Day Trading Strategy

Day Trading Strategy

21 Nov 2018

A single day short-term trade on a financial instrument which is squared off during the day to get the resultant profit or loss is known as Day Trading.

In other words, Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day. Strictly, day trading is trading only within a day, such that all positions are closed before the market closes for the trading day.

Many traders may not be so strict or may have day trading as one component of an overall strategy. Traders who participate in day trading are called day traders. Traders who trade in this capacity with the motive of profit are therefore speculators. The methods of quick trading contrast with the long-term trades underlying buy and hold and value investing strategies.

Some of the more commonly day-traded financial instruments are stocks, options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, currency futures and commodity futures.

Day trading was once an activity that was exclusive to financial firms and professional speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. With the advent of electronic trading and margin trading, day trading has become easily accessible to private individuals.

Technique of day trading –

The following are several basic strategies by which day traders attempt to make profits. Besides these, some day traders also use contrarian (reverse) strategies (more commonly seen in algorithmic trading) to trade specifically against irrational behavior from day traders using these approaches. It is important for a trader to remain flexible and adjust their techniques to match the changing market conditions.

1. Following a Trend: In this technique, traders assume that financial instruments which have been rising steadily will continue to rise, and vice versa with falling. The trend follower buys an instrument which has been rising, or short sells a falling one, in the expectation that the trend will continue.

2. Trading in time frames: In this technique, traders assume that financial instruments that have been rising steadily will reverse and start to fall, and vice versa. The contrarian trader buys an instrument which has been falling or short-sells a rising one, in the expectation that the trend will change.

3. Swing trade or buying near support and selling near resistance: In this technique, traders watch such a stock which is in "trading in a range". The range trader therefore buys the stock at or near the low price, and sells (and possibly short sells) at the high price.

4. Spread trading: In this technique, traders find where small price gaps created by the bid-ask spread are exploited by the speculators. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.

5. Rebate trading: Rebate traders seek to make money from rebates and will usually maximize their returns by trading low priced, high volume stocks. This enables them to trade more shares and contribute more liquidity with a set amount of capital, while limiting the risk that they will not be able to exit a position in the stock.

6. Trading on news: In this technique, traders buy a stock which has just announced good news, or short sell on bad news. Determining whether news is "good" or "bad" must be determined by the price action of the stock. The price movement caused by the official news will therefore be determined by how good the news is relative to the market's expectations, not how good it is in absolute terms.

7. Price action: Price action traders are a form of technical traders that rely on technical analysis but do not rely on conventional indicators to point them in the direction of a trade or not.

8. Algorithms-trading or Artificial intelligence: Traders make strategy on a computer program and they execute orders automatically to gain maximum profits and minimize the losses. The increased use of algorithms and quantitative techniques has led to increased competition and smaller profits.

It is easy to evaluate a profitable trading day strategy. You can analyze your trading strategy by using the following "power" principles. Check a strategy against these principles and dramatically increase your chances of success.

1. Use Few Rules – It is very unlikely to produce profits in real markets with an over optimized system. Thus, it is better to have few rules in any trading system. Be sure that your rules are easy to understand and execute.

2. Trading – Receive your fills in less than one second and you can immediately place your exit orders when trading electronic markets. Trading liquid markets means you can avoid slippage, which will save you money.

3. Realistic Expectations – A trading system that does not have losses is too good to be true. You can always expect realistic numbers from a robust trading system.

4. A Healthy Balance– You can make a lot of money if you are risking a lot. It is a thumb rule that High Risk gives High Returns or Low Risk gives Low Returns. Thus, it is important for you to find a healthy balance between risk and reward.

5. Start Small, Grow Big – A good trading system allows you to start with one or two contracts, increasing your position as your trading account grows. Always have faith in your trading plan even if you have losses or even a string of losses.

6. Winning Trades –Your trading strategy should produce more winners than 50 percent. Your confidence definitely would increase if your strategy gives you a high winning percentage.

7. Strategy Testing –Your trading strategy will succeed in the future if you make use of more trades in your back testing.

To conclude, it can be said that to become a successful trader, you need to have a definite and well-constructed plan. Traders generally fail when they allow hope of recovery to prevent them from cutting their losses and fear of losing a small profit which makes them sell prematurely, even when more profits could have been earned if only they had the nerve to stick with the trend.

Therefore, trade wisely with a good plan and strategy in mind.

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