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 seven day trading strategies that could work with a whole lot of work and a little bit of luck. You’ll also learn seven important risk management strategies 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 or down. The idea is to get in and out before the stock price hits the top or bottom. 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, or for the trader to buy and sell the same stock many times over the course of a day.
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. The idea is that the longer the trend, the more likely it is to continue.
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.
The benefit of breakout trading is that it’s fairly straightforward. However, false signals are always a possibility.
5. News Trading
You’ve probably noticed that stock prices are heavily influenced by sentiment, which is driven by news reports and current events. 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. Market-Neutral Trading
Market-neutral trading is a way to combine long positions with short ones. Rather than place your bets on upward or downward trends, this strategy takes advantage of volatility while mitigating risk. If you’re lucky, you’ll profit from both positions.
7. Use Pivot Points
Pivot points use the previous day’s high, low and closing prices to predict the current day’s movement. Traders employ this strategy to buy shares as they rise and sell as they decline.
8. 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. A stop loss also lets you set a certain profit goal and sell right after shares hit that goal.
It’s important to note that a stop loss isn’t a sure thing. There’s no guarantee that your order will be executed at the exact price you set.
9. Limit Positions
The fewer shares you trade, the lower your risk. Start with small positions and gradually increase as your trading strategies start to pay off more regularly.
10. 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, especially early on, when you’re more likely to lose money than make it.
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%.
11. Set Your Maximum Risk
Day traders often decide in advance how much of their capital they can risk on each trade. Two percent is generally a sensible amount, according to Nadex — enough to avoid major losses while preserving the opportunity to profit.
12. Only Trade Trends, Not Guesses
Day traders don’t generally take positions in the market’s opening or closing minutes. Neither of those times is 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.
13. Start Small
When you’re new to day trading, it’s imperative to start small, with money you can afford to lose. 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.
14. 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.
What Is Day Trading?
The Financial Industry Regulatory Authority defines day trading as the practice of buying and selling the same security on the same day in an effort to profit from small price movements. The law requires day traders to trade from margin accounts, which use funds borrowed from the brokerage, using the account as collateral.
A pattern day trader is an investor who makes four or more day trades within five business days from a margin account, with the trades representing more than 6% of the total trades in the account.
How Do I Find Stocks for Day Trading?
Day traders use technical analysis to identify good day trading stocks based on price and volume data. You can find this data using any number of stock screeners, including Finviz. Here are some of the specific features to consider when selecting stocks and other assets for day trading.
A liquid asset is one that can be traded quickly, with little or no effect on its price. Day trading movies quickly, and prices often move in small increments. A slight delay when you’re selling an asset because no other investors are looking to buy it, or having to reduce the price in order to sell it quickly, can wipe out your capital.
While risky, stocks with fast-moving prices, whether up or down, are potentially more lucrative than more stable assets. To benefit, you must buy before the asset takes off or sell before it crashes.
Volume refers to the number of shares that have been traded over the course of a day or other time period. Low volume means fewer investors are interested in the asset, which suggests low liquidity and volatility. High volume, on the other hand, lets you buy and sell quickly. When volume is higher than usual and prices are moving in the same direction, it could indicate that the asset has good momentum.
What Are the Requirements for Day Traders?
FINRA has established rules to help ensure that day traders have the resources to sustain the significant losses that can result from making speculative trades using borrowed funds.
You’ll have to maintain a margin account balance of at least $25,000 in cash and securities on any day you make a day trade. If the balance falls below $25,000, you can’t day-trade again until you replenish the account.
A margin call is when your brokerage requires you to increase your account balance, whether by depositing cash or other “marginable,” or allowable, securities or selling holdings. This could happen if you fail to maintain whatever amount of equity your brokerage requires for your margin account. You’ll have no more than five business days to comply, and in the meantime, you’ll have limits on how much you can spend from the account.
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 Securities and Exchange Commission 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.
FAQHere 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.
- 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.
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- Financial Industry Regulatory Authority. "Day Trading."
- Fidelity. "Day trading: Strategies and risks."
- Charles Schwab. 2022. "How Traders Can Take Advantage of Volatile Markets."
- CFA Institute. "Technical Analysis."
- Nadex. "How do I manage risk?"
- Benzinga Pro. 2022. "Using Volume for Day Trading Stocks."
- CenterPoint. "The Ultimate Guide to Risk Management."
- Corporate Finance Institute. "Scalping (Day Trading Technique)."