Best Day Trading Strategies
What are the best day trading strategies for stock traders? There are a million possible strategies for trading stocks. Well, okay, maybe not a million – but a lot. In this article, we’ll sift through them to show you five day trading strategies that offer high potential gains and relatively low risk.
The historical average annual gain of the S&P 500 Index is 8-10% per year. Day traders believe that by making multiple intraday trades based on Technical Analysis, they can generate monthly returns of 20% or more. That translates to annual investment returns of over 200%.
Because, on most trading days, there is little fundamental news to drive a stock price substantially higher or lower, day traders commonly use trading strategies based on technical analysis.
Our selections for the Best Day Trading Strategies are organized by category, complete with examples as part of our day trading for beginners guide.
Keep in mind though, to test all strategies by using a trading simulator, paper trading account and optimize it with a backtest software of your choice for your favorite trading time frame. Do not start trading with real money until you are certain that a strategy works for you.
1. Gap and Go Strategy
The gap and go strategy is one of the most popular day trading strategies amongst day traders. Leading gappers have everything that day traders prefer. Above average trading volume, a high number of traded shares, pretty low bid ask spreads, high volatility and community awareness since they hit all stock scanners.
The Gap and Go Strategy is a momentum continuation setup.
Leading gappers often surprise investors at market open, and a big gap up can bring short sellers in real trouble. They have to cover short positions to prevent further losses. The more the up-gapping stock continues to rise, the more short sellers get in trouble.
The key to success is looking out for higher highs and lows with continued high momentum during breakouts, and continuing high relative volume with tight bid ask spreads.
Our Gap and Go strategy beginner guide explains the setups, best scanners and variations in detail.
2. Breakout Trading
Breakout trading strategies are focused on buying a stock immediately after it overcomes a significant resistance level. That resistance level may be an intraday high, a weekly or monthly high, a pivot point price level, or any other price level that has acted as resistance in previous price action.
One breakout day trading strategy commonly used generates a buy signal when price breaks above resistance, following a period of price consolidation. An ascending triangle pattern is a bullish price consolidation pattern that frequently appears at a key resistance level. It’s a pattern many traders look for as a buying opportunity during an overall uptrend. One reason for placing trades off an ascending triangle is that it’s a chart pattern that most good stock screeners can scan for.
The pattern unfolds as follows:
- An uptrend temporarily stalls at a price resistance level
- Price consolidates through a series of swing lows and swing highs; the swing highs all occur at or near the resistance level; the swing lows formed by series of pullbacks in price are successively higher lows (showing each push to the downside less successful than the previous one)
- A buy trade is signaled when price breaks above the resistance level defined by the trend line connecting the triangle pattern swing highs, indicating that the existing uptrend is being resumed and likely to push higher
The price action that creates an ascending triangle appears as follows:
An ascending triangle pattern also provides traders with a clear profit target and stop-loss price levels. For example, an initial profit target may be the price at a distance above the top of the triangle equal to the distance from the triangle top to the lowest swing low in the triangle formation. And just below that lowest swing low is where many traders place their stop-loss order on this type of breakout trade.
Another great breakout day trading strategy is the opening range breakout. The opening range breakout can be traded on any time interval and any asset class like stocks, futures, cryptos and forex.
I’ve compiled a comprehensive guide about the opening range breakout strategies and variations. If breakout trading is right for you, consider reading the guide.
3. Pullback Trading
A pullback day trading strategy is just what it sounds like: looking for a buy entry point with a stock that is generally trending upward when there’s a pullback, anticipating that the stock will continue advancing to higher prices.
This strategy works well with about any stock where the day’s price action shows a steady, ongoing uptrend with occasional moderate retracements. The key to a profitable trade is identifying a good price level to buy in when there’s a temporary pullback in price. Two simple ways of pinpointing a good, low-risk market entry price are by using moving averages or trendlines.
A good way to set the initial stop loss is working with a 1:1 risk reward ratio at the beginning. Lets say the trading day high is at $21 and you go long at $20.
Your profit target is the previous high and the initial stop then at $19. This way your initial risk equals the initial profit target.
Remember, the price action has to support the theory of high chances to see a new high. Entering a trade near VWAP and holding of VWAP for example is an often used indication since VWAP trading is an often used trading indicator that refelects the volume weighted average price. Otherwise the trade can be closed, for example break even, before one or the other event happened.
4. News Trading Strategy
The vast majority of day trading strategies are grounded in technical analysis. However, that doesn’t mean that there aren’t any day trading strategies based on fundamental analysis.
News trading is an extremely risky – but also potentially extremely profitable – day trading strategy. There are commonly dramatic price movements in a stock immediately following the release of significant company news – such as a partnership deal or an unexpectedly favorable or unfavorable earnings report.
The unpredictable, dramatic, and often volatile price action that follows a breaking news story presents a challenge in regard to safely negotiating a trade that you may be in and out of in less than a minute. For example, if you enter a buy trade with a market order, you run the risk of your order being filled at a much higher price than you intended. However, using a limit order risks missing the trading opportunity altogether if your order can’t be filled at the specified price.
Exiting a news trade presents the same challenge. A market order placed in a fast-moving market may result in an unfavorable fill price. A limit order risks not being filled at all.
News trade stop-loss orders should be placed well away from the pre-news release price level. Otherwise, they risk being triggered by a momentary price spike when there’s a sudden, massive increase in volatility.
To be a successful news trader, you have to act very quickly and decisively. Taking even a few extra seconds to make a trading decision can be extremely costly. When it comes to news trading, the old adage is true that “He who hesitates is lost.” You also have to make sure you’re using a broker that will give you instantaneous order fill information so that you know (A) if your order has been filled and (B), if so, at what price.
The ideal news trade enters the market immediately upon the news release – in the direction the stock is most likely to move in reaction to the news – and then is quickly closed out as soon as the trade shows a substantial profit. The trick is managing to pull off that “ideal” trade.
5. Round Number Trading Strategy
Lets say you bought 100 shares of your favorite day trading stock and your P&L says you are up $98. What do you do? If you tend to make the $100 full, then you understand the idea behind the concept of round number trading.
Traders, investors and actually mostly everybody has respect of round numbers. Be it the millenium, or $100 $1,000 marks shopping your favorite brand. Those levels are somehow magic.
If you look at the order book, you will quickly realize that large orders sit and wait on those levels. Often you see prices revert from those levels or explode in price once such a level is broken.
The round number trading strategy requires in-depth knowledge about Level 2 market liquidity. If the price of a stock arrives at a round number like $20, $50, $100, you start monitoring the price action at that point. If there is a large sell order at the round number and the price does not make it trough the price, then trading short with tight stop above the round number is the way to go.
If the price goes trough it, comes back to support, then buying the round number is the way to go with an ultra tight stop below the round number.
This trading strategy is all about tight stops, while the profits can be massive if the price runs to the next round number, for example from $20.00 to $21.00.
6. Pivot Points Scalping Strategy
Pivot point trading is as old as the first steps in Technical Analysis. Floor traders have used them long before day traders began trading on electronic exchanges.
A short trade can be entered once price hits a pivot point ressistance from below, and a long-trade can be taken once the price hits the supporting pivot point from above. Since we’re just looking for a quick scalping profit here, look to exit the trade quickly once it shows a profit.
This strategy works best if the pivot points appear at the same price level like other support and ressistance levels like VWAP, round numbers or along with moving average crosses.
Togehter with monitoring Level 2 and times and sales, this can become a powerful day trading strategies for investors with big accounts trading large-cap stocks with ultra-low bid ask spreads.
The most important part here is to keep the stop loss ultra-tight and to take profits fast based on price action dynamics.
7. Momentum Reversal Trading
Many momentum-based day trading strategies look to hop on board momentum stocks that are trending strongly higher on the day. An alternative momentum trading strategy is trading the short side on a “momentum fade.”
This strategy aims to profit from selling short when a stock that has been driving sharply higher runs out of gas and turns to the downside. The momentum fade trading strategy offers the benefits of being relatively simple and low-risk.
This strategy only requires the use of a single technical indicator: the MACD. The “Moving Average Convergence Divergence” indicator is a popular momentum indicator. Trading a momentum fade, you look for bearish MACD divergence from price action. This occurs when the price of a stock moves to a new high, but the MACD fails to move to a corresponding new high. Instead, it stops short of its previous high. This MACD divergence signals a potential upcoming trend reversal from uptrend to downtrend.
You sell short upon seeing the bearish MACD divergence from price, placing an initial stop-loss order just above the stock’s high of the day. Thus, the trade can be initiated with limited and clearly defined risk. A market reversal move to the downside often features a quick, substantial drop in price. Therefore, you may be able to grab a substantial profit in just a short amount of time.
The MACD divergence trading signal is considered stronger when trading volume falls off as the stock makes a new high. The decline in volume indicates that fewer traders believe the price rally is likely to extend significantly higher.
Spotting “rolling divergence” – where, for example, you first see divergence show up on the five-minute timeframe, then on the 15-minute timeframe, and then the 30-minute timeframe, increases the odds of the trade being a winner.
The chart of the price action in Galaxy Digital Holdings Ltd. shows how a trader could have implemented this strategy for a profitable day trade short sell. The MACD is shown in the window below the main chart window.
The MACD peaks at 0.46 along with a stock price peak around the $28.7 level). However, when the stock makes a new intraday high at approximately $29.3, the MACD doesn’t follow suit at 0.18. The same happens another time when the stock went to $29.5 while the MACD is at 0.08. This is a divergence where the price per share makes higher highs while the MACD makes lower highs.
You could have sold short at that divergence, placing a tight initial stop-loss.
It is crucial for the momentum reversal strategy success that only stocks get shorted that had similar collapsing patterns before, weak catalysts, or multi-day upside price action before. Otherwise, you will most likely get trapped shorting strong uptrends even if the MACD suggests doing so.
Day Trading Tips – Risk Management
One of the primary keys to being a successful day trader is practicing good money management. Proper risk management is always important in trading, but its importance is amplified in day trading because you’re doing multiple transactions per day.
Set a maximum daily loss level that represents a loss amount that your trading account can handle – i.e., that still leaves you plenty of capital for the next trading day. It should also be a loss level that fits your personal risk tolerance. There are just some trading days where every trading decision you make is the wrong one. The best that you can do on those days is minimize your losses and walk away before you’ve suffered a catastrophic loss amount. Don’t let one bad trading day wipe out your trading account.
Day trade stocks with good liquidity: You don’t want to have to be not only trying to beat the market but also having to overcome wide bid-ask spreads that significantly reduce your profits or increase your losses.
Have access to a good market news service. Even if you’re strictly a technical trader, it’s still important to stay aware of news that may affect your trades.
Take advantage of the trading tools provided by a good online stock trading platform, such as the ability to backtest a trading strategy before risking real money on it.
Best Day Trading Strategies: Summary
Day trading is often maligned, but it does, in fact, offer a legitimate opportunity to generate annual returns that are way above average – as high as 200% or more. Day traders benefit all investors by adding significant liquidity to the market.
Self-discipline is an essential trait for profitable day trading. You must strictly abide by the rules of whatever trading strategy you employ. Not following your trading strategy’s rules is an almost certain path to trading ruin.
We’ve outlined five of the best day trading strategies here. Time, learning, research, and trading experience will help you find the strategies that you, personally, can use for maximum trading profitability.
Note: You can also use these day trading strategies in other markets besides stock markets, such as commodity futures or forex trading.
But keep in mind to test each strategy on paper for your time frame and market first. You may find other time frames or indicator setting better suited for your trading. In addition, you can use backtest trading software to test the probabilities of success of a trading strategy on historical prices.
What are the benefits of day trading the stock market?
The primary lure of day trading is that it provides the opportunity to grow and compound investment returns very rapidly – potentially, to earn a good living from trading.
What is the best time of day for a day trader to trade?
The first hour and the last hour of each trading day are usually when the largest price swings occur, offering maximum potential profits. Many day traders start their trading day when the market opens at 9:30 A.M. (New York time) and are done for the day by 10:30.