10 Best Day Trading Strategies for Beginners
Pipscollector.com - The term day trading refers to the frequent purchase and sale of stocks throughout the day. Day traders hope that the stocks they buy will gain or lose value for the short time the day trader holds that stock, which is usually just a few minutes or even seconds.
From candlestick charts to momentum strategies, day traders have a language all their own. Online communities provide day-trading tips, support and strategies, but day trading is risky and only for speculative investors who can afford to lose the money they’re trading.
Day Trading Strategies
Here are some tips for anyone interested in trying their hand at the high-risk, high-stakes world of day trading. You’ll learn about five day-trading strategies that could work with a whole lot of work and a little bit of luck. You’ll also learn five important risk management techniques to help keep you in the game.
You can try them all out if you’re looking to make cash buying and selling stocks within one day — but don’t expect to succeed right away. And always remember that if you’re a day trader, you’ve got to have the risk tolerance to lose all that you trade.
1. Momentum Trading
With a momentum strategy, an investor jumps on a stock whose price is moving up. Momentum stocks are rare and hard to find. Look for these qualities in stocks if you’re using a momentum trading strategy:
- A major move in price, driven by a catalyst
- Stock movement of 30% or more
- Smaller stocks, which trade faster due to the reduced number of outstanding shares — the float should be under 100 million shares
2. Scalping Strategy
The philosophy behind a scalping strategy is that small wins can add up to a lot of money at the end of the day. The scalper sets buy and sell targets and sticks to these predetermined levels. The scalping strategy is fast. It’s not uncommon for several trades to be made within a few seconds.
Scalping is one of the best day-trading strategies for confident traders who can make quick decisions and act on them without dwelling. Adherents to the scalping strategy have enough discipline to sell immediately if they witness a price decline, thus minimizing losses. If you are easily distracted and lack razor-sharp focus, this isn’t a day-trading strategy for you.
3. Pullback Trading Strategy
The first step in the pullback strategy is to look for a stock or ETF with an established trend. Next, monitor the trend until there’s a price decline from the trend. If the established trend is upward, then the downward price movement — or pullback — is an entry point for the day trader to buy.
Fidelity recommends looking for an uptrend with at least two successive high price movements before the pullback or price decline. Or, if shorting the stock, you’d look for two decreasing prices in a row.
4. Breakout Trading
A breakout trade takes place when the stock price rises above the former top resistance price. Breakout trades on high volume are more likely to be sustainable at the new higher price than those breakouts with less volume, according to Fidelity. Lower-volume breakouts are more likely to decline below former resistance levels, making it more difficult to profit.
In most cases, the stock will retreat after hitting the resistance level until there’s a catalyst for a stronger price movement. Above this specific price, there are more sellers than buyers, preventing the price from rising further.
5. News Trading
By keeping an eye on the business news, day traders can capitalize on popular daily stories.
If bad news is out, you might short a stock during the day by “borrowing” shares of the stock from the investment firm and then selling those borrowed shares. If the stock price declines as expected, then you buy the shares back at the lower price and profit from the difference less a commission payment. If the news is good, you could “go long,” or buy the stock outright, and sell the shares after the price rises.
6. Use Stop Losses
To protect from oversize losses, set a stop-loss order just below the first price decline. The stop loss works like insurance: You place a sell order for the stock at a predetermined price, so if the stock quote falls to a particular point, the shares are automatically sold, protecting you from further losses.
7. Don’t Expect Outsized Gains
Many day traders get into the game to become millionaires. While this might be possible over a career, if you’re looking to get rich overnight, day trading might not be what you think it is. Day traders generally succeed by taking numerous small gains that outweigh their losses. Think of it this way: If you can generate even a 0.5% gain consistently, that would amount to an annual return of well over 100%.
8. Only Trade Trends, Not Guesses
Day traders don’t generally take positions in the market’s opening or closing minutes. Neither of those times are necessarily indicative of the day’s market trend. Experienced day traders look to see where the money flow is moving the market — or individual stocks — and don’t get bogged down by opening or closing trades, which may be reflective of position-squaring rather than real money flows.
9. Start Small
When you’re new to day trading, it’s imperative to start small. If you bet your whole bankroll on your first few trades, you might get blown out before you even understand how the game is played. But if you can start small and learn some winning strategies, then you might be in the position to risk more of your money.
10. Don’t Try To Win Every Battle
Even successful day traders lose almost as much as they win. If you can score even a 55% or 60% win percentage with your day trades, you’ll come out far ahead in the long run. But if you’re beating yourself up over not making the right trade every single time, eventually your temperament will prevent you from succeeding.
The Bottom Line
Although you may hear about day traders making a fortune, those select few are usually the only ones that make headlines. The countless other day traders who have tried and lost are not the ones that usually appear on the daily financial news.
As the SEC itself says, “Day trading is extremely risky and can result in substantial financial losses in a very short period of time.” While having a dedicated strategy and a disciplined mind can help your odds of success, if you’re clamoring to try your hand at day trading, only invest money that you can afford to lose.
FAQ
Here are some quick answers to common questions about day trading strategies.
What strategy is best for day trading?
If you can make quick decisions and act without hesitation, you could try the scalping strategy. If you prefer to watch the trends for slightly longer before acting, consider momentum, breakout or pullback trading. News trading is best for those who prefer investing based on real-time events.ư
Whichever strategy you try, make sure you start small and never invest more than you can afford to lose.
What is the 1% rule for day trading?
The 1% rule is meant to protect your funds by allowing you to invest only 1% of your funds per trade. That way, if you misjudge the investment, you don't lose as much.
Can you make $500 a day through day trading?
If you make good trades, you can make $500 a day by day trading, but don't get too ambitious too fast. If you don't understand the game, you're just as likely to lose it all.
Read more about the Complete Beginner's Guide to Trading from Pipscollector.
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