is
simply a measure of the expected daily price range - the range in which a day
trader operates. More volatility means greater profit or loss. (To learn more, see
Day Trading: An Introduction�or�Forex Trading Walkthrough.)
Once you know what kind of stocks you are looking for, you need to learn how to
identify possible entry points. There are three tools you can use to do this:
Intraday Candlestick Charts -�Candles provide a raw analysis of price action.
Level II Quotes/ECN -�Level II and�ECN provide a look at orders as they happen.
Real-Time News Service - News moves stocks. This tells you when news comes out.
We will look at the�intraday candlestick charts and focus on the following three
factors:
Candlestick Patterns - Engulfings and dojis
Technical Analysis -�Trendlines and triangles
Volume - Increasing or decreasing volume
There are many candlestick setups that we can look for to find an entry point. If
properly used, the doji�reversal pattern (highlighted in yellow in Figure 1) is one
of the most reliable ones.
Figure 1 - Looking at candlesticks - the highlighted doji signals a reversal.
Typically, we will look for a pattern like this with several confirmations:
1. First, we look for a volume spike, which will show us whether traders are
supporting the price at this level.Note that this can be either on the doji candle,
or on the candles immediately following it.
2. First, we look for a volume , which will show us�whether traders are supporting
the price at this level. Second, we look for prior�support at this price level. For
example, the prior low of day (LOD) or high of day (HOD).
3. We look at the Level II situation, which will show us all the open orders and
order sizes.
If we follow these three steps, we can determine whether�the doji is likely to
produce an actual turnaround, and we can�take a position if the conditions are
favorable. Typically, entry points are found using a combination of these three
tools. (For more see the Charting Section of the Forex Walkthrough.)
Finding a Target
Identifying a price target will depend largely on your trading style. Here is a
brief overview of some common day trading strategies:
Strategy Description
Scalping Scalping�is one of the most popular strategies, and it involves selling
almost immediately after a trade becomes profitable. Here the price target is
obviously just after profitability is attained.
Fading Fading�involves shorting stocks after rapid moves upwards. This is
based�on the assumption that (1) they are overbought, (2) early buyers are ready to
begin taking profits and (3) existing buyers may be scared out. Although risky,
this strategy can be extremely rewarding. Here the price target is when buyers
begin stepping in again.
Daily Pivots This strategy involves profiting from a stock's daily volatility.
This is done by attempting to buy at the low of the day (LOD) and sell at the high
of the day (HOD). Here the price target is simply at the next sign of a reversal,
using the same patterns as above.
Momentum This strategy usually involves trading on news releases or finding
strong trending moves supported by high volume. One type of momentum trader will
buy on news releases and ride�a trend until it exhibits signs of reversal. The
other type will fade the price surge. Here the price target is when volume begins
to decrease and bearish candles start appearing.
You can see that, although the entries in day trading strategies typically rely on
the same tools used in normal trading, the exits are where the differences occur.
In most cases, however, you will be looking to exit when there is decreased
interest in the stock (indicated by the Level II/ECN and volume). (For further
reading, see�Introduction To Types Of Trading: Momentum Traders and Introduction To
Types Of Trading: Scalpers.)
Determining a Stop-Loss
When you trade on margin, you are far more vulnerable to sharp price movements than
regular traders. Therefore, using�stop-losses is crucial when day trading. One
strategy is to set two stop losses:
1. A physical stop-loss order placed at a certain price level that suits your risk
tolerance. Essentially, this is the most you want to lose.
2. A mental stop-loss set at the point where your entry criteria are violated. This
means that if the trade makes an unexpected turn, you'll immediately exit your
position.
Retail day traders usually also have another rule: set a maximum loss per day that
you can afford (both financially and mentally) to withstand. Whenever you hit this
point, take the rest of the day off. Inexperienced traders often feel the need to
make up losses before the day is over and end up taking unnecessary risks as a
result. (To learn more, see The Stop-Loss Order - Make Sure You Use It.)
Evaluating and Tweaking Performance
Many people get into day trading expecting to make triple digit returns every year
with minimal effort. In reality, around 80% of day traders lose money.�A recent
(January 2005) behavioral finance study of the Taiwanese stock market conducted by
professors at the University of Taipei and the University of California suggests
that "less than 20% of day traders earn profits net of transaction costs". Most of
these people�would be�better off putting their money on the roulette table than
using it for day trading! However, by using a well-defined strategy that you are
comfortable trading, you can improve your chances of beating the odds.
How do you evaluate performance? Most day traders evaluate performance not so much
by a percentage of gain or loss, but rather by how closely they adhere to their
individual strategies. In fact, it is far more important to follow your strategy
closely than to try to chase profits. By keeping this mindset, you make it easier
to identify where problems exist and how to solve them.
Conclusion
Day trading is a difficult skill to master - well over 50% of those who try it
fail. But the techniques described above can help you create a profitable strategy
and, with enough practice and consistent performance evaluation, you can greatly
improve your chances of beating the statistics.
by Justin Kuepper (Contact Author | Biography)
Justin Kuepper has many years of experience in the market as an active trader and a
personal retirement accounts manager. He spent a few years independently building
and managing financial portals before obtaining his current position with
Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other
popular financial portals. Kuepper continues to write on a freelance basis,
covering both finance and technology topics.
DIFFERENT TRADING STRATEGIES :-
We can categorize or divide our strategies as per different time frames &
situations for better understanding.
1. MORNING 30-MINUTES STRATEGY.
2. TRADES AFTER MORNING TRADES.
3. TRADES DURING QUARTERLY RESULTS.
4. GAP OPENINGS OF MARKET.
* MORNING 30-MINUTES STRATEGY *
This strategy is based on understanding the moves of the BROKER. ( sentiments )
If you track the Close price you will wonder the Open price of the trade day is not
always the same as that of the previous days Close price. It is because the major
brokers (BIG TRADERS) according to the sentiments lay a trap in which small traders
get trapped and run into losses. If we understand the brokers mind we can make
profits 90 % times in normal market in the first 3 to 30 minutes of trading.
( Remember you should close your positions in this time frame )
Take the following figures and trade plan with you on the basis of calculations
given below. We will call it Brokers Strategy ( BS )
Difference between HIGH & LOW of previous day i.e.: D = ( H - L )
Now BS = D / 3
BUY PRICE = ( Pr. Close - BS )
SELL PRICE = ( Pr. Close + BS )
For understanding the BS one should understand the following::..
STRONG SHARE or STRONG CLOSE (close price is higher than previous close) &
WEAK SHARE or WEAK CLOSE ( close price is lower than previous close )
Now on the basis of above calculations you are ready with the figures i.e.: BUY
PRICE, Pr. CLOSE & SELL PRICE of STRONG SHARE & WEAK SHARE separately.
Now on trade day if STRONG share opens anywhere between Pr. Close & BUY PRICE you
can BUY first & keep for sell @ SELL PRICE as your target.
The Trap :- As the broker opens the share at a price lower than Pr. Close one gets
the feeling as if the share has become weak and sells it, thus falling in the trap.
On trade day if WEAK share opens at or above SELL PRICE you can SELL first & buy
later @ BUY PRICE as your target.
The Trap :- As the broker opens the share at a higher price than the Pr. Close one
gets the feeling that the share has become strong and buys it thus falling in the
trap.
Note: For this strategy Preferably take shares with high volumes & less
volatility(not operator driven stocks). This strategy will not work in GAP
OPENINGS. This strategy requires you to be very fast in taking decisions and
accordingly positions. Furthermore One should compulsorily come out or close the
position in the mentioned time frame. Life is not that easy and if you find that
your position was wrong immediately square it ( close it)
REMEMBER TO CLOSE POSITION WITHIN THE TIME-FRAME MENTIONED
FEEDBACKS WELCOME
STRATEGIES ( FORMULAE ) FOR INTRADAY TRADING
by:::..intradaySuRe.
The intraday movements of share prices are generally governed by Support &
Resistance levels. The intraday volume, OPEN, HIGH, LOW, CLOSE & previous CLOSE
prices are very important & one should track these prices daily. Previous data of 3
to 5 days is what is to be maintained or tracked. And the intraday data prior to
the trading day is important.
OPEN ( O ) : The opening price for the particular day.
HIGH ( H ) : The highest price for the particular day.
LOW ( L ) : The lowest price for the particular day.
CLOSE ( C ) : The closing price for the particular day.
We can calculate the support & resistance levels for the next trading day with the
help of above prices. The basic formula to calculate the various support(S1,S2,S3)
& resistance ( R1,R2,R3 ) levels is as follows :-
Support & Resistance Levels
R3 = H + 2 * ( B - L )
R2 = B + ( H - L ) or B + ( R1 - S1 )
R1 = ( B * 2 ) - L
BASE = B = ( H + L + C ) / 3
S1 = ( B * 2 ) - H
S2 = B - ( H - L ) or B - ( R1 - S1 )
S3 = L - { 2 * ( H - B ) }
YOU have to understand one more important aspect of these levels. As the price
moves from one level to other the immediate lower level becomes support & immediate
upper level becomes resistance. Suppose the price is above R1 than R1 becomes
immediate support & R2 becomes immediate resistance of the price movement.
Before understanding the different Strategies, we will take a look at the results
of a very long term study of more than 10 yrs.
Actual LOW is lower than S1.......... 43 % times.
Actual HIGH is higher than R1......... 43 % times.
Actual LOW is lower than S2......... 17 % times.
Actual HIGH is higher than R2......... 17 % times.
Actual LOW is lower than S3......... 3 % times.
Actual HIGH is higher than R3........ 3 % times.
Now just apply your mind to interpret the findings of above study to help you
decide ENTRY & EXIT points for your BUY or SELL positions.
THIS FORMS THE BASIS OF YOUR UNDERSTANDING THE MARKET & INTERPRETTING IT BETTER &
ALSO GRASPING MY DIFFERENT STRATEGIES.
POWER OF 3 :-
As a trader always remember 3 is a very important number.
3 sec., 3 min., 3 hrs, 3 days, 3 months , 30 % etc. and so on.
Some basics for a novice trader :
Intraday as the term itself is self explanatory is the position you take and clear
on the same trading day.
As a general understanding of trading people feel that they have to first buy
something to sell it later at profit.
But in intraday trading you can SELL a share even if you don't have it with you.
This is termed as SHORT SELL. i.e.: You sell suppose 100 XYZ share @ Rs. 250 , here
if the price comes down to say 220 and you buy back the 100 XYZ shares. Your
transaction is complete. 250-220=30. And 30*100=3000 Rs is your profit.
i.e.: Short sell is exactly opposite of the buy first and sell later transaction.
SHORT SELL transaction has to be compulsorily completed by buying back the
equivalent no. of shares on the same trading day.
General but IMPORTANT for all :
REMEMBER INTRADAY TRADING IS A MINDGAME. There are many strategies one can apply to
make profits daily in intraday trading as per my experience, observations &
understanding. These strategies have been categorized or you can say designed on
the basis of different TRADE TIMES, SITUATIONS, MARKETS, & SHARES. As discussed
Mostly traders worldwide use above formula of Support & Resistance both for
intraday trading as well as Delivery based trading short term & long term. So my
advice would be to refer the support & resistance levels along with the various
recommended strategies by me.
Although one can apply different strategies for different trades, I would suggest
traders to select one strategy, which they are comfortable with, as per the
mindset, personality & risk taking capacity.( i.e.: either BUYING strategy or SHORT
SELLING strategy. A simple reason is that you cannot be two persons at one time, or
you cannot have two views at a time.) Once you master one strategy, you can
practice another and apply. YOU can also make profits forever by sticking to one
strategy forever.
A little study or homework is compulsory to be successful and self sufficient,
independent trader.
DIFFERENT TRADING STRATEGIES :-
We can categorize or divide our strategies as per different time frames &
situations for better understanding.
1. MORNING 30-MINUTES STRATEGY.
2. TRADES AFTER MORNING TRADES.
3. TRADES DURING QUARTERLY RESULTS.
4. GAP OPENINGS OF MARKET.
* MORNING 30-MINUTES STRATEGY *
This strategy is based on understanding the moves of the BROKER. ( sentiments )
If you track the Close price you will wonder the Open price of the trade day is not
always the same as that of the previous days Close price. It is because the major
brokers (BIG TRADERS) according to the sentiments lay a trap in which small traders
get trapped and run into losses. If we understand the brokers mind we can make
profits 90 % times in normal market in the first 3 to 30 minutes of trading.
( Remember you should close your positions in this time frame )
Take the following figures and trade plan with you on the basis of calculations
given below. We will call it Brokers Strategy ( BS )
Difference between HIGH & LOW of previous day i.e.: D = ( H - L )
Now BS = D / 3
BUY PRICE = ( Pr. Close - BS )
SELL PRICE = ( Pr. Close + BS )
For understanding the BS one should understand the following::..
STRONG SHARE or STRONG CLOSE (close price is higher than previous close) &
WEAK SHARE or WEAK CLOSE ( close price is lower than previous close )
Now on the basis of above calculations you are ready with the figures i.e.: BUY
PRICE, Pr. CLOSE & SELL PRICE of STRONG SHARE & WEAK SHARE separately.
Now on trade day if STRONG share opens anywhere between Pr. Close & BUY PRICE you
can BUY first & keep for sell @ SELL PRICE as your target.
The Trap :- As the broker opens the share at a price lower than Pr. Close one gets
the feeling as if the share has become weak and sells it, thus falling in the trap.
On trade day if WEAK share opens at or above SELL PRICE you can SELL first & buy
later @ BUY PRICE as your target.
The Trap :- As the broker opens the share at a higher price than the Pr. Close one
gets the feeling that the share has become strong and buys it thus falling in the
trap.
This strategy requires you to be very fast in taking decisions and accordingly
positions. Furthermore One should compulsorily come out or close the position in
the mentioned time frame. Life is not that easy and if you find that your position
was wrong immediately square it ( close it)
Note :- The BUY PRICE as per above calculation is approximately S1
& The SELL PRICE as per above calculation is approximately R1
* Some more morning strategies :::::::.
* Some more morning strategies :::::::.
A ) SHORT SELL :- ( sell first & buy later )
OPEN & HIGH IS SAME:.
Sell just below HIGH price if it is not breaking the high price for 3 minutes.
Example : If O-H is 110 sell @ 109 with a SL ( stop loss ) just above HIGH.
Best results are observed if :-
a) Market is Bearish ( weak )
b) O-H rate is near or above SELL PRICE i.e.: ( pr. Close + BS )
c) O-H rate is @ or near R1, R2, R3
d) Share price has gained 10-30% in previous 1-3 trade days.
e) Weak share but O-H rate is @ or near R1, R2, R3
B ) BUYING :- ( buy first & sell later )
1. OPEN & LOW IS SAME::..
Buy just above LOW price if it is not breaking the low price for 3 minutes. Example
: If O-L is 100 buy @ 101 with SL ( stop loss ) just below LOW.
Best results are observed if :-
a) Market is Bullish ( strong )
b) Pr. Close is Strong ( i.e.: it is a strong share )
c) O-L is near or below Pr. Close
d) O-L rate is near or below BUY price or @ S1, S2, S3
2. STRONG SHARE :- ( i.e.: strong close pr. day )
BUY if :-::::..
a) OPEN is @ BUY price.
b) OPEN is same as pr. Close.
c) OPEN & LOW is same, as discussed above.
d) OPEN is just above pr. Close but far below SELL price.
Best results if market is bullish. Keep the target of getting out @ SELL price, or
@ R1, R2, R3 if it is showing strength & volume is more than pr. Day.
PLEASE REMEMBER : 1) AS A INTRADAY TRADER YOU SHOULD NOT FIGHT WITH THE MARKET. BE
READY TO ACCEPT A SMALL DEFEAT RATHER THAN MAKING IT A BIG FAILURE.
2) IT IS NOT A EASY GAME. UNDERSTAND IT . ALWAYS ANALISE SUCCESS & FAILURE FOR
EVERY POSITION YOU TAKE.
3) Select a strategy. Do the homework before trading for that strategy only. Don't
mix other strategy with it. PAPER-TRADE.for few days sincerely(the more time you
take the better)......than start with small qty. for a period of say a month(do not
overtrade your limits).......once your success for your strategy is 70-
80%.........than increase qty in steps again. .....DO NOT OVER RISK.......YOU
CANNOT CHANGE THE MARKET ....ALL YOU CAN CHANGE IS YOURSELF......TOWARDS SUCCESS.
4) Once you get the feel of price movements , how and why they happen....then YOU
may take additional guidance of any softwares (NOT MANDATORY)
5) YOU CAN MAKE MONEY BY STICKING TO ONE STRATEGY FOREVER ALSO.......NEWER FORGET
THIS.........SO.......JUST KEEP A AIM TO MASTER ONE STRATEGY.......AND LOOK FOR
OPPORTUNITIES ....FULFILLING THE CRITERIA OF YOUR STRATEGY
