It’s widely accepted that the narrower a time frame a trader works in, the more risk they are likely to be exposed to, meaning that day trading is one of the riskiest approaches to the financial markets. Day trading rules tend to be more unforgiving to those who do not follow them. Mistakes are more costly and they have the potential to occur more frequently, since the act of trading itself is occurring more frequently. Making a plan and sticking to it is highly important. For more on money management, watch this quick video.
https://www.investopedia.com/articles/active-trading/11/four-types-of-active-traders.asp
While day traders have a wide range of financial products to choose from, such as CFDs, ETFs, options and futures, day trading strategies can only be used effectively on markets which meet certain criteria. The two factors which are essential to a market for short-term trading, irrelevant of the strategy used, are volatility and liquidity.
Volatility measures the variation of market movements, when trading short-term, it’s a must. When it comes to volatility, knowing when to trade is just as important as knowing what to trade. Which timeframe is best for day trading depends on what asset you plan on trading with.
Liquidity is the ease of which an asset can be traded on the market at a price reflecting its genuine value and is equally important for day traders. If there is no liquidity the orders will simply not open or close at the desired price, no matter how good a trader is. This once again, limits day traders to a particular set of trading instruments at particular times.
Another important factor short-term traders consider is volume. The volume of the stock traded is a measure of how many times it is bought and sold in a given time period — commonly within a single trading day. More volume indicates higher interest in a stock — both positive and negative. Often, an increase in the volume of a stock is indicative of price movement about to transpire. Day traders frequently use the trade volume index (TVI) to determine whether or not to buy into a stock. The index measures the amount of money flowing in and out of an asset.
To learn more about volume, volatility and liquidity, check out these videos.
https://www.investopedia.com/financial-edge/0612/how-to-choose-stocks-for-day-trading.aspx
Determining the ideal strategy takes some trial and error, yet it can pay off enormously. A strategy will provide you with more detailed information for executing trades, while relying on the defined indicators and objects. A few common strategies are:
| Strategy | Description |
| Scalping | Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure that translates into “you’ve made money on this deal.” |
| Fading | Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again. |
| Daily Pivots | This strategy involves profiting from a stock’s daily volatility. This is done by attempting to buy at the low of the day and sell at the high of the day. Here, the price target is simply at the next sign of a reversal. |
| Momentum | This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here, the price target is when volume begins to decrease. |
To learn more about choosing a strategy, watch this video:
https://www.investopedia.com/articles/trading/06/daytradingretail.asp
