There are multiple types of trading techniques and strategy methods to choose from. While the number of strategy methods may seem daunting, it is also one of the reasons individuals from all walks of life participate in the financial markets – there is usually something for everyone!
Whether short-term trading, long-term trading, or investing, most techniques and methods will fall into the following types of strategy methods:
1. Day Trading Strategies
Day trading is a style in which traders buy and sell multiple securities within a single trading day, often exiting by the end of the day. In fact, it is rare for active day traders to hold positions overnight, let alone several days. The most common chart timeframes used in day trading strategies are the four-hour, one-hour, thirty-minute and fifteen-minute charts.
Many new traders gravitate towards day trading as they are enticed by the possibility of making profitable trades multiple times, in just one day. While day trading can certainly be lucrative, it is also the most challenging to master and can result in big losses for the untrained. In fact, it is not advisable for most to make multiple high-risk financial decisions in a short period of time, unless they have gone through significant training and conditioning.
How To Create A Day Trading Strategy
While day trading is challenging, it is possible to learn day trading techniques and practice a day trading strategy until it is mastered. Whether it is day trading stocks or day trading forex, there are some key elements to crafting a day trading strategy, such as:
- Which markets will you trade on? Many focus on day trading stocks, but day trading techniques can be used on any major market. As day traders take many trades for very short term price movements, choosing markets which offer low commissions and small spreads are essential.
- What timeframe will you focus on? There are multiple day trading timeframes to choose from. Pick a timeframe that suits your availability, so you can become familiar with how it moves.
- What tools will you use to enter and exit trades? When learning how to day trade, there are vast amounts of trading indicators available to you. Focus on one or two to really master how they work.
- How much will you risk per trade? Trade sizing and risk management are very important. You don’t want to risk too much per trade as it is likely you will have a string of back to back losers at some point in your trading career.
Day Trading Strategy Example
Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
The chart above shows the price behaviour of a particular market across a two-day trading period. Having a day trading strategy written down is hugely important, as the day trader is faced with lots of random price movements that form multiple market conditions and trends (upward, downward and sideways price movement). Each of these requires different day trading techniques.
Trading indicators, such as moving averages, are popular for day traders as they can be useful in differentiating between changing market conditions. Let’s plot a moving average on the same price chart as above, as a day trader would.
The blue line represents a twenty-period moving average of the closing price of the prior twenty bars. When creating a day trading strategy, the trader can use this to create a rule, or condition, for trading:
- Rule 1: When the price is above the moving average, only look for long, or buy, trades.
- Rule 2: When the price is below the moving average, only look for short, or sell, trades.
These two simple rules can help streamline and focus the day traders decision-making process. The number of rules within an effective trading strategy will vary. In this example, the moving average has helped to filter for direction. The trader still needs conditions for timing entries and exits, as well as risk sizing and overall portfolio risk management.
You will find more detailed trading strategies when we cover specific strategies for forex, stocks, commodities, and indices after we have finished going through the six major types of trading strategies, within this section. For now, let’s focus on what is swing trading – the second type of trading strategy.