Day Trading strategy
What is Day Trading?
Day trading is a popular short term trading style where the traders open and close trades on the same day with the intention of profiting from small price movements.
These traders pick a side at the beginning of the day, acting on their bias, and then finish the day with either a profit or a loss.
Day traders don't hold their trades overnight.
Day trading is suited for forex traders that have enough time throughout the day to analyse, execute and monitor their trade.
You might be a forex day trader if:
- You like to enter and exit a trade within one day.
- You're patient enough to wait a couple of hours to close a trade
- You have time to analyse the markets at the beginning of the day and can monitor it throughout.
- You like to know where you're at with your trades at the end of each day.
- You think scalping is too fast but swing trading is too slow for your taste.
You might not be a forex day trader if:
- You don't have enough time to analyse the markets and monitor them throughout the day.
- You like longer or shorter term trading.
- You have a day job.
- You prefer one big profit rather that a couple small ones.
- You don't like looking at charts all day.
Types of Day Trading
Day traders looking to maximise intraday profits often use one or more of the following day trading strategies.
Trend trading is a strategy that looks at longer time frame charts to determine an overall trend. It is usually considered a mid to long-term trading strategy, but in reality, it can cover any timeframe, depending on how long the trend lasts.
It is based on the idea that markets have an element of predictability, so by analysing historical trends and price movements, a trader will be able to predict what could happen in the future.
When the price is moving in one overall direction, such as up or down, it is called a trend.
Trend traders enter into a long position when a security is trending upward. An uptrend is characterised by higher swing lows and higher swing highs.
Trend traders may opt to enter a short position when an asset is trending lower. A downtrend is characterised by lower swing lows and lower swing highs.
Countertrend day trading is a trading strategy in which traders attempt to make profits by trading against the current trend.
The idea here is to find the end of a trend and get in early when the trend reverses.
Generally, countertrend trading may also be referred to as swing trading which refers to the opportunity to take advantage of a trend that reverses or swings in a new direction.
Countertrend trading is generally a medium-term strategy in which positions are held between several days and several weeks.
Whilst this strategy is a little riskier but can have huuuuge rewards in the long run.
Range trading, sometimes called channel trading, is a day trading strategy that starts with an understanding of the recent price action.
A trader will inspect chart patterns to identify typical highs and lows during the day whilst keeping an eye on the difference between these points.
For example, if the price has been rising off a support level or falling off a resistance level, then a trader might choose to buy or sell based on their perception of the market's direction.
This is known as “trading in a range“, where each time price hits a high, it falls back to the low. And vice versa.
A day trader who is using this strategy who is looking to go long will buy around the low price and sell at the high price.
A day trader who is using this strategy who is looking to go short will sell around the high price and buy at the low price.
Breakout trading is when a trader looks at the range a pair has made during certain hours of the day and then places trades on either side, hoping to catch a breakout in either direction.
While there are many approaches that encourage trade execution in response to current price action, breakout trading promotes market entry through anticipating a forthcoming move.
This is especially effective when a pair has been a tight range as it is generally an indication that the pair is about to make a move.
The goal is to be all set up so that when the move takes place you are ready to catch the wave!
News trading is one of the most traditional, short term-focused trading strategies used by day traders.
News traders pay less attention to charts and technical analysis and instead, they wait for information to be released that they believe will drive prices in one direction or the other.
This information could for example be a report releasing economic data, such as unemployment, interest rates or inflation, or simply breaking news or random presidential tweets.
To master news trading, day traders must have a solid understanding of the markets in which they're trading.