Have you ever met any football coach who consistently succeeded with pure luck and zero strategy? I guess not.
The same thing applies to day trading. While luck can produce one-off wins, you need successful day trading strategies to win consistently. Otherwise, you can become one of the 90% who lose 90% of their money within 90 days (according to the popular day trading adage).
“Top traders … have found … that their ability to stick with a trading plan is far more important than knowing or worrying about what their neighbor is doing,” according to Michael Covel, the author of The Little Book of Trading.
So, instead of following the crowd or depending on luck (equivalent to gambling), you should focus on selecting successful day trading strategies to help you make consistent profits.
In what follows, we consider eight successful day trading strategies that experts and day traders have used over the years and how you can apply them to become a better trader. We’ll cover:
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There are two potholes to avoid when it comes to measuring the success of a trading strategy.
First is the expectation of perfection. Anyone with even a minute’s experience in stock trading will tell you that there is no perfection anywhere. Day trading stocks remains a high-risk venture and even the best of strategies will result in some losses.
A successful strategy, then, is not a perfect system but one that consistently results in more wins than losses. “In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten,” according to Peter Lynch, a former mutual fund manager.
Similarly, with a successful strategy, the money you make when you are right exceeds the one you lose when you are wrong. “It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong,” said George Soros, the chairman of Soros Fund Management.
The second pothole is measuring success over a very short timeframe. A strategy with more wins and losses over a month is not the same as the one with more wins and losses over five years, for example.
Michael Covel emphasized this point in his book. The strategy he proposed – trend following – is one that “has worked literally month by month for decades.”
In sum, look for a strategy that produces more wins than losses over the years and with which you make more money when you are right than you lose when you are wrong.
The most successful day trading strategies will answer the following questions:
To provide these entry, stop-loss, and exit points, trading strategies rely on technical analysis – chart patterns, candlestick patterns, moving averages, and technical indicators.
This is why a good knowledge of technical analysis is crucial if you want to learn how to start trading stocks.
[For more on how to conduct technical analysis, read “Invest and Trade like a Pro: How to Use Both Fundamental and Technical Analysis.”]
Though there are many chart patterns, candlestick patterns, moving averages, and technical indicators, trading strategies that work tend to choose just a few ones that can help:
Source: Pro-Setups
The Average Directional Index (ADX) is one of the top technical indicators for day trading that helps identify trend strength. When the ADX is above 25, it means the trend is strong. If it exceeds 50, the trend is very strong.
Source: Investopedia
Most day traders use candlestick patterns to identify trend continuation and reversal. For example, a hammer is a bullish trend reversal pattern (a downtrend about to turn into an uptrend) while the rising three methods pattern is a bullish trend continuation pattern (an uptrend will continue).
Source: LiteFinance
Rising three methods candlestick pattern
Source: Living From Trading
Now that we know what trading strategies do, let’s consider some of the most successful day trading strategies that have stood the test of time.
This is also called the trend-following strategy. This trading strategy seeks to trade in the direction of the market trend instead of going against the trend. Thus, they will go long in an uptrend and short-sell in a downtrend.
Trend followers will avoid stocks that are in consolidation (sideways pattern). Instead, they choose stocks with very clear uptrends or downtrends.
Clear uptrends can be seen when candlesticks are forming higher highs and higher lows and clear downtrends can be seen when candlesticks form lower highs and lower lows.
In addition, trend followers can use moving averages and technical indicators (like RSI and MACD) to identify trend direction. They also want to know if a trend is strong enough so indicators like ADX can be handy.
Let’s consider how this strategy answers the three questions above:
The trend-following strategy involves entering a trade when you are confident that a new trend is starting or a previous trend is continuing.
Traders will often use diverse pointers (and even combine many of them) to identify when a new trend is starting. Some popular options include:
An example of the former can be seen below:
Source: Bse2nse
In the same way, bearish reversal candles can indicate the end of an uptrend and the beginning of a downtrend. Hanging Man and Shooting Star are examples of this reversal.
Source: Pinterest
Source: Trend Spider
Source: Investopedia
The following chart is an example of trendline bounces in an uptrend:
Source: Trading with Rayner
Every time the price bounces off the trendline, it continues in the uptrend direction.
For example, when the MACD line crosses the signal line (as seen below), it is often the beginning of an uptrend or downtrend.
Sample MACD chart
Trend followers will enter a trade when a new trend starts or an old trend continues and they exit when the trend is about to come to an end.
Again, trend followers use various pointers to determine when a trend has been exhausted:
For a long position, traders will usually put a stop loss order below the swing low before the entry point or below a previous support level. In the same way, in a short position, trend followers will put a stop-loss order above the previous swing high or resistance level.
A stock is trading in a range if it is moving between a support level and a resistance level rather than following a clear long-term trend.
A range shows that buyers have a price below which they won’t allow the stock to fall just as sellers have a price above which they won’t let it rise.
Below is an example of a stock trading in a range.
Source: Investopedia
Range traders take long positions close to the support level, placing a stop loss just below the support level and they sell close to the resistance level.
They can also short-sell close to the resistance levels, setting a stop loss just above the resistance level, and take profit close to the support level.
Range traders tend to wait for prices to rise a little above the support level before buying to ensure there won’t be a breakout. In the same way, they wait for it to go below the resistance level a little before short-selling for the same reason.
Indicators like RSI and stochastic indicators – that identify overbought and oversold levels – can also be handy.
If the stock has reached the overbought level and the RSI is now falling, that can be a good entry point for a short position. Similarly, if the stock has reached the oversold level and the RSI is now rising, that can be a good entry point for a long position.
Sample RSI chart
Trend momentum is one of the important information that traders need to know.
When a trend is strong, there is a high probability that it will continue. However, when a trend is weak, a reversal is not out of the question.
Also, a trend going from a weak momentum to a strong momentum shows that the trend is likely to continue while the opposite shows that the trend is likely to stall, with the possibility of a reversal.
Momentum trading depends a lot on indicators with ADX, RSI, MACD, and Momentum being the most popular.
Below is an example of momentum trading using indicators:
Source: Medium
Momentum and RSI crossing 100 and 50 to the upside, respectively, show that there is a strong upward momentum. Momentum traders can place a long position at this point.
Though this particular trader sets the stop loss 60 points below the entry, other traders will use the previous swing low or support level.
Momentum traders will take profit when momentum falls (based on the indicator) or as in this case, when there is a strong resistance level.
Breakout trading is a strategy where traders take a position after a key support or resistance level has been broken.
The breakout of a support level is often the beginning of a downtrend just as the breakout of a resistance level is often the beginning of an uptrend. Below is an example of the latter:
Source: Investopedia
As beginners end up realizing, there are false breakouts that do not lead to new trends. Consequently, the more experienced traders will wait to see a bullish or bearish candlestick (see below) before opening a position.
Source: Elite Current Sea
In addition, some traders will wait to see a change in trading volume in addition to a bullish or bearish candle.
Source: Investopedia
As seen in the chart above, there was high volume just at the place where the stock broke a key resistance level.
What about stop losses and take profits?
You can take a profit at the next resistance or support level or when a bullish or bearish reversal candle appears. Stop losses can be below the support level or above the resistance level immediately before the entry point.
Pullback trading is a form of trend-following strategy.
When a stock is in an uptrend or a downtrend, it doesn’t just move continuously in that direction. There are some short-term (temporary) moves in the other direction before it continues its upward or downward trend.
Source: Investopedia
In this example, there is a clear uptrend as the trendline shows (higher lows). However, within that uptrend, there are times when there is a pullback as the asset’s price touches either the 50MA or the trendline before it continues its upward trajectory.
Traders who are convinced of the strength of this long-term uptrend (using indicators like ADX or Momentum) can use these pullbacks as buying opportunities.
The same thing holds in a downtrend. Within that long-term trend, there will be pullbacks to the trendline or the moving average. Those are buying opportunities for pullback traders.
In the example above, the trader can take a profit at the resistance level and place a stop loss just below the previous swing low.
As with breakout trading, pullback traders may wait to see a strong bullish or bearish candle (together with strong volume) before entering a position. These candlesticks will confirm that the pullback is indeed temporary and the stock is soon back to its long-term trend.
A gap occurs on a stock chart when the market opens at a different price level than the previous close, open, high, and low.
Gaps are usually caused by significant price fluctuations arising from news reports or some changes in the stock’s fundamentals. They can also occur after a strong support or resistance has been broken.
Below is an example of how a gap appears in trading software:
Source: The Robust Trader
Gaps can present trading opportunities if they are of the right type. There are four main types of gaps:
Source: Strike
Source: Strike
Source: Strike
Source: Strike
A gap is said to have been filled when the price returns to the pre-gap level.
Gap traders will make entry and exit decisions based on the type of gap. The following chart is an example of how different gaps lead to different decisions:
Source: Investopedia
The first is a breakaway gap that follows a bullish reversal candle, providing an opportunity for a long position.
The second is an exhaustion gap showing that the upward trend is weak and a reversal imminent.
Finally, the third is a runaway gap which indicates that the current uptrend is likely to continue.
Price action is a term that describes how the price of financial assets (stocks, forex, crypto, commodities) moves up and down within a specific timeframe, as shown in its price chart.
Most price action traders ignore technical indicators though some will use indicators like RSI and Stochastic Oscillator.
As we have seen, we can draw support, resistance, and trend lines on price charts to understand price patterns and trend direction.
Price action trading also considers chart patterns like ascending, descending, and symmetric triangles; double tops and bottoms; and ascending and descending wedges, among others.
The most common chart patterns
Source: How to Trade
Price action traders can trade trends, ranges, breakouts, and pullbacks. This is why some traders don’t see it as a different strategy but a trading style that can incorporate other strategies.
The point of price action trading is that while past performance does not guarantee future results, the past shows patterns that tend to repeat themselves.
Is price action trading profitable? Definitely! While indicators are very important, many traders have made do without them, focusing only on candlestick patterns and chart patterns.
Though we can consider scalping as different from day trading (just like swing trading and position trading are different from day trading), some day traders use scalping as a day trading strategy. It is also popular with other financial instruments like currencies and cryptocurrencies.
This strategy seeks to profit from short-term market movements including bid and ask spreads by quickly buying and reselling.
Source: Tastylive
Some characteristics of scalping include high trading volumes (to turn small price changes into significant profits), more frequent trading (some can take hundreds of trades in a day), large position sizing, quick decision-making, and the use of real-time market data.
Many scalpers use automated bots to achieve the frequency and speed they desire.
Scalpers use many strategies. Let’s consider one of them: the Moving Average Ribbon Entry Strategy.
This involves adding the 5MA, 8MA, and 13MA lines to a price chart, and forming a ribbon (as seen below).
Source: Investopedia
These moving averages show both trend direction and strength. The trend is positive if the moving averages are going up and negative if they are going down.
The trend is strong when prices are glued to the 5MA and 8MA and this can signal trend continuation. However, when prices are glued to the 13MA, that may mean that market conditions are about to change and a reversal is imminent.
Many stocks respond to news like earnings reports, a change in top management, the launch of new products, and general macroeconomic news (interest rate changes, for example).
Successful day traders who are sound at fundamental analysis can predict how certain news reports will impact intraday price movements and take short-term trades based on them.
News traders make trading decisions in anticipation of the news, when the news is released (using real-time market data), and after the news has been released.
For example, news traders can buy a stock in anticipation of a positive earnings report or short sell because of rumors about one of the company’s products failing a trial or quality test.
News traders also seek to understand how the news aligns or differs from market expectations and the impact of that on future price movement.
For example, if the earnings report is negative when it was expected to be positive, it might be an opportunity to short-sell.
In addition to liquidity and volatility, news traders will consider responsiveness to the news before selecting a stock to trade.
News trading can be risky because rumors may not pan out and the expected impact may have been exaggerated. Also, making quick decisions to take advantage of the news can lead to very costly mistakes and significant losses.
Should you just pick any of these best day trading strategies and start implementing them?
Not so fast.
First, you need to adapt the strategy for yourself. As we have seen, these strategies don’t specify the candlestick pattern, chart pattern, moving average, or technical indicators to use. They only tell you what you need them for.
For example, the breakout trading strategy tells you to look out for a bullish or bearish reversal to confirm that a support, resistance, or trend line will not hold. But it doesn’t tell you which one to use.
Similarly, the momentum trading strategy tells you to enter a position when momentum is strong and await a reversal when momentum weakens. But there are many momentum indicators. Which one should you choose?
These two examples show that these strategies are high-level and you will still need to adapt them by choosing specific candlesticks, chart patterns, moving averages, and trading indicators.
Second, you need to test the personalized strategy you create from these high-level strategies before deciding on one. The goal here is to ensure that the strategy produces more wins than losses and that you make more money when you are right than you lose when you are wrong.
You can do this testing with a demo account or live trading with a small amount of real money.
Backtesting is another option. This involves going back in time to apply your strategy and then comparing the results with what actually happened. This is often a low-cost way to test a strategy – all you need is trading software.
Since the high-level strategy has been tested over the years, you don’t need to wait for too long to decide that a personalized strategy works well. Testing over a few months should be enough.
Finally, which high-level strategy you choose will depend on your risk tolerance, capital, personality type, and time availability (whether trading is a full-time or part-time work). For example, news trading will be riskier than range trading and pullback trading will require less capital than trend trading
The trading platform or brokerage that provides you access to the stock market also matters. You want a platform with low commissions, adequate security of your data and money, responsive customer support, and trading support tools (news, market reports, and educational resources, among others).
All of these and more are what we provide at Sarwa Trade. We only charge $1 or 0.25% of traded value (lower than industry average) and you can transfer money from your local bank account to your trading account (and vice versa) for free.
We protect your data and money with bank-level SSL security and provide news, reports, and educational resources that will make you a better trader. Finally, our customer support team is available 24/7 to attend to all your needs.
[What then are you waiting for? Sign up for Sarwa Trade today to start day trading US stocks from the UAE in a cost-effective, secure, and convenient way.]
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