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Day Trading 101

 

2. Day Trading Strategies

Day traders use several strategies:

  • Trading trends

  • Trading the news

  • Trading ranges

  • Scalping

 

2.1. Trading Trends

Trend trading, is a trend following strategy that can be appiled to all trading time frames, not just day trading. Trend traders assume that rising prices in an uptrend will continue to rise and vice versa i.e. the trend follower buys an instrument which is rising, expecting that the trend will continue. 

Trend trading is a high probability strategy - it is easier to make money in a trade that is in the direction of the dominant trend. How does one know what the dominant trend direction is?  Using technical indicators on price charts such as moving averages is widely used to gauge trend direction.

 

2.2. Trading the News

Trading the news is one of the main day trading techniques. The strategy is to buy when good news is announced, and sell when there is bad news. Major news events cause high volatility in the financial markets. This provides a good opportunity for quick profits. Very often, the effects of good or bad news can be seen immediately in price action on the trading instrument's price chart.

The price often moves even before the news broadcasts any announcements. This happens when rumours and estimates by market and industry analysts of the event spreads and circulates before the official news release. In many cases, you will find that the prices have already moved in anticipation. If price does not move much after a major news release, it often means the news was already priced into the instrument.

 

2.3. Range Trading

Range trading can be considered as opposite to trend trading and is recognised as a lack of a trend. A trading range occurs when price trades within a horizontal channel for an extended period - there is no trend. 

Range traders look for price rising from significant support levels and falling from resistance levels. Support levels are where there is high buying pressure, and resistance is where high selling pressure takes place. Range traders buy at support and sell at resistance. Ranges offer the most trading opportunities because markets tend to be range bound most of the time. 

  

2.4. Scalping

Scalping is a trading style where small price gaps created by the bid-ask spreads are exploited. Scalping is also commonly referred to as spread trading. It usually involves establishing and liquidating a position quickly, within minutes or even seconds. Scalpers look for highly liquid instruments where they can take quick profits while minimising risk by keeping the exposure short.

This form of day trading applies technical analysis tools such as over-under bought, support and resistance levels, trend lines and trading channels. The market is entered at key points to make quick profits from small moves. The basic idea of scalping is to exploit the inefficiency of the market when volatility increases and trading ranges expand.

 

3. Trading Systems and Software

Some day trading strategies such as scalping requires relatively sophisticated trading systems and charting software. Many day traders use multiple monitors or even multiple computers to execute their orders. A fast internet connection is essential for day trading. Day traders do not use brokers that are slow to execute trades. They also steer away from brokers that charge high commissions. Direct access trading such as an online trading account offers substantial improvements in transaction speed, better trade execution prices and lower trading costs.

Having access to real time market price feeds is necessary for day traders. The time span for making trading decisions is short and delayed prices are not very useful. In addition to real time market data, some traders purchase more advanced data feeds that include historical data, order flow and features such as scanning large numbers of instruments for unusual activity. Complicated analysis and charting software are other popular additions. 

 

4. Conclusion

Being a day trader is exciting but there is high risk of losing a lot of money in a short period of time. If you trade with discipline, keep emotions in check and follow your trading rules, the profit potential is endless.

 

 

 

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