Day Trading Strategies

Jill Xie,   TradeTrek.com

Basic Principles of Day Trading

Rule #1: Never hold a position overnight.

Day traders trade frequently and, as a rule of thumb, always close all trading positions before the end of day. By doing so, traders significantly limit their risk exposure to after-market surprises. It also lets them start the next trading day worry free, with a fresh mind.

Rule #2: Only trade stocks with prices over $10 dollars and average daily volume larger than 300,000 shares.

This rule makes sure that the bite from bid/ask spreads is limited and that the day trader can always get in or out of any trading positions.

Rule #3: Cut loss promptly.

By sticking to this prudent caution, day traders can make sure to preserve trading capital and stay in the game until they develop a consistent and profitable trading system.

These 3 rules should never be compromised if one wants to become a successful day trader.

Strategy I: Breakouts

Breakout is one of the most effective and popular trading strategies. Experienced day traders do not buy or sell a stock before seeing indications that a stock may start a significant move. Then, monitoring a stock that has stayed in a narrow price range for some time (usually longer than 30 minutes or an hour), traders buy or sell the stock if it suddenly moves out of the range with significantly larger trading activities (larger volumes). The following charts are examples of breakouts picked by Tradetrek's "Day Trading Center:"

Figure 1. ADSK traded within a narrow range for about 3 hours until it breaks out with large volume at 14:25pm. Tradetrek picks up this bullish signal, as it presents itself-no delay--at 14:25 pm. The strategy is to buy the stock at a price near 35.18, right on the heels of the breakout, in hopes of taking profit at about 36.25, which is the most recent resistance level. In order to protect the down side, the trader should enter a stop loss order, right after the buy order is confirmed, to sell the stock at 34.82.

 

Figure 2. TBH traded within a narrow range for about 3 hours until it breaks down with large volume at 13:15pm. Tradetrek picks up this bearish signal at 13:18pm. The strategy: to short sell the stock at a price near 68.26 right after the break, then aim to cover and take profit at about 67, which corresponds to a move about the size of the average daily range. To protect capital, traders should enter a stop loss cover order, right after the short sell order is confirmed, to buy the stock at 68.93.

By buying or selling the stock, then entering a stop loss order immediately afterwards, one will be stopped-out at a limited and controllable loss if a signal proves to be a false Breakout. Otherwise, one can wait until the stock price has stabilized at another trading range, then exiting at a profit. Again, of course, one should always remember Rule #1: always clear the position before the market closes.