Day Trading Strategies

Investment in stock market is considered to be giving maximum return over a long period of time with a proper and stable investment strategy.However, there is another school of investors, or more commonly known as traders, who believe in quick money from share market by trading stocks worth of large sum of money over a single day, and leverage from small movement in the stock prices and indices. This is more popularly known as 'Day Trading'. This involves high risk, as even after several techniques like fundamental and technical analysis etc stock market is by and large unpredictable and a huge decline in the price in a single day will mean that big a loss for the trader. But as they say, high return comes with high risk only, and this is why day trading is so popular in today's financial world.



There are several strategies that are deployed by day-traders to realise profit from day-trading. The single most important of them is the 'Entry Strategy'. Entry strategy depicts when to enter in the trading on a particular day and with which stock. To decide 'when to enter' is a judicious call that the trader needs to take, based price trend, market trend and various tools. We will discuss some of the tools later in this article. While selecting a stock for day-trading, generally there are two factors that are considered - Liquidity and Volatility.



Day trading is normally done with highly liquid stocks or indices. The term 'liquid' in this context means how much volume and amount of the stock is being traded in the market on a particular day. More the volume of transaction, more liquid the stock is, and hence more attractive it is for a day-trader as it can be easily bought/sold with respect to market movement. On the other hand, 'Volatility' is simply a measure of expected daily price range. More volatility means more profit or loss. Therefore a day-trader with high risk profile will enter into highly volatile stock as that gives more possibility of realising greater profit at the end of the day.



The next important day-trading strategy is 'Exit Strategy that depicts when to sell the stock, i.e., at which target price. Identifying a price target largely depends on the risk-profile and trading style of the trader. However, there are some commonly used strategies like Scalping, Fading, Daily Pivots, and Momentum. Scalping means sell the stock as soon as profitability as achieved or the break-even point is reached. Fading is more of an entry strategy, but by selling the stock rather than buying. This happens when a stock moves upward fast, some traders anticipate a downward movement soon and so short sell the stock. When the stock price comes down, the buy it back and book the profit. Daily pivot is basically buying at the lowest price of the day and selling at the highest price of the day. Here the exit strategy is as soon as the upward trend reverses. Momentum strategy broadly depends on various news and other external factors which are expected to impact the share market. Traders enter or exit based on this.




Another important day trading strategy is called 'Stop Loss'. This is basically to set a target of maximum loss that you can take on a single day. Setting and following the stop loss is very crucial, as without this one may end up losing huge sum of money on a single day. The stop loss strategy followe by many experienced traders is to sell and exit from the market for the day, if and when the stop loss target is reached. More inexperienced traders try to recover the loss before the end of day, and end up losing more at times. However which strategy to follow depends on the risk averseness and personal profile of the trader, and no generalisation is possible



There are various tools and techniques used by day traders. While some of them are proprietary tools that come at a very high price, some of them are more fundamental and conceptual in nature and followed by most traders. The most commonly used tool by traders is chart. There are several charts that are followed by traders worldwide, but most popular ones are Bar Chart, Candlestick Chart, and Line Chart. Bar chart gives all the price information (high, low etc) in the form of bar diagram, and easy to read and interpret. Candlestick chat shows all relevant prices too (open, close, high, low etc) and by including open and close it shows whether the bar was an upward candlestick (i.e. closed higher than it opened), or a downward candlestick (i.e. closed lower than it opened). Line chart shows only the closing price.