Are you looking for the best day trading strategies? As its name indicates, day trading refers to a strategy in which a trader opens and closes positions in a particular trading vehicle during the day but generally doesn't hold any positions overnight.
This popular trading strategy tends to suit more experienced short-term traders who prefer to avoid running open positions while they aren't actively watching the market.
Although once primarily practiced by professionals, day trading has become increasingly popular with retail traders who wish to speculate in the financial markets for their accounts. The recent advent of online trading platforms and brokers supporting them has given rise to a new generation of day traders eager to profit from market fluctuations.
Read on for our picks for the best day trading strategies and more useful information about day trading.
Good Day Trading Strategies
Day traders use different strategies in their trade plans. Their choice of strategy will typically depend on their trading and educational background, as well as on their personality type. They might also need quick reactions to capitalize on rapid intraday market movements.
Despite any differences in their actual strategy, a unifying feature among most successful day traders is that they first develop and then discipline themselves to stick to a reasonably profitable trading plan.
Most day traders use technical analysis for their trade plans due to the objective trading signals it can provide in normal trading conditions that help improve your odds on a day trade. Other day traders might use fundamental information and news releases to trade on, especially when the assumptions that underlie technical analysis break down.
These trading strategies can give you a good foundation for your day trading.
Strategy 1: Market Opening Gap
Technical analysts believe that most smaller opening gaps are filled, while larger breakaway gaps tend to indicate the market will continue in that direction. You can look for opening price gaps in exchange-traded markets that exceed some percentage criteria, such as 5% for example.
If you trade the stock market, then pre-market stock scanning tools can usually be employed to do this quickly. The chart below shows an example of a roughly 80% opening gap in the pharmaceutical stock Aprea Therapeutics Inc. (NASDAQ: APRE) after a negative news outcome in a trial of its key experimental drug used to treat myelodysplastic syndrome (MDS).
Opening gap down highlighted with a blue line on the daily candlestick chart of Aprea Therapeutics Inc. after a negative news release outside of market hours. Source: TradingView.
Once you find a stock that is moving strongly around the time that its stock market opens, you can look for a timely news item provoking the move to make sure it makes fundamental sense. The next step involves looking for a suitable entry point and placing your stop loss below support. Your criteria for selecting these points should be as objective as possible.
As an example of a market opening gap strategy, you might observe the pre-market high point and then place a limit order to buy at that point if a retracement occurs. Another option might involve looking at the opening range for the first minute of trading. You can then enter an order to buy at the high of the market's 1st 1-minute candle while simultaneously putting your stop loss order at that candle's low point.
Strategy 2: Ichimoku Kinko Hyo Indicator
The Ichimoku Kinko Hyo or Ichimoku Cloud indicator can be used by itself to provide intraday technical trading signals that you can act upon. You'll see two of its five lines form the "cloud" or Senkou Span, while its Kijun Sen line gives trading signals and a suitable stop loss region.
For example, day traders using this indicator might enter into a trade when the price moves outside the cloud to suggest a new trend. That trade can be held until the trading day ends to take profits or until the Kijun Sen line is crossed to take a loss. Traders might use a trailing stop loss that follows price action and is situated on the opposite side of the Kijun Sen line.
The Ichimoku Kinko Hyo indicator superimposed over the EUR/USD exchange rate with the Kijun Sen signal line shown in blue. Source: MetaTrader.
Strategy 3: News
The initial release of news about current events often directly and substantially influences the prices of stocks, commodities and currency pairs. Many financial markets traders who trade economic data releases wait until the market exhibits a consolidation pattern like a trading range just ahead of the anticipated release. This price behavior suggests that traders remain undecided ahead of the release before jumping into the market in an appropriate direction afterward.
Once the news comes out, the news trader watches for the market to break out of its previously observed consolidation pattern. They then initiate a position consistent with the direction of the consolidation pattern's breakout.
The news trader typically puts their stop loss at what looks like a safe point beneath the breakout level. If the consolidation pattern was a triangle, then they would measure the initial width of the triangle and project that distance from the breakout point to suggest a profit-taking objective. If the pattern was a range, then they would use the width of the trading range to project instead.
Keep in mind that the markets can be exceptionally volatile when important news comes out as the chart below demonstrates. News traders should approach the leaving of stop loss orders carefully since they can be subject to substantial slippage in such fast markets.
A 15-minute candlestick chart of EUR/USD shows the sharp market movement upon the release of Non-Farm Payrolls (NFP) data on December 4, 2020. Source: TradingView.
Before You Day Trade
Before you start off as a day trader, remember that day trading typically involves investing a considerable amount of time each day as you select trade opportunities and then monitor resulting positions.
You will want to have decent research tools available to you and a clear and objective way to decide on which trades to take. Your trading methodology should be practiced in advance of using a live account and should all be incorporated into your overall trade plan.
Another key way to prepare yourself for day trading consists of obtaining knowledge about the fundamental market-moving factors that drive the financial markets you intend to trade.
Avoid trading in markets you do not fully understand yet — even if you intend to use a technical analysis-based strategy — since the assumptions underlying technical analysis tend to break down briefly as the market quickly assimilates new information.
Best Online Brokers for Day Trading
Traders often have differing priorities when selecting a broker depending on their level of experience and trading activity level. You will want to select a broker suitable for your particular needs and preferences.
Check out our selection of the best online brokers for day traders.
Best Day Trading Chat Rooms
Many providers offer online day trading chat rooms where traders can discuss and exchange trade ideas with each other on a timely basis. These rooms can serve as an educational and peer-based feedback tool for novice traders who can learn from more experienced traders and ask questions.
Best Day Trading Research Platforms
Various research platforms allow you to quickly collect and review information relevant to the day trading opportunities you identify in the financial markets. The best day trading research platforms for you will depend upon the trading strategy you plan on using and which market you intend to employ it in.
Benzinga has collected a list of research platforms below to facilitate comparing them.
Is Day Trading for You?
Day trading caters to individuals who can manage the stress of intense risk-taking activity. Successful day traders will typically be more experienced market operators who have traded for several years and have the right personality type to deal calmly and objectively with the volatility often seen in the financial markets. As a day trader, you might need to commit considerable time to monitor the markets and manage your positions.
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.
Frequently Asked Questions
Is day trading risky?
Day trading is considered risky. Assets prices can swing throughout the day, and each day trading strategy requires the trader to keep their emotions in check.
Should beginner traders do day trading?
It is not a good idea to do day trading when you are getting started, especially with assets that experience significant price movement. Day trading requires considerable education, knowledge, and skills. You can learn along the way, but it is better to learn with less risky trading windows.
What are the best day trading strategies?
Traders can use various day trading strategies, but the best day trading strategy is the one that works for you.