9 Popular Day Trading Strategies

Day trading entices investors with the potential for greater profits. Although only some traders win consistently, this approach continues to rise in popularity. If you want to find success as a day trader, you must master day trading strategies. 

Well-informed stock market strategies help you limit losses and reach your financial goals. This is especially true in fast-paced day trading. We’ll explain day trading for beginners, including what it is and how to day trade. We’ll also provide helpful day trading tips and discuss how Composer’s easy trading algorithms can help active traders. 

What is day trading?

Day trading involves buying and selling securities on the same day. The Financial Industry Regulation Authority (FINRA) defines pattern day traders as investors who complete four or more day trades within five business days. These day trades must make up over 6% of an investor’s trades.

Along with other rules, this regulatory designation protects investors from day trading risks and applies to all securities, including penny stocks, ETFs, futures, and forex. Please review the Day Trading Risk Disclosure for more information.

The primary objectives of day trading include the following: 

Profit generation

Most day traders focus on profiting from short-term price moments. They capitalize on recognizable price patterns and corrections, generating small but regular returns. 

Capital growth

Day trading offers potential for capital growth by leveraging small intraday price fluctuations. Exploiting successive modest uptrends can result in significant capital appreciation over time, allowing larger trades and enhanced profit potential.

Intraday liquidity

Rather than tie up funds long-term, day traders prioritize flexibility. Day trading provides intraday liquidity, allowing traders access to daily profits. This increased liquidity opens up more possibilities for day traders and improves their control over assets. 

Skill development

Some investors begin day trading to enhance their trading skills. Day trading emphasizes understanding technical analysis indicators and chart patterns, like moving average crossovers, support and resistance levels, and breakout signals. Learning these skills in live or paper trading accounts helps day traders identify trends and improve their trading win rate. 

How to start day trading in 5 steps

Although every day trader uses different techniques and methods, they all start at the same place. Here’s how you can begin day trading:

1. Education and research

Before you begin day trading, educate yourself about financial markets, trading strategies, and tools. Many brokerages and investing resources offer courses on day trading that teach you the basics. Members of dedicated trading communities swap tips, tricks, and best practices. However, the best knowledge typically comes from experience via live or paper trading, in addition to studying market research and historical trends. 

2. Setting up a trading account

Once you feel ready, you can open an online brokerage account. Ensure the broker meets your investing needs. For instance, you may want a broker specializing in forex or one offering various financial instruments and trading tools. 

Pay attention to broker margin account fees and requirements, as these may impact your profits when you begin pattern day trading. 

3. Developing a trading plan

Many day traders lose money in the long term because they don’t plan appropriately. Before trading, develop a trading plan that lays out your financial goals, strategy, and risk management methods. Although you can update this plan as your strategy evolves, sticking to it ensures you do your due diligence before committing valuable resources.  

4. Practicing with a demo account

Beginner traders should practice day trading in a demo account. A paper trading account lets you simulate trading strategies using historical data to gain experience without risking actual capital.

5. Risk management

Risk management plays a critical role in a successful day trading strategy. Research and analysis, monitoring open positions, and setting stop-loss orders can limit losses and reduce stress, contributing to long-term financial success. 

Popular day trading strategies for investors

The right day trading strategy varies depending on your goals, skills, and resources. Some traders specialize in one strategy, while others mix and match depending on the situation. Let’s examine nine widely used day trading strategies: 

Scalping

Scalping involves profiting from small price movements through numerous, rapid trades. Scalpers exploit market volatility by placing hundreds of trades daily to capture frequent, small gains. This high-frequency trading strategy requires strict exit planning, as one substantial loss can wipe out multiple minor wins. 

Momentum trading

Momentum investing focuses on finding current market trends with the expectation that the momentum will continue. Momentum traders buy rising uptrends and short-sell downtrends, exiting their position when the trend loses momentum. This popular quantitative trading strategy capitalizes on emerging volatility and requires experience with trend signals and market timing. 

Swing trading

Swing trading attempts to profit from short- to medium-term price swings within a trend. Unlike momentum traders, swing traders may hold positions for a few days or several months, depending on the trend strength and market volatility. This strategy primarily leverages technical analysis and candlestick charts for identifying price patterns.

Pattern trading

Pattern trading prioritizes identifying and interpreting chart patterns. Common patterns include head and shoulders, triangles, pennants, and flags. This strategy’s emphasis on charting skills makes it popular among traders who enjoy technical analysis and predicting trends. 

Breakout trading

Breakouts occur when an asset moves above a resistance level or below a support level. Breakout traders study charts for signals indicating possible breakouts. This strategy focuses on watching volume indicators and distinguishing between failed and true breakouts. 

News trading

News trading involves plotting your strategy around significant news events. News traders closely follow earnings releases, interest rate updates, and other financial reports, basing their positions on news findings and their expectations. This strategy requires substantial reading and prioritizes fundamental analysis over evaluating chart patterns and technical indicators. 

Range trading

Range trading seeks to profit from trading within price channels. Range traders find support and resistance levels and connect them with trendlines, buying near the bottom and selling near the top. This strategy focuses on trading within narrow parameters and frequently uses stop-loss orders and volume indicators. 

Arbitrage

Arbitraging occurs when traders purchase and sell the same or similar assets in different markets. Arbitrage traders profit from tiny differences in listed prices, exploiting short-term fluctuations. Although it offers relatively low profit potential, arbitrage trading limits risk, making it a popular algorithmic trading strategy. 

Reversal trading

Also known as pullback trading, reversal trading looks for trend reversals. Reversal traders identify current trends and take positions in the opposite direction, anticipating a pullback or correction. This strategy relies heavily on analyzing trendlines, moving averages, and support and resistance levels.  

How to day trade stocks

You can day trade almost any security, but most investors begin with stocks. High volume and volatility can lead to substantial price movements, making stocks ideal for fast-paced trading. Here’s how you can get started day trading stocks: 

1. Stock selection

Day trading begins with selecting the right stock. Focus on stocks with high liquidity, volume, and volatility. 

2. Intraday analysis

The best day traders conduct extensive intraday analysis. Study historical price data, earnings reports, and company balance sheets. By combining fundamental and technical analysis, you’ll better understand a stock’s price movements, trading signals, and price potential.

3. Order execution

All day traders must understand how to place orders. Learn the difference between market, limit, and stop-loss orders. Most trading occurs shortly after the market opens or the hour before the market closes, so prioritize trading during these windows.

4. Risk management

Day trading due diligence involves developing strict risk management practices. When evaluating risk, consider position sizing, risk-reward potential, and volatility. Use stop-loss orders and monitor open positions, as unmonitored and unprotected positions expose you to substantial losses. Please review the Day Trading Risk Disclosure for more information.

Develop your ideal active trading strategy with Composer

With Composer, you can create an active strategy even if you don’t know how to code. The user-friendly interface streamlines strategy creation, leaving more time for stock selection, research, and intraday analysis.

Although you can’t day trade with Composer, our automated trading algorithms can automatically rebalance your positions daily at market close. Our powerful tools provide convenience and control, enhancing and simplifying your trading strategy.

Explore active trading strategies using the Discover page. Sign up for Composer today and discover the limitless potential of automated trading.