Strategies For Beginners
When people use the term “day trading“, they mean the act of buying and selling a stock within the same day. Day traders seek to make profits by leveraging large amounts of capital to take advantage of small price movements in highly liquid stocks or indexes. Here we look at some common day trading strategies that can be used by retail traders.
Entry Strategies
Certain stocks are ideal candidates for day trading. A typical day trader looks for two things in a stock: liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads and low slippage). Volatility is simply a measure of the expected daily price range – the range in which a day trader operates. More volatility means greater profit or loss.
Once you know what kinds of stocks you are looking for, you need to learn how to identify possible entry points. There are three tools you can use to do this:
Intraday Candlestick Charts – Candles provide a raw analysis of price action.
Real-Time News Service – News moves stocks. This tells you when news comes out.
We will look at the intraday candlestick charts and focus on the following three factors:
Candlestick Patterns – Engulfings and dojis
Technical Analysis – Trendlines and triangles
Volume – Increasing or decreasing volume
There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern is one of the most reliable ones.
First, we look for a volume spike, which will show us whether traders are supporting the price at this level. Note that this can be either on the doji candle, or on the candles immediately following it.
Second, we look for prior support at this price level. For example, the prior low of day (LOD) or high of day (HOD).
Finally, we look at the Level II situation, which will show us all the open orders and order sizes.
If we follow these three steps, we can determine whether the doji is likely to produce an actual turnaround, and we can take a position if the conditions are favorable. Typically, entry points are found using a combination of these three tools.
Determining a Stop-Loss
When you trade on margin, you are far more vulnerable to sharp price movements than regular traders. Therefore, using stop-losses is crucial when day trading. One strategy is to set two stop losses:
1. A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most you want to lose.
2. A mental stop-loss set at the point where your entry criteria are violated. This means that if the trade makes an unexpected turn, you’ll immediately exit your position.
Retail day traders usually also have another rule: set a maximum loss per day that you can afford (both financially and mentally) to withstand. Whenever you hit this point, take the rest of the day off. Inexperienced traders often feel the need to make up losses before the day is over and end up taking unnecessary risks as a result.
