A Look at Top Day Trading Strategies

By its very nature, day trading looks like a frantic feeding frenzy. After all, the practice is defined by buying and selling the stock within the same day. This basic descriptor makes it somewhat easy to picture the day trading scene to be the Wild West of the stock market; a place where slick investor types and luck-pressing armchair wannabe tycoons wheel and deal in the hopes of striking paydirt as fast as possible. And while its structure can translate to a dangerous game for those who play fast and loose within the parameters schematics, investors that approach the practice with savvy, fundamentally sound strategies can make day trading into a most effective strategy to potentially gain profits – even in a way that minimizes risk.

The Art of a Proper Entry Strategy

Savvy investors will never enter the day trading arena as unprepared mavericks. In fact, they will come to the table looking for two components vital to any stock worthy of a day trade; volatility and liquidity. Volatility allows investors to gauge the expected daily price range, which is the range that day traders exclusively operate in and therefore really only care about. The higher the volatility, the greater potential for profit (or loss, from a negative standpoint). Liquidity, on the other hand, enables investors the chance to get in and out of a stock at a good price. Seeking out these two metrics enables day trading investors to shrewdly separate the wheat from the chaff rather efficiently, therefore enabling them to focus on worthwhile stocks more intensely.

Once the stocks worth paying attention to have been identified, savvy day traders can enter the next phase of a proper entry strategy, which is to identify potential entry points. There are typically three tools that an investor can use to make such a pinpoint. The first tool is real-time news services, which can give current information about stocks that can either entice or drive away. The second tool is ascertaining info from equity commitment notes or subscription-based services like Level II. The third tool is to view and decipher info derived from intraday candlestick charts, which provide investors with handy technical analysis and insight into a stock’s increasing or decreasing volume.

Popular Types of Day Trading Strategies

After targeted stocks are identified and entry points established, it’s time for the investor to utilize a particular strategy to make the most out of this vital information. Essentially, there are four-day trading strategies for savvy investors to choose from:

  • Scalping – This strategy involves investors selling off a stock almost as soon as the trade becomes profitable. This is an extremely popular strategy to use, and there is no bones to be made about its endgame of just making some profit off of a purchased stock. Typically, the price target that is set in this situation is just after profitability has been reached.
  • Fading – This strategy depends on shorting a stock after it shoots up rapidly. In other words, investors will sell after a stock bubbles up beyond expectations but before the stock comes back down to its expected normal place. There are three assumptions that are made in conjunction with this strategy. Firstly, it’s assumed the stock is overbought, meaning that the demand for the stock in question pushes it to a level that contradicts fundamentals. Secondly, it’s thought that early buyers are prepared to start taking profits. Finally, it’s assumed that existing buyers are potentially scared out. If this strategy is used, investors will set the price target to be at a place where the stock’s buyers start to step in again. The strategy is admittedly risky, but at the same time, it can be immensely rewarding.
  • Daily Pivots – This strategy uses a stock’s daily volatility to potentially produce products. This is done by making an attempt to buy at the day’s low and sell at the day’s high. It’s a pretty simple strategy, as investors will simply set the price target to be the next sign of a reversal.
  • Momentum – Arguably the most well-known strategy, investors using momentum tactics will trade stocks on either news releases or discover strong trending moves on the stock that are justified by high volume. The sentiment behind this kind of trading isn’t too surprising, given its name; it’s not uncommon to see a momentum day trader to pick up a stock based on news releases and “letting it ride” until signs of a trend reversal start to manifest. Typically, investors will set their price target when volume begins to decrease, and bearish data begins to manifest on technical, analytical tools.

Similar, but Different

If the strategies that are deployed by successful day trading investors look familiar to tactics used by “normal” traders, it’s because they are very similar. There’s one key difference: In day trading, the trick to using the strategies is exiting when there is a decreased interest in the stock as indicated by technical analysis. This can be a little more hardline than longer strategies, who may target different exits and such over a longer course of time.

This doesn’t mean day trading can be boiled down to a simple formula of waiting for a stock to surge and exiting when that happens. Those that enter the mindset may assume the practice is an easy way to make a ton of money with minimal effort. Of course, these folks are in for a harsh awakening. The unprepared investor that looks as day trading as easy money can and probably will lose money.

However, if savvy investors come into day trading with a strategy that reinforces the notion that this is, in fact, a legitimate trading technique complete with its set of strategies and technical analysis, it can be a most effective strategy. It won’t make them obscenely wealthy overnight or anything similarly fanciful. However, it will help them potentially maximize profits and minimize risks that could be had with playing the market. At the end of the day, that’s all you can ask for.

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