Does the term 'intraday' thrill you? Do you ponder over how these day traders do what they do? If yes, then this article is for you.
In this article, you will get to know the most effective and popular strategies used by day traders to earn maximum returns. But prior to that, let's understand what Intraday means.
Intraday Trading Strategies
In market parlance, Intraday Trading means the activity of trading securities within a day. So, basically, whether you buy or sell stocks, you have to square off your position by the closure of the market that day. Intraday trading is pursued to take advantage of the short-term fluctuations in the share prices.
So, now that you know what intraday trading means, let's understand some of these intraday trading strategies:
Momentum Trading Strategy
This strategy takes advantage of the volatility in the stock market. Here, a trader buys the stocks which are going up and sells them as soon as they start to fall. It is like riding a wave and jumping to the next wave before it could crash. It is usually effective at the start of the day or the news, which causes an increase in the volume of trades.
The trader uses investor herding to his advantage. He is the leader of the group and the first one to take out his money. This way, he can earn significant profits in minutes! But he should be constantly alert and look out for any news, besides monitoring markets frequently. Also, it is ineffective in bear markets, as people are cautious at that time. And the profit margin is less in that case.
Breakout Trading Strategy
If you watch business channels like CNBC and Zee Business, you would have heard the word 'breakout.' But we know that most of you haven't bothered to find what it actually means. Well, don't worry. We've got you covered.
Breakout is a situation where the stock price moves beyond the specified levels with increasing volumes. In case you don't know, there are two levels: Resistance (upper price level above which prices aren't expected to move) and Support (lower price level below which prices aren't expected to move). It is the most common trading strategy used in the stock market, as the traders expect prices to move in the direction of the breakout.
If you want to identify a breakout, try looking for a triangle, flag, and head and shoulders pattern on the charts. But beware of fake-out (a fake breakout). It happens in a breakout, but the stock reverts to the trading range by the day's end. So, it's better to wait till the end to get a confirmation. It will help to avoid losses.
Reversal Trading Strategy
As the name suggests, reversal means a change in the price direction of the stock. E.g., if a stock is rising, the downside movement in price is a reversal and vice versa. It is a highly debated trading strategy as it emphasizes going against the prevailing trend. So, it is burdensome to identify pullbacks correctly that could lead to reversals.
Indicators like moving averages, oscillators, and channels help in finding reversals. You can also use trendlines to know the reversal in trends. But there may be pullbacks and false signals, which may lead to huge losses. That is why traders use a popular approach called 'daily pivot' to identify stocks with great potential for reversal. So, use this strategy carefully to minimize the losses.
Anyway, before you proceed further, here's a note of caution for you. Remember that nobody is 100% perfect. So intraday strategies don't guarantee absolute success. For instance, have a glance at this pyramid -
(Source of data: Tradeciety)
Pull Back Trading Strategy
If you have understood the reversal strategy, then you would have no problem understanding this. You ask why? It is so because the pullback strategy is the short-term version of the reversal strategy.
Here, there is a reversal in the short-term trend. And traders earn profits by using these pullbacks. They enter the stock at pullbacks and exit their positions when the stock continues its long-term trend.
Trading volumes play a crucial role in ensuring that there is only a pullback and not a reversal. So, do check the trade volume while using this trading strategy. If the pullback turns out to be a reversal, you would be unable to imagine the condition of the trader who bought the stocks at that level. That is why it is a complex strategy to implement in trading.
Gap and Go Trading Strategy
It is used when there is a difference between the opening price and closing price of the previous day, hence the gap. If it opens at a higher price, it is called a gap-up opening.
It is a popular trading strategy among day traders, as it is easy to use. Generally, there is a news catalyst for the gap. Here, the traders look for stocks with a wide gap in price and decent pre-market volumes. After all, volumes are the best evidence available for trading in the stock market.
Anyways, traders speculate that the gap will close till the end of the day. So, they buy stocks at pre-opening and earn profits by exiting their trades at the opening price. Through this, they can make profits at low risk.
Bull Flag Trading Strategy
In case you don't know about the bull flag pattern, it is the pattern that looks like a flag when there is an uptrend in the stock price. Unlike other strategies, it can be used in any time frame. So, you can become a swing trader and the day trader at the same time by using this strategy.
This strategy is simple. But it becomes a challenge to implement it in real-time. Over the years, it has become possible with technological advancements in charting software. As mentioned above, the foremost thing is to look for volumes. Afterwards, there should be a descending trend for identifying the breakout. All of this takes time. So, it is better that you should be patient while using this strategy. After all, haste makes waste.
Moving Average Crossover Strategy
We are always advised to live in the present. The same goes for this strategy. Here, the average price is updated constantly with the current market price.
In the breakout strategy, you would have understood the two price levels called resistance and Support. But do you know how they are determined? Well, all thanks to moving averages. Besides this, they are known as the backbone of technical analysis, as they form the basis for other indicators used by traders.
Anyways, this strategy includes identifying the stocks trading above or below the moving average. It is done by comparing short-term and long-term averages, which indicates a change in trend and an opportunity for a trader to take a position.
Having said that, whatever strategy you adopt, there is a very effective tool at your disposal, that every trader (and investor as well) must use to protect the downside in trades - Stop Loss.
So, now you know the different strategies for intraday trading. But you would have understood that they require constant monitoring of stock markets. So intraday trading is effective only if you can stick your eyes to the screen all day long. But if you don't have time or the hassle to monitor the stock market, then investing is the best option to create wealth.
In the end, remember that you can't build a long-term future on a short-term goal. So, start investing and get rid of the trouble of watching the stock market frequently.
Anyway, what do you prefer, investing or trading? And why? Let us know in the comments below.