Day trading Strategy – Three That Work

Day Trading Strategies

Much like a Major League Pitcher’s ability to master multiple pitches (three seam fastball, curve, slider, etc.) to reach their end goal of getting a strikeout. As a Day Trader you will want to master at least one day trading strategy that can lead to both short and long-term financial success.

The below three strategies should be studied, practiced using paper trading, and then tested and re-tested in small increments until you have confidence that you’re properly executing.

Over time you will find the strategies that work best for your trading style. That can help lead to consistent, effective and profitable trading.

Momentum Trading

Momentum Trading is a very popular day trading strategy among beginners, and for good reason. It combines the use of price movement and some sort of news catalyst. These two elements bring high volume to a stock and quickly changes the momentum of a stock

This strategy can be incredibly effective, and lead a high-probability of successful and profitable trades. But as always, you have to be careful.

Let’s look at an example: Blue Hat Partners, Ticker: BHAT

On May 28th, 2020, Blue Hat Partners put out a press release shortly before market open at 9 a.m.. They announced a partnership with a different company to launch Augmented Reality Classrooms in up to 1,000 preschools.  At the time, the world was still reeling from Covid-19 and anything related to “getting back to normal” typically caused big spikes.  So let’s take a look at the chart:

Momentum Trading

As you can see, starting at 9 a.m., the stock price started to significantly climb. The climb was accompanied by a large influx of volume at market open at 9:30. The stock spiked from $1.20 all the way up to $2.40 by 9:45 a.m. 

That is a 100% increase in 15 minutes!  Talk about momentum!

BUT, as you can see on the chart, just as quickly as it rose it began to lose momentum and gradually fell back to the $1.20 range by the end of the trading day.

For these kind of trades, you will usually want to target your entry as close to the news catalyst as you can. Your exit should follow whatever trading strategy % gain you are practicing.  It’s always better to secure profits than to hold the stock into the negative thinking it will spike again. 

It is also recommended to implement stop-loss trading strategies when Momentum Trading.  Not all news catalysts will create a 100% runner, so understanding your entry and exit points before entering is always recommend.

Learn more about stop-loss strategies here!

 Breakout Trading

Breakout Trading is another day trading strategy and is the act of buying a stock after the price of that stock has moved outside of a pre-defined price range.  These price ranges are often defined by the support or resistance areas of a stock. They rely on the stock to “breakout” or “break through” those support or resistance areas.  Read about support and resistance areas here.

In addition, for a stock to truly fit the breakout trading strategy, it will almost always need to be accompanied by increased volume.  Increased volume typically indicates that the amount of buyers (or sellers) is growing. This can lead to explosions upward when resistance levels are broken leaving little to slow down the stocks upward movement.  But enough talking, let’s take a look:

Breakout Trading

You can see from the chart above that the price bounces between the support and resistance lines multiple times until it reaches a breakout point and skyrockets upward.  In addition, the breakout trade is confirmed when you see at the drastically increased volume (the blue bars along the bottom). 

In these scenarios, your entry would likely be within the first green candlestick above the resistance line. Your likely exit would be based upon what type of profit strategy you’re using.

Channel Trading

While Channel Trading is a little more complex than Momentum or Breakout trading, it can be a great intra-day trading strategy to deploy, especially on slow news days.  So what is it?

Well, it’s a lot like the name sounds.  We all know that stock prices spend all day going up and down. This ebb and flow can frequently create channels that can be ripe for day trading.  As a stock charts develop over the course of the day, the can form ascending channels that can be used as support and resistance levels of upward moving price.  Let’s look at an example:

Channel Trading

As you can see above, the stock price was rather volatile all trading day long, climbing and pulling back on multiple occasions.  But, the highs were higher and the lows were lower as the day continued. This led to the creations of a rather nice channel.

Drawing lines that touch as many candlesticks as possible on the upper and lower ends you will create a channel.  And as the stock continues to trade, you can quickly notice when the channel is broken. Caused either by a downturn or, in some cases, an upward turn.

Entry and Exit Points

In this example, there are 3 entry and exit points that would make trading this channel worth your time.  Although the channel only offers a little over 3% gains per entry/exit, repeatable and consistent profit is a sure fire way to growing your wealth.

It’s important to note that when you want to use channel trading, the more candlesticks your channel lines touch, and the longer period in which the channel is observing, the more accurate the channel is likely to be.

Like any stock trading strategy, it is important that you do your own research. Continue to educate yourself on what you think will work best with your style of trading.  Some strategies are faster than others and some involve more risk. Ultimately you will need to decide which fits with how you want to trade.

Before you get started, make sure you read the Quick Guide To Day Trading!

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