Are you fascinated by the idea of making money day trading? This is the right post for you if you want to make money with day trading.
Day trading refers to the process of buying and selling stocks frequently throughout the day. Day trading strategies are important when you want to take advantage of the frequent, small movements of the price.
A consistent and effective trading strategy depends on detailed technical analysis, through the use of charts, indicators, and patterns to predict future price movements.
It is easy to get carried away by the idea of making quick profits in the forex market, but day trading rarely makes one rich. Most people end up losing money.
In this guide, we will check out some strategies that you can use to make money with day trading.
1. Momentum Trading Strategy
The momentum trading strategy entails jumping on a stock whose price is increasing. Momentum stocks are not easy to find. According to Warrior Trading, about 10 out of 5,000 will meet the criteria on a particular day.
Here are the qualities that you should look out for if you want to use a momentum trading strategy:
- A major move in price is caused by a surprise increase in earnings, the discovery of a new treatment by a drug company, or news that a larger company will acquire a smaller firm.
- Stock movement of about 30% to 40%.
- Smaller stocks that trade faster as a result of the reduced number of outstanding shares (the float must be less than 100 million shares).
2. Scalping Strategy
The idea behind the scalping strategy is that little wins accumulate to lots of money at the end of the day. This strategy works by setting buy and sell targets and sticking to these levels. The strategy is fast. Several trades can be completed within a few seconds.
The scalping strategy is one of the best strategies to make money with day trading. Confident traders that are good at making quick decisions and act on them swiftly make money with this strategy.
Those that adhere to the strategy have disciplined themselves to the level that they sell once they notice a fall in price, thereby reducing losses.
This is not the right strategy for those that are easily distracted and do not have laser target focus.
3. Pullback Trading Strategy
If you want to use the pullback strategy, the first thing you need to do is to look for a stock that has an established trend.
Next, pay attention to the trend until you detect a fall in the price. If the trend is upward, the downward movement of price (also known as the pullback) is the entry point for you to buy.
Day traders use tools like technical charts to understand the trend of the market. It is advisable to look for an uptrend that has at least two successive high price movements before the decline in price (or pullback).
If you are selling, look for two successive falls in price. If the trend reverses after buying, don’t panic because, in most cases, the trend continues in the trending direction for a long period. Those that use the pullback strategy usually make lots of profits.
4. Breakout Trading Strategy
A breakout trade occurs when the price of the stock rises above the previous top resistance price. It is not as easy as just looking at the chart, spotting the resistance, and buying after a breakout. You need to pay attention to the level of trading volume or the number of shares that are moving from one hand to the other.
This is because breakout trades that occur on high volume have a high chance to be sustained at a new higher price than those that occur with less volume. Breakouts that occur at lower volume have a high chance of declining below former resistance levels; thereby making it harder to make a profit.
The market usually retreats after it hits the resistance level until a more powerful event makes it change direction. Above the resistance level, we have more sellers than buyers. This prevents the price from increasing further.
5. News Trading
The forex market reacts quickly to events in the market. A lousy earnings report can cause the price to fall in the market.
On the other hand, events such as FDA approval for a new drug can make the price increase. By watching out for the business news, day traders can take advantage of the popular stories that are released every day.
If the news is bad, you can sell the market during the day. If the price falls as expected, you can buy the market back at the lower price and your profit will be the difference after deducting the commission paid. If the news release is good, you can buy the market and sell it after the price increases.
According to the SEC website, day trading is very risky and can make you lose money within a short period. If you want to try and make money with day trading, ensure you use only the money you can afford to lose.
6. Closing All Trading Positions After the Trading Day
To be honest, there is nothing like one best trading strategy in Forex or the financial market as a whole. Some traders may find some strategies more effective than others. However, we have some trading strategies that work for many traders.
The day trading strategy that involves closing all trades at the end of the trading day has two benefits.
Firstly, it will be helpful to note that if the trader leaves a trading position overnight, serious changes can take place in the market before the trader returns to the trading platform. Before the US markets open, most of the trading activities in the Australian and Asian markets would have concluded.
During this period, major economic news could be released and this can have a serious impact on the market and your trade.
Thus, you can lose out on your positions while you are away from the platform. It is therefore advisable to close all positions before the end of the trading day to safeguard against these risks.
For instance, if a trader buys the AUD/JPY pair and holds it overnight, the broker will pay $0.29 to the trader. If it was a sell position, the trader will be charged $5.54 per day.
The trader can avoid this expense if he closes the position before the trading day ends (this calculation was made by Axiory’s swap calculator and it’s based on $100,000 capital).
It is important to point out that, unlike the scalping strategy, it is not necessary to open many positions every day when you are using this strategy.
Professional traders even restrict themselves to just one trade per day. This allows them to have more time to analyze different pairs and settle for the ones that have the best and most profitable setups.
7. Trend Following Strategy
While some experienced traders are figuring out and taking advantage of breakouts, others are looking for reversal signs and making use of counter-trend strategies.
Those trading techniques can be confusing for newbies. The good news is that there are other simple trading strategies that you can use. One of them is the trend-following strategy.
The idea behind this strategy is that the trader analyzes many currency pair charts using Simple and Exponential Moving Averages. He or she will then look for confirmations for uptrend or downtrend and then place trades accordingly.
Forex strategies for day trading require setting stop-loss orders or monitoring the market, it is important to note that you don’t need to win 90% or 100% of your trades to be successful as a Forex trader.
Most professional traders that trade Forex on a full-time basis win about 55% to 60% of their trades and are still able to make a living from it.
So, if you can successfully identify trends in most of the pairs that are enough for you to earn some decent income.
8. Setting the Right Profit/Loss Ratios
Another strategy that you can use to make money with day trading is to set correct profit and loss ratios.
As stated earlier, professional traders succeed even with 55% wins. However, some traders may find this difficult to achieve.
There are some solutions to this challenge. For instance, Ross Cameron (a professional trader and the founder of the Warrior Trading site) championed the 2:1 profit to loss ratio. He usually applies this method while trading stock; nothing is stopping you from using it to trade the Forex market as well.
According to Cameron, for every 50 cents risked in a trade, the goal is to achieve at least $1 profit.
Here’s how you can apply this tactic to Forex trades; if you open a buy position on EUR/USD at 1.1000, you can place your stop loss at 1.0980 (20 pips lower than the market price). If you aim to gain 40 pips, the Take Profit order will be at 1.1040.
This form of day trading strategy is useful for Forex traders because it allows them to succeed with 40% or 50% wins. However, I can’t guarantee a 100% success rate with this strategy. No Forex strategy is 100% successful.
When it comes to day trading strategies for Forex, it is important to point out that there is no standard for the number of pips that you should set for the stop-loss and take-profit levels. Every currency pair has different volatility.
How Much Can You Make Day Trading?
There is no fixed amount that you can make day trading. You can only have a fixed income if you are employed by an investment bank or a Forex brokerage company.
For others that are self-employed, your earnings will be determined by your trading and your performance. The goal of most professional traders is to make 10% to 20% of their capital every month.
For instance, if a trader has a capital of $25,000 and makes a 10% profit, that makes earnings of $2,500.
What is the difference between day trading, scalping, and swing trading?
In scalping, the traders usually focus on 1 to 15-minute timeframes and focusing on gaining 5 to 20 pips. Swing traders differ from day traders because swing traders can hold positions for many days and even weeks, instead of closing their trades at the end of the trading day.
What is the difference between Forex and stock market day trading?
There are two main differences between them. Stocks are more volatile than the Forex market since each stock is for an individual company, not national economies. As a result, they are more prone to market swings.
Another difference between them is this; the trader has to focus on the most recent earnings of the company and quarterly reports in the case of stocks, instead of analyzing inflation and economic growth figures as it is in Forex.
Although day trading is somehow controversial, it is still useful in earning a profit. Both institutional and individual day traders are very important in the marketplace because they keep the markets efficient and liquid.
Day trading is popular among inexperienced traders. However, it should be limited to traders that have the skills and resources required for success.
Thanks for reading. I hope you’ve learned one thing or the other on how to make money with day trading.