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Day Trading Strategies For Beginners

Finding a Target Identifying a price target will depend largely on your trading style. Here is a brief overview of some common day trading strategies:

Strategy

Description

Scalping

Scalping is one of the most popular strategies, and it involves selling almost immediately after a trade becomes profitable. Here the price target is obviously just after profitability is attained.

Fading

Fading involves shorting stocks after rapid moves upwards. 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 (LOD) and sell at the high of the day (HOD). Here the price target is simply at the next sign of a reversal, using the same patterns as above.

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 and bearish candles start appearing.

You can see that, although the entries in day trading strategies typically rely on the same tools used in normal trading, the exits are where the differences occur. In most cases, however, you will be looking to exit when there is decreased interest in the stock (indicated by the Level II/ECN and volume).

Determining a Stop-Loss
When you trade on margin, you are far more vulnerable to sharp price movements than regular traders. Therefore, using stop-losses is crucial when day trading. One strategy is to set two stop losses:

1. A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most you want to lose.
2. A mental stop-loss set at the point where your entry criteria are violated. This means that if the trade makes an unexpected turn, you'll immediately exit your position.

Retail day traders usually also have another rule: set a maximum loss per day that you can afford (both financially and mentally) to withstand. Whenever you hit this point, take the rest of the day off. Inexperienced traders often feel the need to make up losses before the day is over and end up taking unnecessary risks as a result.


Evaluating and Tweaking Performance
Many people get into day trading expecting to make triple digit returns every year with minimal effort. In reality, around 80% of day traders lose money. A recent (January 2005) behavioral finance study of the Taiwanese stock market conducted by professors at the University of Taipei and the University of California suggests that "less than 20% of day traders earn profits net of transaction costs". Most of these people would be better off putting their money on the roulette table than using it for day trading! However, by using a well-defined strategy that you are comfortable trading, you can improve your chances of beating the odds.

How do you evaluate performance? Most day traders evaluate performance not so much by a percentage of gain or loss, but rather by how closely they adhere to their individual strategies. In fact, it is far more important to follow your strategy closely than to try to chase profits. By keeping this mindset, you make it easier to identify where problems exist and how to solve them.

by Justin Kuepper