Day trading is a standard method used by investors as a more active approach to equity investment.
In this trading style, the trader buys and sells financial instruments – such as stocks, commodities, or currencies – during one day, closing out all positions at the end of each trading day.
It’s a more active investing style compared to traditional buy-and-hold portfolios, where an investor holds a stock for months or years. More than 90% of professional traders use some form of day trading strategies in their daily trading activities, with most using it as their primary source of income (check out Saxo Broker for more info).
Many different strategies can be employed when looking at day trading. A study performed by the Australian Bureau of Statistics (ABS) found that the most common day trading strategy is scalping.
Scalping involves holding a stock for less than a minute, making gains of 1-5% on each trade (ABS, 2010). This process usually occurs throughout the day as traders try to make many small profits rather than focusing on one or two larger trades.
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Intra-Day Swing Trading
Another popular day trading strategy is intra-day swing trading – also known as intraday trading. With this type of strategy, traders look for price momentum changes over different periods during the day and will open and close positions accordingly.
One example might be if an investor placed an order to purchase shares in Company A at 9:00 AM but by 10:00 AM they have lost value, they will cancel the order and then switch to a short sell on Company A. This would be done in an attempt to profit from falling stock prices.
Inter-Market Analysis
Frequently, traders use inter-market analysis for day trading strategies, which is when they trade stocks based on what other assets are doing at the same time. Traders might consider buying Company A if it’s moving in line with another asset’s price movement or when Company A has decreased while similar assets have been increasing (Grant & Gallmeyer, 2011).
Cost Averaging
Another strategy that can be used in conjunction with any of the above-listed methods is cost averaging. Cost averaging means buying a certain amount of shares each day or week over a specific period – regardless of the share price.
In doing this, traders will buy more shares when the price is low and fewer shares when the price is high. It allows them to gather a large number of shares with fewer purchases.
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The A’s
During the regular trading hours (9:00 – 16:30), there are three letters traders pay attention to – ‘A’, ‘B’, and ‘C’. When trading stocks, these letters refer to opening trades, breakouts from consolidation periods, and continuing trends, respectively.
When a price is in a tight range – the so-called ‘C’ – traders do not know whether it will break out to the top or bottom and continue trading in that direction until it has done one of those things.
In this situation, they use closing trades to take profits from their open positions and look for short opportunities. However, if the price breaks out from a consolidation period, traders can continue making further transactions using these breakout trades.
The Shallow Triangle Strategy
A shallow triangle consists of two trendlines with less resistance on the downward side than an upward side, creating a ‘shallow profile when looking at it from above. It is a pervasive pattern in low volatility situations so when you see one, be aware that it might not break out with a significant price movement in the direction of the trend in force.
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The Triangle Breakout Strategy
A triangle can also consist of only one trendline, with the other line representing support. It’s called a symmetrical triangle, and traders (who predominantly use closing trades) would open long positions if the price breaks out downwards from this pattern.
Conversely, they would open short positions if the price broke out upwards. However, not all symmetrical triangles end up having a significant impact – some of them are referred to as ‘noise’ due to their small size – so do not always expect a significant movement in the direction of the breakout.