What makes the day traders different from the rest of us? Day traders try to take advantage of small price movements in a bid to generate profits. In contrast to long-term investors, day traders don’t let trades remain open for more than 24 hours.
Day trading can be lucrative when done in the right way. However, the practice can also result in losses given the impulse buying that can lead to overtrading. While many reasons exist as to why so many beginners fail, top on the list is greed as well as lack of proper training. A lack of a reliable trading strategy has seen a good number of people burn their capital in a matter of days.
Successful day traders have for years taken time to understand what the financial market entails as well as the risks involved. However, a good day trading strategy is one of the reasons why most of them are still in business.
If you’re contemplating day trading, then below are some of the best day trading strategies that you can learn with ease.
Scalping has to be the oldest and the most popular day trading strategy. This simple strategy involves carrying out an analysis of the security you are interested in trading. Once you’ve ascertained a clear direction the asset is likely to move in, you would open a position and close it a few minutes later.
For example, when the price of an item is moving up, a scalper could enter a buy position. Immediately the price starts retracing they would exit and enter a sell position directly. The process of buying and selling repeatedly continues until one achieves their target.
Scalping is an ideal trading strategy during periods of low volatility. At low volatility, assets tend to trade sideways providing solid entry and exit positions.
Professional scalpers open and close tens of positions a day. By doing so, they generate small profits from each trade in minutes. A chance to maximize on every small price movement is the ultimate goal with this strategy. One of the benefits of the scalping strategy is that it limits your exposure to significant risks given the swift entry and exit.
Successful day traders have spent years understanding what the market entails as well as the risks involved. However, a good day trading strategy is one of the reasons why most of them are still in business.
Scalping also stands out as a day trading strategy on the fact that it does not require much knowledge about the actual asset being traded. The only thing you need to have a clear understanding of is the direction the asset is likely to move.
However, you should always approach scalping with a lot of caution. For instance, you should never enter positions just before a significant economic data release. Markets tend to be extremely volatile when economic data hit the wires.
While not all brokers tolerate scalping, Octafx is one of the trading brokers that allows people to enter and exit positions as they wish. Tight spreads on offer make it easy to enter and exit trades with ease which is essential for this day trading strategy.
An algorithmic trading strategy is a new strategy that involves complex mathematical algorithms. The strategy may not be ideal for novice traders running the ropes of day trading but it might be a great choice if you have trading experience or a background in mathematics as well as computer science.
Traders use their computer and complex mathematics to develop algorithms that generate trading signals. For those looking to perfect this strategy there are programs online that allow people to come up with trading algorithms.
However, no algorithm is ever perfect given that financial markets are continually evolving and changing. Such algorithms are only as good as the people developing them. Testing of the algorithms in demo accounts is a must before putting them to use with real money.
Fine tuning algorithms from time to time are also vital to ensure a trading algorithm is up to date and relevant.
Break Out and False Breakout
Being able to identify breakouts and false breakouts provides an easy way to generate profits as a day trader. However, with this strategy, one must have a clear understanding of some indicators. Some of the indicators that go hand in hand with this strategy include Bollinger Bands, Double Moving Averages as well as RSI and MACD indicators.
During the day, an asset may trade in a given range, within the confinement of a given indicator, say a Bollinger Band. However, as the day progresses the asset may try to break out of the range, i.e. on the upside or on the downside. In these cases, an asset may be flirting with either overbought or oversold territories.
In case an asset tries to break out on the upside in a Bollinger Band, the asset is said to be in overbought territories. A day trader may use this opportunity to sell the asset back to the range. In case the same security tries to break out of a trading range then oversold sentiments should kick in. When this happens, you would see it on the lower side of a Bollinger Band. A day trader could use this opportunity to open a buy position. It is because the price would, most of the time, try to come back to the range in case of a false break out.
To be able to day trade breakout and false breakouts you must have a clear understanding of fundamental analysis. It entails understanding economic and financial data making the price of an asset tick. Octafx comes with an economic Calendar that you can use to be up to speed with various economic developments likely to affect price movements.
Day trading requires time, skill and discipline, but it's definitely on the list of traders who plan to be successful and generate a significant amount of returns. Remember that there is no perfect strategy. Be ready to change, improve and combine different approaches to get the most promising results.