Day trading strategies

As we noted earlier, market timing is at the heart of successful day trading. That means spotting an opportunity as early as possible, getting on board, and capturing as much of a move as you possibly can, intraday.

So, what type of strategies can you adopt to do that?

Trend following in day trading

Trend following is going with flow, letting the market tell you which direction it’s moving in then joining that trend. Going long if it’s moving up or short if the market in question is trending lower.

Of course, to do this, you need markets that trend strongly.

A good example of this would be US equities as represented by the S&P 500 index, between early February and mid-May 2019 (see the left-hand side of the chart below). The green candles indicate up days and the red candles down days in the index, and in this period, there were very few indecisive days, as far as price action was concerned.

Here’s more about trend trading and how to use it to your advantage.

Momentum day trading

A momentum trading strategy involves looking for individual stocks or sectors whose prices are moving and gaining strength as they do so. One way to spot such situations can be through the use of a heat map, such as the one below which again tracks the S&P 500 index. The map is colour coded so that the brighter red a square is then the bigger the downside move in that instrument conversely the more vivid the colour green a section is then the bigger the upside move.

You can also gauge the momentum in a stock or other instrument by comparing the current price and prints to recent period highs and lows, for example, the appearance of five consecutive new 5-minute highs could be considered a sign of strong upward momentum.

Another indicator that day traders can use to assess the strength or momentum of a move is to keep an eye on current volume traded versus average daily volumes (where available). The thinking here is that a move on decent volume is more sustainable than one made without it.

The calendar – economic event day trading

As day trading is all about capturing market moves that occur over a single day it makes sense to consider trading the market with an economic calendar. Company announcements and economic data are released almost every day, and key items such as company results and trading updates are released to a known and published timetable, as are major macroeconomic data points.

These news releases often move markets, particularly if they deviate from market expectations in either a good or a bad way.

It’s often the case that even a good set of numbers from a company or a positive economic data point can disappoint the market if that’s already been priced in. By the same token if the market is expecting the worst and the news is better than anticipated, then you can often see a relief rally or bounce.

By paying attention to earnings and macroeconomic calendars, day traders can plan ahead and know what to look for. By trading the calendar, you are effectively hunting for and trading in changes in market sentiment and the revaluation that brings about.