Intraday trading is essentially a short-term form of investing where traders look to take advantage of small price movements. Rather than let prices run for hours or even days, traders open and close positions within minutes.
Active traders engage in intraday trading on the belief that short-term price movements will provide an easy way of capturing profits. Below are the four main intraday trading strategies.
1. Trend trading
Trend trading is one of the most reliable intraday trading strategies. Traders, in this case, carry out an analysis to ascertain the trend direction of a given security. They then enter a position in the direction of the trend and stick to it throughout the day.
The strategy is only effective if one can interpret technical indicators that highlight and show the strength and direction of a trend. Some of the indicators used to identify the direction of a trend include Moving Averages, RSI and On Balance Volume. OctaFX has all these indicators on its trading platforms.
In addition to trend trading, intraday day traders at times do deploy a reverse trend strategy. The strategy is ideal for experienced traders as it involves identifying when a trend has peaked or bottomed for a reversal. Once they identify a potential reversal, they enter a trade against the underlying trend.
2. Swing trading
Swing Trading is an ideal day trading strategy when the market is experiencing high levels of volatility. Whenever a trend breaks, underlying prices tend to be volatile as they move against the underlying trend. In this case, a trader may enter a trade to take advantage of the high price volatility.
Given the exacerbated levels of volatility, this strategy is only ideal for experienced traders who can identify reliable entry and exit positions. Swing trading also requires a high degree of discipline given that one wrong move could result in huge amounts of losses.
Scalping is an intraday trading strategy deployed by both novice and experienced traders. The strategy involves trying to take advantage of small price movements in a matter of minutes. In this case, traders open positions and let them run for minutes depending on the direction the price is moving.
Scalping is for active day traders who can maintain a watchful eye on their trading screen to identify price differentiation. In case the price of an asset is moving up, a trader would enter a buy position and immediately shut it down when it starts moving down.
The process of buying, selling and exiting positions comes into play multiple times throughout the day. Scalping is an ideal intraday trading strategy for liquid markets that allow one to enter and exit the position with ease. In the case of a volatile market, one should only deploy the strategy with a lot of caution given the high risk of losses accruing.
4. News trading
News tends to trigger huge price swings which many professional traders make good use of. The price of an asset, most of the time, moves depending on how traders interpret the outcome of various news events.
News events trigger high volatility which gives intraday traders an opportunity to enter long and short positions with ease. For this reason, economic calendars act as an important tool as they give intraday traders a heads up on potential market-moving events.
How to enter and exit positions in intraday trading
With intraday trading, you have to enter and exit positions as soon as possible. To do so effectively, you need to know the ideal place to buy or sell a security and where to exit. For this reason, intraday traders rely on moving averages and candlestick patterns to identify reliable entry and exit positions.
Moving average crossover strategy
Moving averages (MA) are standard in all trading platforms, found in the indicators portal. In this strategy, traders deploy three moving averages on a given security. One of the moving average lines is set at 20 periods, the other at 60 periods and the third one at 100 periods.
The 20-period line, in this case, would be the fastest MA line with the 60 actings as the slow-moving line. The 100 MA line acts as a trend indicator.
The fast moving average (20MA) crossing above the slow Moving line (60MA) would signify a buying opportunity. In this case, a trader would look to enter a buy position. The fast moving average (20MA) crossing below the slow-moving line (60MA) would signify a sell signal.
If the two moving averages 20 and 60 are above the 100 moving average, then the underlying trend is bullish. Conversely, if the two trend lines are below the 100MA, then the underlying trend is bearish, calling for sell positions.
Intraday trading strategies won’t be complete without having a clear understanding of what the candlestick pattern implies. The ability to recognize candlesticks makes it easy for one to identify entry and exit positions.
Engulfing Candle Patterns
Engulfing Candle Patterns occur whenever the body of one candle engulfs that of the preceding candle. The greater the number of candles of a given pattern the stronger the trend.
Bullish engulfing patterns signal an uptrend. It occurs whenever a market is moving down, and then all of a sudden a bullish candlestick occurs such that its entire body covers the previous sell candle.
A bearish engulfing Candle, on the other hand, signifies a sell signal. It occurs whenever a market is moving up and then a strong bearish or sell candle appears engulfing the previous bullish candle.
Hammer pattern signal candles indicate a potential price reversal. They occur whenever the body of a candle sits on one end of a candle. An intraday trader may use them to enter a trade and place a stop loss at the lower or upper end of the candle.
Intraday trading involves dealing with lower time frames where risks tend to be high. For this reason, traders should be extra cautious when entering positions to ensure losses, in case something goes wrong, don’t get out of hand. Here are some other tips to help you manage risk:
Get to understand the ins and outs of intraday trading with a demo account
Consider longer-term strategies until you are familiar with your trading platform
Have a solid trading plan with risk strategies in place. This way you can refer to it quickly even when markets start to move fast
Understand your risk tolerance and set stop loss orders to reduce your risk exposure in the market.
If you arm yourself with a solid trading plan, risk strategy and knowledge base, then you will be able to make the most out of intraday trading at OctaFX.