Day Trading Strategies for your Long-Term Success

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Day trading is exactly what it sounds like: purchasing a financial instrument such as a stock and reselling it for profit later that day. Taking advantage of small price changes using this day trading strategy can be quite rewarding when done correctly, however, is often disastrous when research and methods are lacking. Follow these best practices to get into the day trading game without losing your shirt.

Prepare for Battle – The Day Trading Mindset

Get in the day trader mindset before your first investment with these basic day trading strategies for success.

Do Your Homework

Day Trading Strategies for your Long-Term Success

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Keep up with news and events that impact the stock market or you won’t succeed as a day trader. Read about the economic outlook, federal interest rate projects, and other indicators in respected financial publications. Maintain a short list of stocks you want to trade and do focused research on those companies before taking the plunge.

It’s important to understand the U.S. Securities and Exchange Commission (SEC) rules for day traders. You must have at least $25,000 in your trading account at all times and can only trade in margin accounts if you make four or more day trades within five market days. This qualifies you as a pattern day trader.

Understand the Terminology

If you’re new to trading, you’ll encounter numerous jargon you won’t understand right away. Get a head start by learning some of the most common day trading terms and their meanings.

  • Candlestick: A candlestick is the charting mechanism used to track price action on a specific stock. Each candlestick displays open, close, high, and low prices with color changes that indicate whether the stock closed higher than the opening price (green) or lower (red). Candlesticks can be used to chart changes down to the minute, as well as on a daily or monthly spread to analyze trends over time. Each has a body that illustrates the open and close prices, as well as a wick on one or both sides to chart the high and low prices for the period in question.
  • Impulse wave: An impulse wave is a strong move either up or down within 5 to 15 minutes of the market opening.
  • Reversal: A reversal is when an impulse wave is followed not by a pullback, in which prices stall, but by a large move in the opposite direction.
  • Support areas: Support areas, also known as resistance areas, are price ranges that the stock has reversed from at least twice. When a stock price enters this range, be aware that a reversal could shortly follow. Stocks that fail to break above the highest resistance point are said to be “holding in range.”
  • Price action: Price action is a trading strategy in which the trader acts based only on the stock price without considering context (why the price may be changing).
  • Breakout: A breakout occurs when a price has generally been stagnant but changes that pattern. For example, if the price has been wavering between $13 and $14 for a few days, movement above or below that range is a breakout that could signify a day trading opportunity.
  • False breakout: A false breakout is when a breakout happens but the stock price does not continue moving in the expected direction.
  • Long trade: A long trade is when a day trader has purchased a stock and hopes the price will go up. Going long indicates you’re interested in buying a particular asset.
  • Short trade: With a short trade, you can sell a stock you don’t already own, then buy it at a lower price than you sold it for. The terms “short” and “sell” often have the same meaning in the day trading lexicon.
  • Trend line: A trend line connects swing lows and swing highs to indicate whether a stock price is generally falling or rising and the severity of this price action. A single stock could have many trend lines depending on the time frame you’re considering. Steep trend lines tend not to last very long, while more moderate trend lines are more sustainable.
  • Tick chart: A tick chart is a trading tool that shows a bar for each stock transaction. This can be either a one- or five-minute chart illustrating how the asset price moved during that period.
  • Triangle: The triangle is one of the most common chart patterns that day traders will encounter. This could be:
    • Symmetrical triangle, in which price moves are confined to an increasingly smaller area as the day proceeds. Connecting the highs and lows in this type of pattern using a trend line will create a roughly equilateral triangle.
    • Ascending triangle, formed when swing lows and highs reach similar levels, creating a triangle with a straight line on top and an increasing trend line at the bottom.
    • Descending triangle, which is similar to an ascending triangle except that the bottom trend line shows a decrease.

Make a Budget

For each trade, set aside the amount of capital you’re willing to risk, and don’t exceed that amount. For most successful day traders, this is no more than 1 to 2 percent of their overall trading account. For example, if your trading account has $50,000, risk a maximum of $500 on each trade. Keep in mind that you don’t need to win every trade to come out ahead. Most successful day traders profit in about 50 to 60 percent of transactions, but they earn more on those they win than they lose on those they don’t.

Open a Broker Account

To trade stocks, you’ll need to have a broker account. When choosing the right firm, consider the following questions:

  • What costs and fees are associated with this account?
  • What services will I have access to as a result of my broker account with this firm?
  • Is the broker reputable? Are online reviews generally high and absent of red flags?
  • What is the account minimum, and can I afford it?
  • Does the broker provide research tools?
  • Does the account allow for the fast market access and trade execution that day traders require?

Move Quickly

When you’re making multiple stock trades each day, you need to jump on opportunities that arise. Day traders who think they can make bank in their spare time are often surprised at the number of hours they need to dedicate to make this a truly worthwhile pursuit. Tracking the market closely is the key to success.

Start With One or Two Stocks

The more stocks you’re trading, the more time you’ll spend tracking their activity, and the more opportunities you’ll have to make a mistake that will cost you money. Starting small doesn’t just apply to the number of stocks. Many would-be day traders begin to read up on the process and get frustrated by the sheer number of trading strategies that exist. Instead of getting bogged down, remember that you only need to pick one and see how well it works for you. You’ll have plenty of time later to expand and experiment.

It’s important for new traders to remember that while it may seem like others are making tons of money quickly, in general, day trading success does not occur overnight. As you begin experimenting with different day trading strategies that work, you’ll eventually be able to find your sweet spot. Consider the 10,000-hour rule: Most day traders spend at least 10,000 hours honing their craft by trading before they begin to see substantial financial success.

Recognize Patterns

When you begin to track stock activity, you’ll notice that trades are more intense in the hour after the market opens and before the closing bell. Although these rush times create price volatility that can bolster the profits of day traders, just watch the first few days to see if you notice patterns in the stocks you’re tracking. Until you get acclimated, time most of your trades in the middle of the day when activity is slower.

Seek Mentorship

In most areas of life, if you spend time with those who are successful in a particular area, you’ll also become more successful in that area because of what they are able to teach you. Day trading is no different; trading with those who are more successful than you can help you learn more about how to get to where they are. Developing a community of trusted mentors gives you a feedback loop, whether you want to learn more about high-profit strategies or you want to run a potential trade by a trusted, knowledgeable person before taking the leap.

Decide What to Buy

As a day trader, you’ll be dealing in stocks, currencies, options, and futures, taking advantage of small price movements to make money by investing substantial capital. Choosing the right stocks is a critical component of success in this field. Look for these three main qualities when selecting an asset to trade:

  • Trading volume is the number of times a stock is bought and sold within a day or another designated period. The higher the trading volume, the hotter the stock. When volume dramatically increases, this usually indicates that a price change has occurred.
  • Liquidity is the quality that allows you to buy low. It can come from the difference between a stock’s bid and ask price, known as a tight spread, or the difference between the actual and expected price, known as low slippage.
  • Volatility measures the price range for the stock within a day. The greater the volatility, the greater the potential to profit or to lose money on that particular stock.

In general, to make a profit as a day trader, you need to identify stocks that are moving. In a given day, at least one publicly traded asset will increase in price by 20 to 30 percent, offering an opportunity to make a profit with a quick buy and sell. The trick is to find the stocks that are having a dramatic, once-a-year increase and capitalize on that unexpected event. Use these criteria to identify the day’s big mover:

  • The float for the stock in question should be less than 100 million shares.
  • The charts for the day should not show nearby resistance and should be higher than the moving average.
  • The high relative volume, which compares the average volume for that stock at the moment to the overall average volume for this time of day, should be at least two times higher than the average.
  • The stock is the subject of breaking news such as earnings, an announcement from the FDA, or another PR event that will affect stock prices.

If all four of these factors are present, the stock is likely a good day trading bet. Stock scanner software can help you identify assets that meet these criteria.

Know When to Buy

When you have analyzed a potential stock based on the criteria above and determined it’s a good buy, it’s equally important to know when to buy the stock. Take advantage of information from resources that should include:

  • Intraday candlestick charge, which analyzes the price action of a stock in real time.
  • Real-time news services, which allow you to stay abreast of current happenings that could affect your stock prices.
  • ECN quotes, a computer system that automatically matches and executes orders depending on the best available bids from multiple traders.
  • Level 2, a subscription that provides access to the Nasdaq price quote order book in real time.

You must be able to understand the time-sensitive conditions that apply to your potential trades. You should establish criteria to make a trade and stick to it, giving you a strategic position that will help mitigate loss. The conditions you choose should be specific and testable, meaning that you can check for them before making your move. After establishing these conditions, you can check whether they hold every day and whether the price moves as expected. This gives insight into your potential entry point for that particular stock.

One common strategy is the breakout, which can be used with all three types of triangle patterns. When the price of the stock you’re interested in rises above the top trend line of the triangle, it’s time to buy. Make a short sell when the price drops below the triangle’s lower trend line. Once you master the breakout strategy, you can branch out into the anticipation strategy. This involves predicting when the breakout will occur for a specific stock based on the existing trend lines, then buying at the lowest possible price and selling at the peak.

Understand When to Sell

Day traders use many different stock day trading strategies to time a sale for optimal profit. Some of the most common techniques to try include:

  • Profit targeting, or selling as soon as your profit on that transaction meets a predetermined threshold.
  • Scalping, which is similar to profit targeting except that you make the sale immediately when you can profit from it.
  • Daily pivot, in which you attempt to buy at the daily minimum price and sell at the daily peak.
  • Momentum, in which the sale is timed based on news of price changes.

In general, you should sell an asset as soon as you notice interest decreasing.

Reading Charts and Patterns

Knowing what charts to read and when is one of the biggest components of your role as a day trader. Monitoring a one-minute tick chart is recommended at the opening bell and for up to an hour after, since this time tends to be more volatile. Moreover, the short time frame of this tick chart allows you to pick up on small opportunities to profit. This strategy is especially viable if you’re focusing on high-volatility stocks.

As discussed above, analyzing daily patterns is an essential skill for the successful day trader. Understanding what advantageous patterns look like can help you jump on lucrative day trading opportunities. There’s no single best day trading strategy for stocks, so you can choose between the many day trading strategies that work.

Limiting Your Losses

You can minimize your losses by placing a stop-loss order at a specific price that does not exceed your tolerance for risk. In addition to the actual physical stop-loss order, consider a second mental stop-loss order in which you’ll plan to exit the transaction if the trade takes a sudden and unwanted turn. You should also set a maximum loss per day that you will not exceed, and this amount should be less than you can afford to lose. When you hit this point, you’re done for the day.

Once you have developed an exit strategy, test it by looking back at up to 100 historic charts to see where you would have made out on that particular trade on that specific day, based on your established criteria. If you find that it would be profitable, start with a demo account and run that trade using those parameters for two months. If you virtually come out ahead during that period, move on to test the strategy with actual funds.

Implementing a stop-loss also allows you to evaluate your position size accurately: the number of shares you’ll take on a single trade. Let’s return to the above example, where you plan to risk no more than $500 in each trade. You’re interested in a stock currently trading at $10 and have set a stop-loss price of $9, so you’re risking $1 per share. With this information, you discern that your position size for that stock should be 500 shares. Place a stop-loss at the same time you place the trade; otherwise, your risk for that particular transaction is unlimited.

Because you’re making so many transactions as a day trader, it can be hard to keep track of whether you’re truly ahead using the strategies you’re currently implementing. You should benchmark your performance by looking at your risk/reward and win-rate ratios. The first measure compares your average profit per winning trade and the average loss per losing trade.

This risk/reward ratio should ideally be higher than 1.25. For example, if your average winning trade earns $250 and your average losing trade costs $100, your risk/reward ratio is an excellent 2.5. Win-rate is the percentage of trades that you win and should stay above 50 percent. If these two measures look healthy, you’re on the road to day trading success.

In addition to a transactional stop-loss, you should also set a daily stop-loss. For example, if you lose 3 percent of your total account, you’re done trading for the day. One of the biggest mistakes new day traders make is the failure to stick to the parameters they’ve established and go for one big trade. This might be tempting if you’ve had a few losses in a row, if you’ve been very successful and begin to believe you can’t lose, or you feel very confident about that specific stock or transaction.

Once you exceed your transactional and daily risk limits once, it’s much easier to do so again and again. Soon, you’ll be risking 5 or even 10 percent on a single transaction, putting you in a position where you can begin to lose money very quickly. Remember that it’s much easier to come back from small losses than it is to come back from large ones.

Reviewing your trades is an essential part of long-term success. Treat your day trading ambition like a business by writing out a plan you stick to and analyzing each transaction to glean knowledge to make you a better trader. The common statistic noting that up to 90 percent of day traders fail includes those who dip a toe in and quit without putting in the necessary time and research. Give yourself six months to a year to learn the business fully, work the strategy you’ve created, make adjustments as needed, and keep track of what works and what doesn’t.

With RagingBull, you can become a successful day trader within seven days. Simply enter your email address on our site to sign up for our free boot camp program and request your e-book packed with day trading resources. As you learn, spend time with our trainers and learn from your peers in our day trading chat rooms. We strive to provide clients with the tools they need for financial freedom through smart investments.