Many new investors believe that intraday trading is an action-packed way of investing in stocks. However, most successful day traders will tell you that intraday trading is only 10% action. The rest is about waiting and watching. Day trading can be lucrative if traders are capable of leveraging price fluctuations without getting carried away. However, it can be dangerous for new traders especially if they don’t approach it strategically. In this article, we will share some popular intraday trading strategies to help you approach it in a structured manner.
Before we start talking about intraday trading strategies, we would like to mention that no strategy can offer guaranteed success. Market conditions play an important role in ensuring the success of a strategy. Hence, intraday traders must be flexible and practice multiple strategies while trying to adjust to multiple scenarios. Here are some popular intraday strategies:
In this article
Momentum Trading Strategy
Success in day trading can be attributed to investing in stocks that have momentum. These stocks typically move around 20-30% every day. The trick lies in finding them early and investing in them before they make the move. The movement of stock prices can be in either upward or downward direction. Based on the speed of movement of the security, traders can hold positions for minutes, hours, and even the entire day.
This strategy is usually effective at the start of the trading day or when a news report results in a sudden increase in the trading volume of the security. Identifying the momentum requires traders to constantly monitor the markets and catch uptrends at the right time.
Reversal Trading Strategy
Reversal trading or trend trading or pull-back trading is a highly debated trading strategy for beginners since it talks about investing against the trend. This is a difficult strategy since it requires the investors to identify pullbacks correctly along with their strengths. This means they will need a detailed understanding of the market and experience. Talking about reverse trading, a famous approach is the ‘daily pivot’ since it focuses on trading the daily low or high pullbacks. Traders look for stocks that are at extreme highs or lows with great potential to snap back. As soon as the price trend reverses, they take long or short positions to benefit from the price movement.
Breakout Trading Strategy
This is one of the most commonly used day trading strategies that involve identifying times when the stock price rises above or falls below specified levels with an increase in the trading volume. If the price rises above the specified level, then the day trader enters into a long position or buys the stock. On the other hand, if the stock price falls below a specified level, then the day trader enters into a short position or sells the stock.
This strategy is based on an observation that once the stock price trades beyond the specified levels, there is an increase in volatility and prices trend usually in the direction of the breakout. Timing is of the essence here is most traders look for such stocks and the price rises only till the time that stocks are available for purchase.
Gap and Go Trading Strategy
Sometimes, a stock does not have much pre-market volume and opens at a gap from the previous day’s close. If the price opens higher than the previous day, then it is called a gap up and if it opens lower, it is called a gap down. In most cases, the gap is created due to a news catalyst. Day traders look for stocks that have decent pre-market volumes and are gapping over the previous days’ close and bet on the fact that the gap will close during the day. They make small profits quickly without taking high risks.
Bull Flag Trading Strategy
Imagine a stock whose price had risen explosively in the last few days. Once it reached a peak, a pullback started in a diagonally symmetric manner – giving the impression of a flag. In the pullback zone, the highs and lows are almost parallel to each other. This requires traders to remain patient and wait for the flag to take shape. Based on the highs and lows, they need to identify upper and lower trend lines, spots of entry on the higher and lower side, and stop-loss points. This allows them to generate profits before another trend sets it.
Pull Back Trading Strategy
A stock usually follows a long-term trend. However, there are times when a short-term trend develops in the opposite direction of the long-term trend. In the pullback trading strategy, traders enter during these short pullbacks and generate profit. It is important to ensure that the short-trend is a pullback and not a reversal. This can be ascertained by looking at the previous day’s trading volumes.
So, if a stock price is trending upwards and experiences a pullback, day traders identify it as a low-risk buy opportunity. As soon as the pullback eases and the stock continues its long-term trend, they sell and book profits. On the other hand, if a stock price is trending downwards and a pullback happens, day traders sell the share and buy it back when it resumes its downward trend.
Moving Average Crossover Strategy
Every stock has a moving average that signifies the trend of the stock price. A simple way to pick stocks for day trading is to look for those who go above or below the moving average as it signifies a change in the trend. If the stock price falls below the moving average, then it is a downtrend and if it goes above the moving average, then it highlights an uptrend. Based on the catalysts behind this change in trend, traders can make decisions.
Stock prices have a short-term moving average and a long-term moving average. When the short-term average crosses above the long-term average, it usually indicates an upcoming strong move and traders tend to buy. On the other hand, if the short-term average crosses below the moving average, then day traders tend to sell.
Most of these strategies can be implemented effectively with the use of charts. Remember, day trading requires an understanding of the markets and awareness of the trends and external events causing any change in trends. While strategies can help make sense of the markets, most traders use them interchangeably based on the market conditions. New traders must try various strategies and find the ones that work well for them.
Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.