6 Basic Day Trading Strategies You Can Use
August 13, 2019 Leave a comment
Day trading or intraday trading, is speculation in securities by buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day.Day trading has been a time honoured way for enterprising individuals to accumulate capital and manage their living expenses while they go about building wealth.For certain personality types,day trading sure beats working at a jobby job !
Every successful day trader has his or her own personal style,that’s a variation or combination of the 6 basic strategies below. Moreover there is profit in being able to vary the strategies you use depending on various market conditions.
6 Basic Day Trading Strategies:
Trend Following :
Trend following, assumes that financial instruments which have been rising steadily will continue to rise, and those that have been falling will continue to fall. So the trend follower buys an instrument which has been rising, or short sells a falling one, in the expectation that the trend will continue.To do this,trend followers rely on moving averages and channel breakouts.
While trend trading, its important to enter in the market only after the trend “properly” establishes itself. That is when the “Bandwagon Effect” gets established due to the “herding” of traders and the “confirmatory bias” of investors.If there is a turn contrary to the trend, trend followers exit and wait until the turn establishes itself as a trend in the opposite direction. In case their rules signal an exit, trend traders exit but re-enter when the trend re-establishes.
Trend trading is most effective for a market that is quiet, with relatively low volatility and trending. Additionally trend trading is also very effective in market crashes when trend traders can short the market and benefit from the downside market trend.
Range Trading:
Range trading or range-bound trading, is a day trading style in which securities that have either been rising off a support price or falling off a resistance price are watched. That is, every time the security hits a high, it falls back to the low, and vice versa. Such a security is said to be “trading in a range”, which is the opposite of trending.The range trader buys the security at or near the low price, and sells and possibly short sells at the high.
A related approach to range trading is looking for moves outside of an established range, called a breakout ie the price moves up or a breakdown ie price moves down, and assume that once the range has been broken prices will continue in that direction for some time.
Scalping:
Scalping or spread trading is a strategy where small price gaps created by the bid–ask spread are exploited by the speculator. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds.Scalping involves taking quick profits while minimizing risk .To do this technical analysis concepts such as over or under-bought, support and resistance zones as well as trendline, trading channel to enter the market at key points and take quick profits from small moves are used. Scalpers also use the “fade” technique. When security prices suddenly rise, they short sell securities that seem overvalued.
News Playing:
News playing involves buying a security on good news, or short selling on bad news. Such events provide volatility in a security and therefore the greatest chance for quick profits or losses. Determining whether news is “good” or “bad” must be determined by the price action of the stock, because the market reaction may not match the tone of the news itself. This is because rumors or estimates of the event ,like those issued by market and industry analysts, will already have been circulated before the official release, causing prices to move in anticipation. 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.
Price Action:
Price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators.Since price action day trading relates to recent historical data and past price movements, all technical analysis tools like charts, trend lines, price bands, high and low swings, technical levels of support, resistance and consolidation, etc. are taken into account as per the trader’s choice.The tools and patterns observed by the trader can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.Psychological and behavioral interpretations and subsequent actions, as decided by the trader, also make up an important aspect of price action trades.This approach requires a solid background in understanding how markets work and the core principles within a market.
Contrarian Trading:
Contrarian day trading is based on the assumption that financial instruments that have been rising steadily will reverse and start to fall, and vice versa. The contrarian day trader buys an instrument which has been falling, or short-sells a rising one, in the expectation that the trend will change.Contrarian day trading involves seeking out securities that are set for a quick and sharp reversal and setting up trades that will close by the end of trading day. As contrarian traders are fighting the trend, it can work against them sometimes. This style of day trading favors people who know the market inside and out, so that they know when to move against it.
Everybody has to get started somewhere.And day trading is as good as any place to get started,especially if you have the talent for it.So why not give daytrading a try if you need to come up with a bit of money ?
An important prerequisite of day trading is to have a way to buy and sell securities cheaply.A demat account with Kotak Securities comes with free intraday trading. Which means, when you buy and sell your shares on the same day, you do not pay them any brokerage! Or as close as it comes to reality in real life.As per SEBI norms, brokerage cannot be zero, so Kotak Securities charges you a negligible 1 paisa per trade.This way brokerage expenses don’t eat into your profits.