Day Trading Strategies

For novice traders, choosing day trading strategies is often preferable to a short-term approach. This method is less mentally exhausting and allows for results to be observed within a few hours, which can significantly boost confidence.

In day trading, traders have ample time to analyze and make decisions, do not need to monitor charts and avoid swap fees constantly.

In this article, we will review the basics of Intraday Trading. Readers will become familiar with stock selection methods and suitable time frames for implementing day trading strategies. Additionally, you will learn critical techniques in this field and benefit from practical examples to enhance your trading system.

Reviewing Key Points for Day Trading Strategies

The following section examines essential day trading strategies for beginner traders. Day trading refers to entering and exiting trades within a single trading day, regardless of the placement of buy or sell orders. The important aspect is that all trades must be closed before the end of the day, avoiding swap fees.

In day trading strategies, although it is not strictly necessary to adhere to the rule of closing trades within a single trading day, it is better to keep trades open only when observing a strong and reliable trend to achieve optimal results.

A key advantage of day trading strategies for newcomers is that swap fees are not incurred. These costs can be seen in each instrument’s “Contract Specifications” section, and these fees may triple at certain times. Novice traders might lack the experience to calculate all fees accurately, which can significantly impact their trading results.

In day trading strategies, there is ample time for decision-making. Time frames are available for deciding when to enter trades and profit from short-term trends.

The trading process in these strategies is straightforward. In M30 to H1 time frames, there is no need for continuous chart monitoring, and trading results are visible by the end of the day, which provides psychological and emotional benefits.

Additionally, the initial capital required for this type of strategy is relatively low. Various methods exist for setting stop-loss levels, and traders should place them at an appropriate distance from the entry point.

The only limitation of these strategies is their limited profit potential compared to long-term strategies. However, on the flip side, the risk of loss is lower with these strategies.

Finally, types of day trading strategies include short-term scalping, swing trading, channel trading, impulse trading, and trend-based strategies, all of which will be explained in this article.

Key Elements in Day Trading Strategies

To implement a successful day trading strategy, traders should focus on several key elements:

1. Asset Selection for Trading
   This choice should be based on volatility, liquidity, and trading volume. For example, stock markets may have longer-term trends than currency markets, but they also carry the risk of price gaps. On the other hand, cryptocurrencies come with high volatility but also higher risk and are more challenging to predict.
2. Risk and Capital Management
   Determining the maximum volume used in each trade, the total trade volume relative to total capital, and the maximum risk per trade (stop-loss) is crucial. Typically, these values are set at 1%, 5%, and 15%, respectively.
3. Time Management
   Time is highly valuable in these trades. Options include spending 8 to 12 hours a day scalping or using trend-based strategies and only periodically checking trades.
4. Setting Goals and Risk-Reward Ratio
   It is important to have clear objectives, such as aiming for an annual profit goal of 60% or a monthly profit of 5% of total capital.
5. Education and Skill Improvement
   Besides practical practice, it is important to dedicate time to learning market theories, testing indicators and scripts in demo accounts, and studying new strategies. Utilizing various informational resources is also beneficial.
6. Emotional Control
   Half of success depends on the ability to manage emotions and behave logically in difficult conditions. Calmness, adherence to the trading plan, patience, and balanced confidence are vital for a professional trader.

A trading plan should be defined as an algorithm to achieve objectives. Having clear goals in life enhances motivation for learning and skill development to achieve those goals.

Key Principles in Day Trading

To create an effective day trading strategy, traders should pay attention to the following principles:

Understanding Market Conditions and Using Key Parameters in Day Trading

1. Focus on Quality Over Quantity
   Accurately identifying trading signals is more important than their quantity. Limiting yourself to 3 or 4 assets is recommended, as smaller time frames require more attention and control.
2. Accurate Entry Conditions
   Determine which indicators are primary and which are supplementary. Specify which conditions are essential for entering a trade and which can be overlooked. Timing of conditions must also be defined; for example, in an H1 time frame, all conditions should occur within a single candlestick.
3. Defining Exit Conditions
   It is crucial to close a trade when the profit target is reached. A good strategy might involve closing half of the position at the desired profit level and managing the remainder manually or with a trailing stop.
4. Timely Closure of Losing Trades
   Avoid hesitation in closing losing trades and refrain from adjusting stop-loss levels in hopes of a price reversal. Adhering to capital management rules and strictly following the trading plan is essential for minimizing losses.

Success in trading depends on having a suitable trading system, adhering to it, and maintaining psychological stability.

Review of Top Forex Day Trading Strategies

This section will introduce top-day trading strategies, including signals and entry and exit points.

Trading Based on Fundamental Analysis

One such strategy is trading based on fundamental analysis. The impact of news and economic data on asset prices can vary in both the short and long term.

The key aspect is how the market reacts to this information and which direction it will take. In news-based trading, there are two common approaches:

• Setting pending orders in both directions before the news is released.
• They enter trades after the news is released and assess the market reaction in a 5-minute time frame. Typically, these trades remain open for up to two hours.

In News-Based Trading Strategies

Attention to forecasts is crucial. For example, if a company’s net profit is lower than expected, fundamental traders might anticipate a decline in the company’s stock price.

It is essential to consider the likelihood of an event occurring and how the market will react to it. For instance, if the market expects the Federal Reserve to hike interest rates, this event might have little impact on the value of the dollar.

Additionally, the significance and impact of the news should be carefully assessed. For example, if a company increases its profits despite a downward trend in the stock market, its stock may not be significantly affected.

Key tools in news trading include economic calendars, which show the timing of economic news releases and important company statements, and analytical newsletters.

For a better understanding of this strategy, consider the following example:

After Facebook announced its Q3 2022 financial report, its stock value fell by 24%. This significant drop was due to a 52% decrease in net profit compared to the previous year, a 19% increase in expenses, and negative forecasts.

The company’s attempt to rebrand as Meta also failed to impact investor sentiment positively. The opportunity that arose after the financial report and the price gap allowed traders to enter a short trade and potentially earn significant profits in a short period.

Trading Based on Pivot Points

Pivot points are key levels in technical analysis that often indicate potential market direction changes. These points become more significant when the price deviates significantly from its usual average as the likelihood of a price reversal increases in these conditions.

Common tools for identifying potential pivot points include:

• Supply and Demand Zones: These indicate overbought and oversold levels and are identified by oscillators.
• Pivot Points: These are essential references in market analysis.
• Reversal Patterns and Support and Resistance Levels: Act as potential indicators of price direction changes.
• When pivot points overlap with support and resistance levels, they create a strong signal for a market direction change.

To better understand this day trading strategy, consider the following example:

Accurately determining pivot points can be challenging, but we might consider an area as a potential trend change zone. By analyzing past highs on the chart, we defined a horizontal line at level L2, which the price had not yet breached. The price tested level L1 and rebounded but eventually broke through and surpassed this level.

The range between L1 and L2 is defined as a demand zone. Breaking the L2 line indicates an upward trend, while a price rebound in the demand zone could signal the start of a downward trend. Observations showed that after breaking level L1, the price turned downward, leading us to enter a Sell trade at this point.

Breakout Trading

In the trading approach known as Breakout Trading, entry into a trade occurs when the price moves beyond critical levels such as support or resistance levels or trend lines.

These levels are typically determined when there is a significant concentration of buying and selling volume (including pending orders). Disruptions in the balance between buying and selling volume can lead to the price breaking through the level and starting a new trend.

This strategy is particularly effective in time frames from M30 to H1, and shorter time frames may show false breakouts due to market maker activities.

Tools Used in Daily Breakout Strategy Include:

• Channel Indicators: Breaking their boundaries can indicate the beginning of a strong trend.
• Trend Indicators: These identify price exits from stable and unchanged areas.
• Chart Patterns and Graphical Analysis: Flag patterns, triangles, and double and triple tops/bottoms are used to detect significant changes.

After breaking a fundamental level, a strong signal is received when the price retests it and continues to follow the trend. Allowing the price to retest levels reduces the likelihood of falling into false breakouts, but care must be taken not to miss entry opportunities, as sometimes the price continues its trend without retesting the key level.

Example of Breakout Strategy:

The hourly chart of the EURUSD currency pair shown below shows an upward trend. This trend has formed with three consecutive peaks, each higher than the previous one.

However, the fourth peak, which is lower than the third peak, indicates a weakening of the current trend. A double-top pattern on the chart, another reversal signal, is also visible.

Given these signs, the price will likely experience a significant decline soon. As a result, these conditions provide an opportunity to open a sell trade after breaking a horizontal line.

Trading Based on the Ichimoku Indicator

The Ichimoku Cloud, or Ichimoku Kinko Hyo, is an advanced analytical tool among trading strategies. This indicator, classified under trend detection, momentum, and signal filtering indicators, consists of five lines: two lines associated with the Ichimoku Cloud and three other lines that function as oscillators for filtering.

A practical example of using Ichimoku in day trading is that it can be employed as a comprehensive trading system. For signal analysis, as shown in the figure below, the price above the bullish cloud indicates that buying opportunities are available. Conversely, if the price is below the bearish cloud, it can be considered a suitable opportunity to open a sell trade.

Scalp Trading

Scalping is a trading method in which traders execute a large number of trades with short time frames. This method is typically carried out using time frames from M5 to M15, where trades usually remain open for a few minutes to an hour. Since the profit from each trade is relatively small, traders increase their profit by increasing the number of trades.

One advantage of this strategy is that it allows trading during corrective periods or in markets with stable trends. However, the drawback lies in the large number of trades, which can be time-consuming and mentally exhausting for the trader. To address this, scalpers often use robots and automated advisors.

For example, in the daily scalp trading strategy shown in the figure below, a large channel, created due to severe market fluctuations, is visible on the M15 time frame.

In these conditions, trades are based on price reversals from the channel boundaries, and signals are confirmed using a series of bullish or bearish candles that indicate strong movements.

Trend Trading

Day trading based on trends involves following the general market direction while disregarding temporary corrections. In this strategy, the trader seeks to identify the beginning of a new trend and starts trading once the trend direction is confirmed.

These trades are usually closed during price reversals or at the end of the trading day. Using stop-loss or trailing stop allows the trader to manage the position without constantly monitoring the chart.

Signs indicating the start of a new trend include significant news releases, formation of reversal patterns, reactions to strong support or resistance levels, trendline breaks in the opposite direction, trend weakening in supply and demand areas, trend reversals, and artificial supply and demand created by market makers.

For example, as illustrated in the figure below, in a daily trend strategy, one might observe the start of an upward trend with deep corrections after a short and volatile downward movement. If the trade is opened at the beginning of the trend, deep corrections will have minimal impact on the trade.

Using a trailing stop, the trade will eventually be closed with a profit. In daily trading, trades are usually closed at the end of each trading day, but this depends on the length of the trend and the trader’s risk tolerance.

Momentum Trading

Momentum trading refers to entering trades when the price experiences sharp and sudden movements, typically occurring under specific market conditions. This strategy’s main advantage is the ability to gain quick profits. However, the challenge lies in accurately timing the start and end of powerful price movements and exiting the trade at the right time.

Possible factors that can create price momentum include:

• Important news and trading based on fundamental analysis, such as financial reports and economic data.
• Short squeezes, where price movements mainly have technical roots, lead to the automatic closure of many sell orders, resulting in a sudden increase in demand.
• Market maker activities involve large-volume buying and selling, often occurring in M5 to M15 time frames.
• Pumps, or artificial price increases, are sometimes due to collusion among traders or mistakes and are observed in cryptocurrency markets and occasionally in stock markets.

For a better understanding, consider this example:

In the hourly chart of BTCUSD, rapid price movements are marked by large candles, followed by a steady trend with smaller candles. These movements start with a series of bullish candles, leading to the formation of the main wave.

At the beginning of the chart, three rapid price waves, each stronger than the previous one, occur within a short time frame. Analysts believe that these movements are due to the market reaching its low. Recent reports on US inflation likely influence this sudden movement.

Key Practical Guidelines for Day Trading

Here are some practical tips for novice day traders, which are commonly shared across various trading theories:

1. Always Have a Clear Plan and Strategy: A well-defined plan and strategy will guide you through any market conditions, even unexpected ones.
2. Trade Only with Capital You Can Afford to Lose: Use only the amount of capital that won’t put you under significant psychological stress if lost. This does not mean taking unnecessary risks.
3. Follow Risk and Capital Management Rules. This includes determining trade sizes based on your capital and total trade volume and setting stop-loss levels.
4. Enhance Your Experience and Knowledge: Experiment with new indicators, gain hands-on experience in the forex market and quickly identify key levels and patterns.
5. Diversify Risks by Working with different currency pairs, stocks, and cryptocurrencies and using various time frames and trading strategies.
6. Always Use Stop-Loss Orders: Protect yourself from significant losses by using stop-loss orders.
7. Practice Emotional Control: Calmness, logical thinking, and patience are key traits for a successful trader.

Final Thoughts

To achieve success in day trading, remember the following key parameters:

1. Day Trading Means Closing Trades Within the Same Trading Day: If you haven’t reached your target by the end of the day, close the trade regardless of the profit earned. Keeping trades open overnight can incur swap costs and risks from price gaps. However, if you’re in a strong trend and the trade hasn’t completed half its standard movement, you may keep it open for over a day. In this case, secure part of your profit and manage the rest with a stop-loss or trailing stop.
2. Best Time Frames for Day Trading: Time frames from M30 to H1 are ideal for day trading. In H4, with only six candles per trading day, completing a full-day trade is less likely. Time frames M5 to M15 are more suitable for scalping and recommended for professional traders.
3. Stick to Your Trading Plan: Adhering to your trading plan is crucial regardless of the symbol or indicator used. Day trading can involve various symbols, except exotic symbols or low liquidity markets. Your primary responsibility in your trading plan is to follow your capital management rules and selected strategy.
4. Be Flexible: Quickly close your trades if unexpected news impacts the market. If you’re prepared for emergencies, you can manually adjust stop-loss levels within a reasonable range.
5. Use Strategy Testers: Use strategy testers to assess the risk and profitability of strategies. Each strategy should be tested for at least one year (and at least 200-300 trades).
6. Success Begins with Comfort in Your Chosen Strategy: To achieve success in day trading, focus on risk reduction and market understanding.
7. Trust Your Abilities and Gain Experience: Building experience is the path to success in day trading.