Day trading—while an enticing proposition for the brave—can be a dicey business.
The breakneck world of intraday investment is particularly treacherous for the new: the market has claimed the hopes (and savings accounts) of thousands of excited and ill-informed amateur investors since the day that trading from one’s home was even a possibility.
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Despite all the horror stories, making money consistently on short-term trades is feasible; it simply requires an intelligent, systematic approach and a bit of discipline.
Well that, and a chunk of capital that (and this is important) you can actually afford to lose. While I can’t help you with the latter, you’ve come to the right place for the former.
Here are 5 quick tried-and-tested day trading strategies for beginners seeking to begin to demystify the seemingly labyrinthine world of active trading:
5 Proven Day Trading Strategies
level of Risk
Trade the News
Trade the Gap
to read trends
Trade Trend Lines
Trade the News
Among the most effective day trading strategies is also one of the most obvious: just read the news, and react accordingly. This works best when dealing with markets, for example, buying and selling Dow Jones E-mini Futures.
When good news comes out you should buy the market, and when bad news drops, sell it. While, obviously, it’s not quite that simple, the basic gist remains.
One thing to note is that you’re going to have a difficult time as a small-time retail trader competing with hedge fund and bank traders equipped with high frequency trading algorithms and a direct insider line on the latest leads.
This means that you should react only to the biggest economic releases, the ones that consistently tangibly affect markets, and then use your intuition—honed by dozens of healthy hours staring at market charts—to assess the best risk/reward positions to take.
If this strategy sounds right for you, you may want to take a look at these 3 more specific implementations of news-trading strategies.
Trade the Gap
Another one of the most beginner-accessible strategies is to trade the gap.
First, use your trading software to set a 5-minute chart of the Dow Jones E-mini Futures (a commonly traded security among intraday traders). Then set a horizontal line at the previous day’s closing price point, and when the market opens today, simply trade in the direction towards your line.
The reason this strategy works is that often when a security shows a heavy gap, it tends to correct in the opposite direction, consistently enough for the strategy to be profitable.
For example, if the Dow opens lower than it was at yesterday’s close, you need to buy, and if above yesterday’s close, you need to sell short. Set a stop-loss at the size of the gap to avoid bad exiting positions.
For more detail, here is an excellent video by trader Alessio Rastani showing the strategy in action:
Trade on the 30-Minute Range
This basic technique involves watching over the market during the first 30 minutes after open, using a 5-minute chart as in the previous method.
After the 30 minutes are up, draw a resistance line at the highest level the market reached during the interval, and a support line at the lowest level, forming your range for the trade.
Then, all you have to do is wait for the market to break through either line, and respond by placing a trade in the same direction. Place a stop loss at the bottom of the range.
The 30-minute range is the perfect technique for beginners just learning to read trends and getting a feel for price movement.
In the current age of near-perfect computer algorithms reading and basically dictating the fluctuations of markets, this may not be the absolute most effective strategy, but it does tend to minimize loss and is a good entry-level technique.
Look for two stocks, both in the same category, which are currently moving in opposite directions. You can use a market scanner to make this easy. Then, you sell the weak stock and buy the strong one.
This strategy utilizes the correlation of two similar securities to maximize profits. The strategy is lower risk than others as the trade is market-neutral, which means it is unaffected by the overall market. This Investopedia article explains the idea in further detail.
Trade with Trend Lines
The current climate of large-scale day trading is ruled by technical indicators, generated by powerful analytical machines.
However, as they are generated via old data, they are inherently lagging. This means that often, a self-drawn trend line is a viable way to compete against large-scale investment organizations. Absolutely anyone can draw a trend line using charting software.
For a downtrend, you want to draw a line connecting the high point of one price wave to the high of the next price wave, extending it out to the right. For an uptrend, do the same but with the low points.
You can then use these projective lines to determine effective entry points. For example, if during an uptrend a pullback stays above the last low swing and moves near to the line, buy when the price moves back up to the trending direction. The inverse would apply to a downtrend.
This is another excellent strategy for getting grips on price movement and how the market reacts to certain situations.
Some Closing Notes
Keep in mind that the best day trading strategy is always the one you stick to, unemotionally and consistently. One of the easiest ways to lose money is to either get overexcited or spooked, doubling-down on an insecure position or withdrawing too quickly. The purpose of a systematic approach is to minimize emotion while maximizing profits.
If you’re brand new to day trading, it’s a very good idea to do some virtual trading before putting large sums of capital on the line in the cruel and dispassionate open market. A good rule of thumb before implementing a system in the real world is at least a month of consistent profitability in the virtual market.
With some practice utilizing the strategies above and a little experience reading the market, you’ll find the intimidating universe of day-trading becoming clearer by the day. With ingenuity and careful attention, you can easily avoid becoming one of those horror stories, and instead create a narrative of financial success, prosperity, and personal freedom. Good luck, and happy trading!