Day trading is a popular option for people who want to escape the rat-race and invest in a lifestyle career.
We recently looked at whether you can actually make money from day trading, and in this article, we wanted to go a little deeper and examine a few strategies that you can use to make money day trading.
What Is Day Trading?
We need to clear up what we actually mean by “day trading” here because there is often confusion about what this term refers to.
Day trading in the traditional sense means people who buy and sell stocks, derivatives, or other financial instruments on the same day.
A day trader aims to get in, make money, and get out – and ideally without any open positions overnight.
In the past, this has been mainly the preserve of large institutional investors, but as the share dealing market has evolved, so have the opportunities for the home investor.
There are many different types of day traders, and each has its own way of going about its business. The types of companies they like, the sectors, sizes, and the recent history all play a part in a trading strategy, and what is good for one person won’t be attractive for another.
Learning how to day trade takes dedication and should be seen as a job. Once you understand the fundamentals, then you can move on to choose your strategy.
So let’s look at some of the strategies you can use.
1. News Trading
This is probably the easiest to understand and carry out and requires the least amount of preparation.
It’s as simple as having a mainline into the business news channels, understanding what news means for your particular stocks, and then getting in before anyone else.
Remember that the day trader wants to be out by close of market, so the key is to get the news early, get your position as the market opens, and then as other retail investors come in and react, pushing the price up, you sell out.
Combine this with range trading to build a really powerful strategy.
2. Contrarian Trading
Many day traders believe that the markets are cyclical, and what goes up must come down and vice versa.
So if they see a stock bottoming out, they will buy in to reap the next upswing benefit. The trick, of course, is knowing when it has reached the bottom.
This takes experience, nerves of steel, and some really good stock scanning software – because spotting targets is challenging but rewarding.
Because it is difficult and requires a good amount of experience and knowledge, it’s not a strategy for the novice.
3. Range Trading
If you have carried out your research, you’ll know the underpriced companies based on their fundamentals. You’ll have a range of values that makes it attractive for your portfolio, and when it falls into that range, you buy.
For example, perhaps there is a company you feel is underpriced, and you know it has had strong trading for the last quarter. You also know that the half-year results are out today, so you buy-in.
Once the results are announced, the market reacts to what it sees as a pleasant surprise, and you cash in.
In many ways, it is similar to news trading, but range trading takes more research into a company’s fundamentals.
4. Pattern Traders
Stock pattern strategies can be as simple or as complex as you like, and many people use this as a method of day trading.
Perhaps you think that a fall of three days in a row is always followed by a day of gains?
In this case, you’d set a stock scanner to highlight targets that were on a three-day losing streak and then buy-in.
Pattern trading is about playing human psychology. If traders see a stock constantly rising, they get nervous, and if they see it falling, they see a bargain in the offing.
The trick here is to realize that not every pattern is faultless but that overall you’ll win more than you lose, and as long as you diversify, you’ll end up ahead.
5. Technical Indication
This strategy has nothing to do with the stock’s value, but looks at the way the market is reacting.
This one is all about the numbers, and if you are a highly analytical person, then this is for you.
A technical indicator strategy looks at various aspects of stock performance and aims to buy in at the right sweet spot.
It may use volumes traded, momentum indicators, resistance, or even a Fibonacci sequence to predict a good buy, and naturally, to do this effectively requires a good stock scanner.
This is a fast-moving strategy for the genuinely committed day trader and uses a high-volume, low-margin approach.
The scalper watches prices of the underlying asset and buys in quickly, and as soon as the position is in profit, they sell again.
The money made on each trade is small, so it requires a large number of trades, which means that the scalper needs to focus on highly volatile stocks with a ready market of willing buyers.
There’s no emotion here, you sell a winning position, and you close a losing one as soon as you can.
Wrapping Up With The 6 Must-Haves For Day Trading
If you want to get into day trading, then there are some absolute must-haves to give yourself the best chance of success:
- Get a good day trading broker – some fee structures aren’t suitable
- Have a great internet connection – seconds mean money, and you don’t want lags
- Use the best software – if you can afford it, get it, a good scanner will make you money in the long term
- Get educated – never stop learning
- Use a paper account – test your strategies first
- Cut out the emotion – it has no place in day trading
Day trading can be a lucrative way to earn money, but like anything worthwhile, it takes effort and dedication.
We’d always suggest that you take one of these strategies and then test it thoroughly in a simulator or paper account before committing any real cash. You can then refine it so that it suits your needs.