Day Trading Strategy

by Amanda Harvey

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Introduction

Day trading strategy involves selecting suitable stocks or options with which to conduct day trades, as well as identifying entry and exit points, and determining types of tools and analysis that are most effective for the goals and practice of day trading.

Day trading, as the name indicates, refers to conducting trades which are completed within a single trading day – in other words, entering and then exiting a stock or option position on the same day.


Selecting Stocks or Options to Trade

When day trading stock or options, one of the most important considerations is that the trader should be able to close their position before the end of the trading day. In order to assure that this will be possible, it is advisable to select stocks or options which have a high trading volume or liquidity, meaning that when the trader is ready to exit their position, there are likely to be buyers ready to offer a fair price. Entering trades in stocks or options with lower volume may result in the trader having to wait longer than desired to find a buyer, and consequently being faced with the choice of selling at a lower price, or holding the position overnight, both of which are contrary to good day trading strategy.

In addition to choosing stocks which have good liquidity, another criterion for successful day trading is to identify stocks which also have significant volatility. Volatility refers to the amount of fluctuation that a price is likely to experience, and for a day trade to make a worthwhile profit, a fair amount of volatility is desirable. If a price is moving only incrementally, a day trade will not provide sufficient time to allow for the desired amount of increase in price.

While one type of day trading strategy, known as scalping, operates on the premise of cutting the trade as close to the bone as possible once it has become profitable, even to achieve this minimal increase while covering the costs incurred by taking the trade requires a certain amount of movement that a less volatile stock is unlikely to provide in a short enough time frame.

Determining Entry and Exit Points

This aspect of day trading strategy involves deciding on the best moment to buy and then subsequently sell the stock or options which have been selected as having sufficient volume and volatility to make them a good choice for a day trade.

There are various indicators, chart patterns, and forms of analysis which can assist a trader in identifying an entry point. Candlestick charts are especially popular for spotting an imminent reversal, which can present a good opportunity to enter a trade, as well as subsequently exiting the trade before the next reversal. It is recommended that a trader always seek confirmation of chart patterns using momentum indicators such as the MACD, and also by observing the volume of trading.

Deciding on when to exit a day trade depends largely on the style of trading that is being employed. In the instance of scalp trading, as mentioned above, the trader will usually exit a trade as soon as it has become marginally profitable. Using this type of day trading strategy, a trader typically executes numerous trades within a session in order to generate a worthwhile amount of return.

A trader who is following the momentum approach to trading will usually enter a trade when a price is beginning an upswing, and exit when the price shows signs of beginning a downswing. This premise would obviously be reversed if a trader is using put options, which increase in value when the price of the underlying asset drops.

Conclusion

Having a well-rounded day trading strategy is vital for anyone wishing to profit from the fast-paced arena of stock and option day trading. Being able to ascertain which stocks to trade, as well as knowing the most effective tools available in helping to determine optimal entry and exit points, is the cornerstone of successful day trading.


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