Day Trading Strategies for Beginners
Day trading is the act of buying and selling a stock within the same day. Day traders seek to make profits by leveraging large amounts of capital to take advantage of small price movements in highly liquid stocks or indexes.
Day trading can be a dangerous game for traders who are new at it or who don’t adhere to a well-thought out method. Let’s take a look at some common day trading strategies that can be used by retail traders. (For more, see: Tutorial: An Introduction to Technical Analysis.)
Certain securities are ideal candidates for day trading. A typical day trader looks for two things in a stock—liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price (i.e. tight spreads, or the difference between the bid and ask price of a stock, and low slippage, or the difference between the expected price of a trade and the actual price a stock trades at). Volatility is simply a measure of the expected daily price range—the range in which a day trader operates. More volatility means greater profit or loss. (For more, see Day Trading: An Introduction or Forex Walkthrough: Foreign Exchange.)
Once you know what kinds of stocks you are looking for, you need to learn how to identify possible entry points. There are three tools you can use to do this:
Intraday candlestick charts. Candles provide a raw analysis of price action.
Level II quotes/ECN. Level II and ECN provide a look at orders as they happen.
Real-time news service. News moves stocks; such services tell you when news comes out.
Looking at the intraday candlestick charts, we’ll focus on these factors:
Candlestick patterns, including engulfings and dojis.
Technical analysis, including trendlines and triangles.
Volume, as in increasing or decreasing volume.
There are many candlestick setups that we can look for to find an entry point. If properly used, the doji reversal pattern (highlighted in yellow in Figure 1) is one of the most reliable ones.
Figure 1: Looking at candlesticks – the highlighted doji signals a reversal.
Typically, we will look for a pattern like this with several confirmations:
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