Day Trading Strategies for Experienced Traders
In day trading, traders open and close positions within the same day or trading session. Flexibility, independence and income prospects are some of the reasons why they choose to become day traders in the first place. However, day trading is riskier than other types of forex trading, since it could also lead to significant losses, especially with leveraged financial products. So, day trading is not for the risk-averse, but more suitable for experienced traders.
The strategies involve swiftly buying and selling assets like currencies and equities, across very short timeframes, to take advantage of market volatility. Such trading could occur numerous times a day, requiring fast decision making and a critical eye for identifying trading opportunities, which only comes with experience.
Here are some strategies that experienced traders can use in the markets.
What You Need for Successful Day Trading
Whether a beginner or an advanced trader, day trading requires three essential things:
- Liquidity: High liquidity means traders can enter and exit trades quickly throughout the day, at stable and desired prices. The higher the number of buyers and sellers in the market, the greater will be the liquidity. The forex market is the most liquid financial market in the world.
- Volume: This refers to the number of times an asset has been traded in the market, within a particular timeframe. Day traders call it the “average daily trading volume.” Significant volume is an indicator that a huge price jump is on the horizon.
- Volatility: This is the frequency with which the price changes in the market, where higher frequency means greater volatility. Extreme volatility can lead to either significant gains or significant losses, which is why risk management is absolutely essential in day trading.
Choosing the right asset is essential for day trading strategies, if one wants to make the most of small price movements. The above 3 factors can help in identifying the right asset.
Most Popular Day Trading Strategies
To make the most of day trading, you first need to establish a robust strategy. Here’s a look at the most popular ones.
Scalping aims at achieving smaller profits through minimal price changes in an asset. These traders go for large quantity trades, opening and closing positions on intuition, since there is no alternative to cut the market noise. The hardest part of scalping is closing a trade on time, which means only highly liquid markets like forex are suitable for this strategy. Execution speed is also critical in such strategies, which is why experienced traders opt for robust trade terminals like MT4 or MT5.
Scalping can be extremely rewarding but also highly risky. It entails a low risk to reward ratio, which means that traders need to achieve high trading probability in order to balance out risk and reward.
2. Breakout Trading
These strategies are reserved for times when the price clears particular chart levels with higher volume. When the price crosses the resistance level, traders enter a long position, while when the price moves below the support level, traders go short.
Volatility increases after the price crosses specified barriers, and trends in the direction of the breakout. The more the price hits these support and resistance levels, the greater the validation of the signals.
One can use the asset’s recent performance to decide on a price target. The average recent price swings are helpful in deciding this target. Chart patterns can further make this process more precise. Make sure that the average price swing is 3 points above the last few price swings. After a realistic target has been met, one can exit the position carefully.
3. Reverse Trading
Also known as countertrading, fading or pullback trading, this is a highly risky strategy, where traders take positions against the trend. Here, you will need to identify potential reversals and be able to predict their onward strength, with greater probability. Pivot point strategies can be useful in such cases, since they work well for trading daily high pullbacks and reversals.
Extensive market knowledge and strong trading skills are required for this strategy. It also requires a good understanding of how to combine technical indicators to confirm trend reversals.
4. Momentum Trading
This strategy involves keeping track of high impact news events, and then identifying substantial trending moves with increased volume. An asset should show significant volatility, on account of breaking news, say a movement of 20% to 30% in a day. Traders need to hold on their position until a price reversal occurs.
A high amount of discipline and patience is required to execute momentum strategies. Traders have to wait for the best opportunity to enter trades, and then focus on planning an exit strategy.
A Few Things to Keep in Mind
Since day trading strategies tend to be high risk in nature, there are some things to keep in mind. Firstly, it is ideal to stick to one market, to make it less confusing. Traders should focus more on building their skills, rather than keeping tabs on multiple screens all through the day.
At the end of the day, winning trades have to be greater than losing ones, in order to register a profit. The aim is to cut short losing trades, without letting emotions come in the way. This requires significant trading discipline and the ability to follow a plan and stick to it.
Traders also need to keep their charts simple and easy to read. Limiting the use of technical indicators will help avoid contradictory signals. Remember, in strategies like scalping, the trader simply cannot wait for the markets to come back. Understanding the market environment is essential to quickly adapt to changes. The end goal is to make small yet consistent profits through the day.
In the past, forex day trading activity was reserved only for institutional traders, but with global interconnectivity and robust electronic trade terminals, margin day trading systems have gained popularity among retail traders. Moreover, day traders do not incur forex swaps, which other traders usually have to bear, while holding positions overnight.
Demo accounts are a good way to test the efficacy of complex day trading strategies, before applying them in the live markets.