The 5 Best Day Trading Strategies

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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, according to the U.S. Securities and Exchange Commission (SEC). Day traders are investors who seek higher profits from the stock market in exchange for a much greater risk of loss. These investors believe that if they use the right day-trading strategies, small daily wins will add up to big long-term profits.

From candlestick charts to candlestick patterns and momentum strategies, day traders have a language all their own. Online communities like Warrior Trading 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 with.

Here are some tips for anyone interested in trying their hand and 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 can try them out if you’re looking to make cash buying and selling stocks within one day — but don’t expect to succeed right away.

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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 — only maybe about 10 out of 5,000 will fit the criteria in a given day, according to Warrior Trading. Look for these qualities in stocks if you’re using a momentum trading strategy:

  • A major move in price, driven by catalysts like surprise earnings growth, a drug company’s discovery of a new treatment, or news that a small company will be acquired by a larger firm
  • Stock movement of 30 to 40 percent
  • Smaller stocks, which trade faster due to the reduced number of outstanding shares — the float should be under 100 million shares
  • Trends or ideas for momentum trading through tools like StockTwits, a financial communications platform

To protect from oversize losses, Warrior Trading sets 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.

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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.

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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.

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Day traders use technical charts to understand a stock’s trend. 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. And if the trend completely reverses after you buy in, there’s no need to panic because the trend usually continues in the trending direction for a long while. You might find pullback candidates from the stocks making the biggest gains.

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Breakout Trading

A breakout trade takes place when the stock price rises above the former top resistance price. But it’s not as easy as looking at a chart, recognizing the resistance and then buying after a breakout. You should monitor the level of stock trading volume or how many shares are changing hands. That’s because 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.

News Trading

You might already know that stocks react quickly to news events. One lousy earnings report can cause a stock price to fall. Something like FDA approval for a new drug, on the other hand, might cause a stock to take off. By keeping an eye on the business news, day traders can capitalize on the popular daily stories.

If bad news is out, you might short the 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 go long or buy the stock outright and sell the shares after the price rises.

“Day trading is extremely risky and can result in substantial financial losses in a very short period of time,” according to the SEC website. If you’re clamoring to try your hand at day trading, only invest money that you can afford to lose.

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Andrew Lisa contributed to the reporting for this article. 

Last updated: May 20, 2021

About the Author

Barbara A. Friedberg, MBA, MS, brings decades of finance and investing experience. She has a Bachelor of Science degree in economics from the University of Cincinnati, a Master of Science degree in administration and counseling from Miami University, and a Master of Business Administration degree in finance from Penn State University. Her work has been featured in U.S. News & World Report, Investopedia, Yahoo! Finance, GOBankingRates, InvestorPlace and many more publications.

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