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Best Day Trading Strategies

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Day trading is a trading style that involves opening and closing your trades intraday through margin accounts, which means you borrow extra funds from your day trading broker to trade with larger amounts of money.

This way, you aim for higher returns but also can suffer large losses. That’s why it’s important to employ an adequate day trading strategy, and Benzinga is here to introduce three separate day trading strategies with visual examples to help your investments.

Best Day Trading Strategies:

Overview: Day Trading Strategies

A day trading strategy involves a set of trading rules for opening and closing trading positions. There are many different trading strategies based on the indicators and the signals you use. Different indicator combinations give you different results.

What Makes Up a Good Day Trading Strategy

Indicators play a large role in strategy. Make sure you have the following.

  • Clear trading signals: Your trading strategy should involve clear rules for opening and closing your trades. The more they’re based on technical criteria, the easier they’ll be for you to implement. The fewer personal thoughts you involve, the less hesitation there will in your decision-making process.
  • Clear stop-loss rules: Your trading strategy should involve good stop-loss rules. Always use a stop-loss on each of your trades, which limits your risk. It’s always a good approach to risk no more than 1-2% of your bankroll in a single trade. You’ll need 50-100 consecutive losing trades to lose all funds in your account. Imagine a coin-flipping 50-100 “heads” in a row. How likely is this to happen when you follow a strict trading strategy?
  • Success rate: A good trading strategy will have a success rate relatively positive to the risk you take. It should give you higher returns than your losses in the long run. Notice that a strategy with a success rate lower than 50% can still be successful. Imagine that your strategy has a 40% success rate. This means that four out of 10 trades reach your preliminary set target. Now, imagine that your risk-to-return ratio is 1 to 10. This means that with risking one, you aim to get 10. In 40% of all cases, you’ll be correct. This way, the 40% success rate strategy appears to be a great trading approach. Unfortunately, it’s not that simple and will take hundreds of trades to determine the exact success rate and potential profit targets of your strategy.

Just remember, the higher your trading strategy’s target, the lower your success rate will be. The results of your testing will strongly depend on your discipline during the trading process. One step outside of the rules will change your day trading strategy’s potential.

The Best Day Trading Strategies

Your main goal as a day trader is to catch a potential daily trend and to exit in the right moment, which should happen prior to the end of the trading session. Notice that in some of the strategies, you’ll also use a volume indicator to confirm our signals. Valid signals and trends are likely to occur during increasing or high trading volume.

Strategy 1: Ichimoku Kinko Hyo

The Ichimoku Kinko Hyo, also known as the Ichimoku Cloud, is a good standalone indicator. It plots on the chart on top of the price action and consists of five lines. Two of them form the Senkou Span, known as the cloud. The other line you need is the blue Kijun Sen line. This strategy is suitable for every trading asset as its rules are trend-related.

  • Strategy rules: You’ll open a trade whenever the price goes out of the cloud, which is an indication that a potential trend is probably interrupting the ordinary flat price activity. You’ll then hold the trade until the price interrupts the blue Kijun Sen line or until the end of the trading day.
  • Stop-loss rules: Use a stop-loss order for this trading strategy. Since you expect a trend, the Kijun Sen should follow the price. The closing moment moves as well, so use a trailing stop-loss order which follows the price activity. Place it on relative distance so that it is always at the other side of the Kijun Sen, then close a trade if the price breaks the Kijun Sen. Don’t wait for interaction with the stop-loss. The idea of the stop is to be as close as possible to the Kijun Sen and to protect you from sharp moves against your trade.

Example of Ichimoku Kinko Hyo

This is the five-minute chart of the EUR/USD for December 20, 2018. The image shows a bullish price activity. The chart starts with the price inside the Senkou Span (the cloud). The green circle shows the moment when the price breaks the cloud in a bullish direction. A few moments later, there is an increasing trading volume on the volume indicator, which indicates a bullish trend forming on the chart, which gives us a good reason to buy the EUR/USD.

We can put a trailing stop-loss order at approximately 18 pips’ distance below the price action. This way, the stop-loss will crawl up and will increase with the price action. The price increases afterward.

The trade continues for nearly three hours. Our closing signal comes when the price breaks the blue Kijun Sen line, indicating that the bearish trend might be over. The results from this potential trade equal to 66 pips, or 0.58%. The risk we took with our stop-loss order is equal to 0.16%. Our win-loss ratio is 3.63:1. In other words, we profit 3.63 with risking 1.

Strategy 2: RSI and Stochastic Oscillator

Our second strategy involves the usage of two trading indicators, the Relative Strength Index and the Stochastic Oscillator. These two indicators are mostly used to get signals for overbought and oversold market conditions. Thus, their main purpose will be to trade price reversals. This is a scalp day trading strategy suitable for all trading assets.

Our goal here will be to scalp the market for minimal price moves and to rely on a bigger number of trades. This is a very active trading strategy, which involves multitasking and good reactions to open and close trades in the right moment. The two indicators will take place below your chart. They will have separate areas down there.

  • Strategy rules: We will open a trade when we get an overbought/oversold signals from both indicators. If both indicators go in the lower part of its areas, we get a double oversold signal. We will expect a price increase, which we will tackle with a long trade. If both indicators go in the upper part of the area, then we have an overbought signal. We need to react with a short trade in this case. The trade will take place until one of the indicators give us an opposite signal supported by a price move against us.
  • Stop-loss rules: Trades can be very short in terms of time. Thus, stop-loss orders need to be very tight. It might be better if you decide on a specific stop-loss distance and follow it for every trade – 0.1% for example. Some trading platforms might let you set this stop-loss distance by default with the opening of every single trade.

Example of Relative Strength Index and Stochastic Oscillator

The chart shows the GBP/USD on Dec 19, 2018. We have the Stochastic Oscillator and the Relative Strength Index (RSI) at the bottom of the chart.

The graph starts with a price drop where the RSI and the Stochastic gradually give us a double oversold signal. This is an indication that a price increase might occur. We buy the Cable (GBP/USD) and we place a tight stop-loss order at 15 pips’ distance as the trade is not likely to take much time. The price increases and we get an overbought signal from the Stochastic Oscillator.

Few periods afterward, the price action creates a small bearish move. This tells us that the price might be finishing the increase and the overbought signal supports this theory. Therefore, we close the trade and collect our profit.

The trade takes an hour and a half and brings 42 pips’ profit or 0.33%. The risk we take equals to 15 pips, or 0.12%. The win-loss ratio of this trade is 2.8:1. We don’t use a volume indicator here because of an attempt to catch short price moves. These also occur in the absence of a general trend.

Strategy 3: Post-Gap Trading with Price Action

The post-gap trading strategy is suitable for stock-based trading assets. As the strategy suggests, we will need a gap in order to apply our trading rules. For this reason, we will use financial assets that start and end the trading day. These financial assets have morning gaps between the different trading sessions.

  • Strategy rules: The training session starts with a morning gap. Then, in the next 30 to 60 minutes, the trading assets will try to stabilize from the craziness caused by the market opening. The strategy suggests that we observe what happens in the first 30 to 60 minutes and open our trading position based on these events. If the stock starts with a bearish gap and then in the next 60 minutes the price fulfills the gap in bullish direction, then we will have sufficient reason to believe that the price might continue to increase. But if the price continues to decrease, then maybe it will enter a decent bearish trend. The opposite rules apply if the gap is bullish. Another feature of this day trading strategy is that we will constantly use price action rules to determine our exit points. We will use trendlines, candle patterns, chart patterns and other on-chart formations to find the best exit point for our trade. We will use the volume indicator to determine the end of the morning craziness. This will help us jump into an eventual steady trend for the day.
  • Stop-loss rules: A good place for your stop-loss order will be the opposite side of the gap. If you open a bullish trade, a good place for the stop-loss order will be below the lower point of the gap. But if you open a bearish trade, the stop-loss order should be above the highest point of the gap.

Example of Post-Gap Trading with Price Action

This is the five minute chart of AliBaba for December 21, 2018. The volume indicator is at the bottom of the chart. The trading day starts with a relatively big bullish gap. The trading volumes are high and volatility is high, as well. This is the morning craziness.

Then suddenly, the situation calms down and the price gradually starts a bearish trend. The price breaks the gap’s low which gives us an indication that the downward move might be dominant during the day. We sell on the assumption that this will be the intraday price movement. We place a stop-loss order at the opposite side of the gap.

The distance between the entry point and the stop loss order is $1.60. The price decrease continues throughout the day. We manage to follow the gradual price drop by a trend line (blue). Since we have a trend line, we can hold the trade as long as the price is below that line or until the end of the trading session. The end of the day is what comes first and we close the trade in order to keep it intraday.

The trade gets a bearish price move of $3.10, which equals to 2.31%. The stop-loss order is at 1.19%. This gives us a win-loss ratio of nearly (1.94:1).

Compare the Best Online Brokers for Day Trading

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Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.

Webull is widely considered one of the best Robinhood alternatives.

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Chase You Invest is the retail brokerage arm of JP Morgan Chase, the largest bank in the United States. While most of the firm’s products are targeted toward wealthy clientele, You Invest gives novice investors a chance to learn about markets, select the best securities and plan for future goals like retirement. No futures, forex, or margin trading is available, so the only way for traders to find leverage is through options. 

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TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.

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Final Thoughts

You need to be disciplined and rigorous to start day trading. A common day trader problem is that they lose it and deviate from their strategy.

Some time can pass before you realize you’re not strictly following your initial strategy. This troubles the success rate of the strategy and breaks your odds. A good way to tackle discipline issues is to write down the exact rules of your strategy and stick the note to your monitor so it will be always in front of you during trading sessions.

This way, you’ll constantly be reminded to follow your strategy rules. In each of the above trades, we’ve carefully calculated the outcome. You should do so, too, to be familiar with what exactly can happen to you in every trade.

When you get more experienced, it gets easier, and some advanced day trading apps will also calculate everything for you automatically.

Want to learn more about day trading? Check out Benzinga’s guides to the best day trading software, the best day trading brokers and day trading rules.

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