The rise of the internet and online trading houses completely changed the financial market. Nowadays, getting into trading has become really easy for everyone. Extremely popular form of short-term speculation is called day trading. It can turn out to be a very lucrative career. On the Web, we can find countless trading strategies. However, which of them are considered the most useful? This is a common question among traders all over the world. After all, the simpler the strategy, the easier it is to understand the underlying concepts. There will be plenty of time to add complex actions after you have mastered the basics. Because of that, we’ll present below 3 uncomplicated strategies, which every trader should keep in his or her back pocket. However, let’s explain what day trading means first.
What is day trading? – definition
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, such that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day’s close and the next day’s price at the open. Day traders are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy and hold and value investing strategies.
Day traders generally use high amounts of leverage such as margin loans and short-term trading strategies to capitalize on small price movements. Some of the more commonly day-traded financial instruments are:
- Forex pairs
- Contracts for difference
- Futures contracts
What are 3 day effective trading strategies in Forex that everyone needs to know? Let’s start with:
One of the day trading strategies for beginners is an Impulse-Pullback-Consolidation Breakout method. A trading session often begins with a strong move, called an impulse wave, in one direction. This usually occurs within the first five to 15 minutes after stock trading begins. The price may then pull back and stall out, forming a consolidation where the price moves sideways for two or more minutes. This consolidation should occur within the range of the impulse wave. If the price falls off the open, the pullback and consolidation may occur below the opening price.
Based on the direction of the initial impulse, you need to wait for a breakout from the consolidation in that same direction. A breakout in the opposite direction of the impulse isn’t traded. For example, if the price rallied off the open, then pulled back and consolidated above the open price, wait for the price to break out above the consolidation. That should trigger a buying opportunity. Bid one pip above the consolidation high point for a long trade (buying in the hope of selling later for a higher price). Or bid one pip below the consolidation low point for a short trade (selling borrowed assets in the hope of buying them at a lower price before returning them to the lender). Stop-loss order should be placed a few pips below the consolidation high point in a long position or few pips below the consolidation low point in a short position. We should exit the trade a moment before the end of the session. Or alternatively, we can use a trailing stop-loss.
The consolidation should be relatively small compared to the impulse wave that preceded it. If the consolidation is large compared to the impulse wave, the pattern is less effective. There should be a distinct impulse wave, a distinct pullback, and a distinct consolidation during the pullback. If each of these parts is not discrete, the pattern is less effective and should be avoided.
This pattern could occur throughout the day, but keep in mind that the most significant moves in a market typically occur near the open. Catching the first trade of the day with this strategy can have a substantial impact on overall profitability. If this pattern occurs later in the day, it will often produce smaller price moves.
Reversal at Support/Resistance
Another one of the high probability day trading strategies and systems is a Reversal at Support/Resistance method. Support or resistance levels are places where the price has reversed at least two times before. A stock price finds support as it’s falling prior to a reversal; it faces resistance as it’s rising prior to a reversal. These levels are often pricing areas, not exact prices. You should watch for consolidation at a support or resistance level. If the price breaks above a consolidation near support or breaks below a consolidation near resistance, you have a trade signal.
If a reversal signal occurs, make the trade when the price moves one pip above the consolidation near support or one pip below the consolidation near resistance. Expect the price to bounce off support or fall off resistance if this pattern occurs. In this strategy, you also need to use a stop-loss. Set it a few pips below the support level (in a long position) which is being attempted to attack or few pips above the resistance level (in a short position). When we should exit the trade? When the price gets close to the resistance level (in a long position) or support level (in a short position). Or by the end of the day, of course.
Pivot Point Strategy
Another example of day trading strategies that work very often uses Pivot Points. A day trading Pivot Point strategy can be fantastic for identifying and acting on critical support and/or resistance levels. It is particularly useful in the forex market. In addition, it can be used by range-bound traders to identify points of entry, while trend and breakout traders can use Pivot Points to locate key levels that need to break for a move to count as a breakout.
A Pivot Point is defined as a point of rotation. You use the prices of the previous day’s high and low, plus the closing price of a security to calculate the Pivot Point. So, how do you calculate a pivot point?
Pivot Point (PP) = (High + Low + Close) / 3
You can then calculate support and resistance levels using the Pivot Point. To do that you will need to use the following formulas:
- First Resistance (R1) = (2*PP) – Low
- First Support (S1) = (2*PP) – High
The second level of support and resistance is then calculated as follows:
- Second Resistance (R2) = PP + (R1-S1)
- Second Support (S2) = PP – (R1- S1)
When applied to the Forex (or indices, for example) market, you will find the trading range for the session often takes place between the Pivot Point and the first support and resistance levels. This is because a high number of traders play this range.