Best Day Trading Strategies
Day trading is risky and not for the faint of heart, so if you want to go in, make sure you're using day trading strategies that are tested.
Even if you're just starting to invest in the stock market, then you probably have already heard about day traders scoring it big. To a point, day traders are glorified in Wall Street-oriented movies.
Day traders are the people who do short-term investments that are bought and sold within hours, rather than opting to invest in the long-term, which is one of the ways to invest like Warren Buffett. Because of the short investment cycle, these traders are the ones who make fast money and might even do it from home.
It sounds cushy, but we'll tell you right now—it's really not for everyone. Though stocks typically aren't the most dangerous investments you can make, even solid stock picks can become major losers if you decide to try your hand at day trading and get reckless.
Don't get us wrong. If you use the right day trading strategies, are smart about your trades, and are just a little lucky, you absolutely could make a living doing it. Many do, and thrive on it.
Over the years, some trading strategies have proven to be safer than others. Here are some tips and strategies for those who are bold enough to try this investment route.
Part of the reason why day traders get the money they do is because they are well-equipped for the job. And, by well-equipped, we mean you need to have money. You cannot be a day trader (legally) without holding a minimum ledger balance.
FINRA and the SEC require all pattern day traders to have a minimum of $25,000 in their daily ledger to keep trading. Most day trading experts would suggest having far more, often citing a suggested minimum as large as $75,000 to $100,000.
You also should open up an account with a brokerage that's capable of handling rapid trades, ideally one with a mobile app that will allow you to trade on the go. Regular investing apps for beginners will not give you what you want; this is an advanced trading style.
Interactive Traders, also known as IBKR, is a favorite among day traders due to its very low fees, real-time updates, and excellent research tools on its app.
We also will need to talk about risk and personality type.
Even with the best day trading strategies in the world, it's still very possible to lose money. Around 90 percent of all day traders end up losing most or even all the money they put in the first time around. This means that very few will actually make a living this way.
Those who do often have to have the following personal qualities:
- They have to be willing to work long hours. All that research is going to be hard on you. Most day traders that are successful work well into the night to determine their next movies.
- They are always looking to learn. To day trade successfully, you're going to need to keep abreast of news, stocks, politics, trends, as well as strategies that work in your climate. That's a lot of learning.
- They look before they leap. If you think that this is a shortcut to wealth, don't attempt it.
- They also have money they can rely on in case they lose it all in trading. We want to emphasize that this form of investment is very risky. Only 10 percent make a profit! A better idea would be to learn how to invest like Ray Dalio or Warren Buffett.
If you have all these traits, congrats. You might actually succeed. Now, let's take a look at trading strategies that have been proven to work...
The most common and time-tested day trading strategies are often based in Momentum Trading. Momentum Trading is a strategy that has traders actively seek stocks that are trending upwards that have the following traits:
- They have price increases as high as 30 to 40 percent in a short period of time.
- The spike in price is due to an event that catalyzed it.
- The stock is relatively small in size, which makes it easier to sell.
A lot of apps like StockTwits help day traders find out what experts are saying on stocks and select stocks for Momentum Trades. Once they find a stock that's floating on momentum, they buy it, wait a couple of hours, and sell it for a (hopeful) profit.
Another way to try out common day trading strategies is to give News Trading a try.
For this strategy, you will need to read up on news. Everything from business to politics can make a huge difference in how stocks trade. The idea behind News Trading is to capitalize on the way people will react to certain news headlines by buying or selling first.
A good example of this would be if a trader scanned newsfeeds and discovered that a new drug just got FDA approval. This would send the stock soaring, and that in turn would make day traders buy it up then sell it as stocks surge on the news.
To understand more advanced day trading strategies, you're going to need to learn the lingo.
Among day trading strategies, there are a couple of indicators that you need to watch for. These include:
- Pin Bars. These are the maximum and minimum prices that stocks will typically hit during a typical fluctuation. The bottom price that stocks don't sink below is called the support bar, or the support pin bar.
- Impulse Waves. These are the trends of upwards and downwards price changes that happen over the course of minutes. They are rapidly moving upward or downward spikes.
- Corrections. With every spike in movement trends, there will be shorter turns in the opposite direction. These are called corrections. If the overall trend goes upward, then a correction would be a small dip downwards.
- Resistance. Resistance happens whenever there's a certain price that the stock never quite seems to rise above due to the number of sales exceeding buys at a particular moment. This tends to be shown as a line that slightly grazes the tops of all price spikes.
- Support. Support is the opposite of resistance. It's the general line that price never dips below.
- Breakout. When a stock manages to break through the resistance line, it's called a breakout.
A risky but potentially profitable strategy would be Strong Area Breakout.
Breakouts happen when a stock finally rises above the resistance level that it's been struggling with for days, weeks, or months. This particular strategy gets people investing once a stock hits above the breakout level.
The idea behind this is that you would be able to profit as the stock surges even higher. Breakouts are indicators of big moves, sure, but this remains one of the toughest day trading strategies to actually nail.
In some cases, weak breakouts don't lead to major changes—or could just be a false alarm. As such, most day traders that are able to make a living on their trading do not tend to use this tactic unless they really have a lot of reason to trust in the stock.
Impulse-Pullback-Consolidation is one of the best day trading strategies in the morning.
When a stock opens itself up for trading in the morning, the stock will typically get snapped up by buyers or will have a strong sell streak. This impulse wave often happens within the first 15 minutes of the opening bell.
Typically, the price will start to correct itself and stall for a couple of minutes. Then, it'll start moving in the same direction again, ideally below the price of the open. This is when you buy. Then, day traders wait for the next impulse wave that goes on an upward trend to sell their stock.
Most impulse waves are strongest during the opening moments in the stock market, so catching that very first trade can be a huge factor in your profitability for that day.
Pullback Trading is one of the most low-risk day trading strategies out there.
To try this strategy, a day trader will seek out a stock or an ETF that's known for having an established upward trend. Every stock has a little bit of a shake that causes dips in it—even the ones that are known for being on a stark upward trade.
Whenever a stock that has a solid upward trend has a small dip in price, it's called a pullback. Pullbacks are a perfect time for day traders to snap up stocks. As pullbacks subside and the price increases to a reasonable amount, traders sell off their goods.
Limit-Order Scalping is another excellent way to maximize your profits while curbing losses—for more reasons than one!
This is one of the smartest day trading strategies out there, simply because it blends traditional investing with day trade style investing. Even beginner investors who aren't into the concept of day trading need to know what a Limit Order is.
Limit Orders are a type of order that allows you to choose the price at which your stocks are bought and sold. They can act as stop loss points or instant profit points. For day traders, this style of ordering is an absolute must if you want to maximize profits and minimize loss.
With Scalping-style day trading, it's a game of numbers. A buyer will limit-order stocks on a very large scale, then sell them off for profits that are often just pennies. Then, they continue doing this.
As one awesome 80s band said, "Everything counts in large amounts." Such is the basis of all scalping-style day trading strategies.
Though you can use a wide range of day trading strategies on here, the best strategy to choose is the one that makes sense for you.
There are tons of different strategies traders can use to win at short-term investing, but none of them will work 100 percent of the time. Every trade is a risk, and even the best risk management tactics will not work all the time.
Ideally, the strategies you use are going to be the ones that make sense to you. If day trading doesn't sound like it'll work well for you, it's okay to stick to long-term investments. After all, there's no shame in getting rich slowly.