Day Trading Strategies – Basics

Day trading can be a path to financial independence, but it needs to be undertaken with proven approaches that support strong decisions. Whether you’re new to the financial markets or you’re already an experienced investor, it’s essential to leverage time-tested day trading strategies that can lead to success.

Trend following, fading and scalping are three examples of such strategies. Before you begin your day trading endeavors, you should learn how to apply these approaches with confidence, day in and day out.

Day Trading Strategies: Trend Following

Trend following draws on historical patterns. It uses average stock prices, as tracked over a period ranging from several days to several weeks, then uses those trends to make entry and exit decisions. By definition, day trading has a very short entry/exit horizon, and as such, it’s vital to predict ebbs and flows with as much accuracy as possible.

However, it’s important to remember that there is no single indicator which will always work in every single case. Traders who have mastered the art of trend following tend to use one or more of four specific indicators to identify stocks that have the greatest likelihood of generating a favorable return. Those indicators are:

  • Moving averages. This approach uses specifically determined time frames to pinpoint a stock’s average value over a given period, then identify when it has risen above or fallen below that average. These insights help day traders determine which stocks are likely to move up or down in the days ahead.
  • Moving average convergence divergence (MACD). MACD is used to determine a given stock’s momentum, which can be upward or downward. It uses a 0 value as its baseline, and MACD analyses that return a value above 0 usually signal upward momentum, while those returning a value below 0 typically indicate a downward trend.
  • Relative strength index (RSI). RSI analysis assigns a value between 0 and 100 to a given stock, aiming to identify when a stock is being overbought, and thus overvalued. Stocks that are overvalued usually fall or “correct” in value, and RSI scores of 70 or higher tend to indicate that such a correction is imminent.
  • On-balance volume (OBV). Trading volume can be a very valuable tool in predicting where the price of a given stock is heading. Generally speaking, rising OBVs correspond to upward-trending prices, while falling OBVs indicate downward-trending prices.

Day Trading Strategies: Fading

Fading is a high-risk, high-reward strategy that seeks to capitalize on rapidly rising and falling prices. Also known as “fading the market,” this approach sees investors buy a stock when its price is going down in the hopes of earning a profit through a subsequent rally, or rise, in its value.

Day traders may also use fading to try to fill market orders in other indices that brokers cannot or will not match. This is a more advanced approach, which requires significant experience to master.

Day Trading Strategies: Scalping

With scalping, investors try to extract or “scalp” many small profits by making a large number of safer trades within the space of a single day. In day trading, scalpers can capitalize on price fluctuations of just a few cents, or fractions of a percentage point, by buying and selling large volumes of shares. Scalping requires a rigid exit strategy, demanding that investors leave positions quickly once they’ve earned a small profit.

If you’re interested in learning more about these day trading strategies, Markus Heitkoetter of Rockwell Training offers both basic and advanced instruction in these and other proven tools. Investors of all experience levelsĀ are invited to benefit from his expertise.