Learning day trading strategies is a crucial part of becoming a profitable day trader. Not every strategy is created equal, however, and some may not be right for you. The best thing to do is to test different day trading strategies until you find the ones that work for you.
What is a Day Trading Strategy?
A day trading strategy is simply a plan for direction and action when trading stocks. A successful day trading strategy is exactly what consistent and profitable day traders look for.
As a day trader, of course, you want to be prepared and ready to know how to make a successful trade. It makes life a lot easier when you have rules to follow, and things to look for that can signal it is time to trade.
Before we look at some great day trading strategies, there are a few things you need to make sure you know first.
How to Identify Support and Resistance Levels
The ability to successfully identify the supports and resistances of a stock price, is a major key in many trading strategies.
A support is a low price, level, or area that a stock hits over a certain period of time.
A resistance is a high price, level, or area that a stock hits over a certain period of time.
To fully grasp the importance of supports and resistances, you have to think about what is actually happening in the minds of traders. The more the price keeps confirming a support or resistance, the stronger it is. The stronger they are, the more traders start to notice these areas and use them to enter or exit trades. There are traders waiting to enter the trades as it comes to these areas, because they know there will be action in these area.
There are two basic types or ways to establish a support or resistance. This can be done with either a horizontal or diagonal line on a chart.
Diagonal Resistance and Support Lines
These diagonal lines can also be considered trend lines.
Here are the 5 of the most common and best day trading strategies:
1. Momentum Trading Strategy
Momentum trading is entering a trade when a stock begins to make a big move and then exiting when it loses its’ momentum.
This is probably the most exciting of the day trading strategies, especially for those beginners learning how to start day trading. The reason is that the goal of this strategy is to make profit fast from quick moving prices. When one stock has seemed to lose it’s volatility, the momentum trader moves on to the next.
The good news is that there are stocks that make pretty big moves everyday, you just have to find them.
How to Find Momentum Stocks
Traders use stock scanners and other charting tools to find stocks that show sign of gaining momentum. The basic goal is too find stocks with high volume and volatility on a lower time frame.
Volume: The number if times a stock is bought and sold in a certain time period.
Volatility: This is how much the stock price actually moves. Volume is usually the main cause for volatility.
Low Time Frame: When studying a chart for a specific stock, you have the option to look at the chart on different time frames. Usually day traders use the 5 min or 1 min charts for momentum trading, but not always. This means every candle you see, for example on a 5 min chart, represent 5 minutes.
More Specific Criteria For Momentum Stocks:
- Greatly Increased Relative Volume – Relative Volume is the volume for the stock at that time of day compared to other days
- Repeatedly Making New Highs
- No Close Resistances
- Reasonably Low Float – Float is the number of total shares available in the public market to trade. Traders look for low floats, because less shares means the stocks can make bigger moves. You have to keep in mind liquidity, however, which is basically the ability get in and out of a trade quickly. It can depend, but a example of a good range for a reasonably low float would be somewhere in between 50-100 million shares.
- Price Catalyst – Sometimes you can look for a price catalyst, which is something that drives the stock price to move. This can comes in the form of any announcement or news about the stock.
Obviously traders love to catch these big momentum trades for huge profit. This momentum strategy is number one because the rest of the strategies we cover are basically just ways to find and trade smaller bursts of momentum.
2. Breakout Trading Strategy
Breakout Definition: A breakout happens a stock price breaks out or passes an established price level, resistance, or area of support. A breakout that goes up is often referred to as an upside breakout. When a breakout goes down it is called a downside breakout.
Breakout Trading Strategy Basics
- Not everyone identifies or sees the same exact support and resistance levels. This can be a factor in helping cause a false breakout, or a fakeout, as it is called. There is always a chance of a false breakout occurring.
- This trading strategy is used successfully on many different time frames. This means it is used not only in short term day trading, but also in long term trading.
- The price often will come back to where a stock originally broke out before continuing in the direction of the breakout. When this happens, it confirms a strong breakout.
- Focus on the volume of the stock as it approaches support and resistance levels. An sharp increase in volume, for example, may indicate a better chance that the stock breaks out. While the opposite, a decrease in volume, may signal a failed one.
3. Bull Flag Trading Strategy
A bull flag is just a candle formation on a chart that appears to form a pole with a flag on it. This is a very popular signal that many traders recognize and trade. It can be considered its own strategy or part of a pull back or a breakout strategy.
The formed picture of a flag really means nothing at all, its the what it reveals is happening in the market that is important. The pole is formed from upward momentum price move, while the flag is the result of consolidation or a pullback.
The straighter the pole goes up, the stronger the momentum is. Then the price only retraces far enough to form a flag often means that it is just a brief rest before continuation in the trend upward.
How to Trade a Bull Flag Pattern
- Use a trend line to define the trend or flag pole part.
- Not everyone is going to draw the flag the exact same way.
- Rather than getting fixed on exact price, try to focus on areas of resistance and support.
- Watch the volume while monitoring the price action near the trend areas.
- Look for price to squeeze or breakout on this flag resistance area.
- Remember risk/reward ratio when entering trade and for setting stop-loss.
- Possible entry can be when price breaks out of flag, and exit can be new high above flag.
4. Reversal Trading Strategy
A reversal in trading is when a price of a stock switches directions completely. The main goal of reversal trading is to identify when a price is going to completely change direction, and take advantage of it.
While it has a lot in common with the pull back strategy, it is different. The pull back can be looked at as a rest in the trend, or a failed reversal.
To trade reversals, you must first be able to identify which way a stock price is going currently. Once you figure out the current trend or direction of a stock, then you use can use tools to find out when a stock price might reverse.
To figure out a direction or trend in a stock, you can use trend lines. A trend line is basically a diagonal support or resistance line.
A downtrend is when a stock price starts to hit lower lows and lower highs. In a uptrend, of course the opposite, a stock price starts to hit higher highs, and higher lows.
Reversal Trading Tips
- Reversals an require a little more patience than other strategies, because you need to make sure it’s not just a pull back before you just hop in.
- Remember you don’t have to predict the exact price point where the reversal switch is flipped, and price changes direction. Traders refer to this as “trying to catch a falling knife”.
- There is less risk when you wait for confirmations of reversal.
- Entries and exits can be based on new big trends forming, or on breakouts of smaller trends, supports, and resistances.
5. Pull Back Trading Strategy
A pullback is basically a mini reversal. Traders using this strategy mainly look for a brief rest in a big move, believing that it will eventually pull back for at a least a short period of time.
This strategy is used when you are predicting the trend is going to continue. The reason for waiting for a pullback is for a better entry price. Entering during a pull back reduces risks if you are wrong, and puts you a better position if you are right.
The hard part is knowing exactly when the stock is done pulling back. A traders nightmare is to buy a stock, and then watch as it keeps pulling back into a full reversal. A pullback can be any number of candles, traders just use supports and resistances help find trade entries and exits.
With pullbacks, just like when you are trading reversals, the trend is your friend. Even though day trading is primary focused on low time frames, it can help to look at other time frames as well. Look for the overall trend in multiple time frames, and then look for major supports and resistances.
In Conclusion- Finding the Best Day Trading Strategies
There are many day trading strategies that get created or altered each day. It is hard to say which strategy is the best, or if there even is a best strategy. You have to find what works for you and what fits your trading style.
The best way to test strategies is to practice analyzing and using them while paper trading. Another great way to experiment with strategies is to backtest them.
How to Backtest A Trading Strategy
Backtesting is studying and applying strategies to old chart data, not a live market. Backtesting is similar to paper trading, except you can pause or slow the data because it is not happening live. This is a great way to practice trading when the market is closed, or when you feel like going at a slower pace.
Manually Backtesting a Trading Strategy
Step 1: Find a stock chart you want to test, and make sure it is on your desired time frame.
Step 2: You can manually backtest on any chart by scrolling back on any chart to old data. Simply click and drag or scroll to a chosen point in time.
Step 3: When you are ready you just slowly drag the chart until the future candles appear one by one. You watch for setups and can stop to draw lines if needed.
Step 4: Test strategies by identifying possible setups and by trying to predict what will happen next.
Step 5: Record outcomes and notes on each specific strategy.
How to Backtest Using TradingView
Backtesting is easier when it is automated. There are platforms like TradingView that make it easier to backtest data. You can pick a certain date back in time and it will let you hide the future candles and have them appear at your desired speed. Then you simply do what you would for manual testing, except TradingView automatically moves the chart at specified speeds for you. You can sign up for an account with TradingView for and get a 30 day free trial to start backtesting.