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Filed Under: Active Trading, Technical Analysis
When people use the term "day trading", they mean the act of buying and selling a stock
within the same day. Day traders seek to make profits by leveraging large amounts of capital
to take advantage of small price movements in highly liquid stocks or indexes. Here we look
at some common day trading strategies that can be used by retail traders.
Tutorial: An Introduction To Technical Analysis
Entry Strategies
Certain stocks are ideal candidates for day trading. A typical day trader looks for two things
in a stock: liquidity and volatility. Liquidity allows you to enter and exit a stock at a good
price (i.e. tight spreads and low slippage). Volatility is simply a measure of the expected daily
price range - the range in which a day trader operates. More volatility means greater profit or
loss. (To learn more, see Day Trading: An Introduction or Forex Trading Walkthrough.)
Once you know what kind of stocks you are looking for, you need to learn how to identify
possible entry points. There are three tools you can use to do this:
Level II Quotes/ECN - Level II and ECN provide a look at orders as they happen.
Real-Time News Service - News moves stocks. This tells you when news comes out.
We will look at the intraday candlestick charts and focus on the following three factors:
There are many candlestick setups that we can look for to find an entry point. If properly
used, the doji reversal pattern (highlighted in yellow in Figure 1) is one of the most reliable
ones.
Identifying a price target will depend largely on your trading style. Here is a brief overview
of some common day trading strategies:
Strategy
Description
Scalping
Fading
You can see that, although the entries in day trading strategies typically rely on the same tools
used in normal trading, the exits are where the differences occur. In most cases, however, you
will be looking to exit when there is decreased interest in the stock (indicated by the Level
II/ECN and volume). (For further reading, see Introduction To Types Of Trading: Momentum
Traders and Introduction To Types Of Trading: Scalpers.)
Determining a Stop-Loss
When you trade on margin, you are far more vulnerable to sharp price movements than
regular traders. Therefore, using stop-losses is crucial when day trading. One strategy is to set
The intraday movements of share prices are generally governed by Support &
Resistance levels. The intraday volume, OPEN, HIGH, LOW, CLOSE & previous
CLOSE prices are very important & one should track these prices daily. Previous
data of 3 to 5 days is what is to be maintained or tracked. And the intraday data
prior to the trading day is important.
OPEN ( O ) : The opening price for the particular day.
HIGH ( H ) : The highest price for the particular day.
LOW ( L ) : The lowest price for the particular day.
CLOSE ( C ) : The closing price for the particular day.
We can calculate the support & resistance levels for the next trading day with
the help of above prices. The basic formula to calculate the various
support(S1,S2,S3) & resistance ( R1,R2,R3 ) levels is as follows :Support & Resistance Levels
R3 = H + 2 * ( B L )
R2 = B + ( H L ) or B + ( R1 S1 )
R1 = ( B * 2 ) L
BASE = B = ( H + L + C ) / 3
S1 = ( B * 2 ) - H
S2 = B ( H L ) or B ( R1 S1 )
S3 = L { 2 * ( H B ) }
Mostly traders worldwide use above formula of Support & Resistance both for
intraday trading as well as Delivery based trading. The general intraday
interpretation of these levels (also called as PIVOT POINTS ) is if the Share
price(or market) is above the BASE one should take a Long ( i.e. Buy ) position
with target of exiting (Selling) at R1, R2, R3 levels. Similarly if the Share price (or
market ) is below the BASE one should take a Short ( i.e. Sell ) position with the
target of exiting ( Buying ) at S1, S2, S3 levels.
YOU have to understand one more important aspect of these levels. As the price
moves from one level to other the immediate lower level becomes support &
immediate upper level becomes resistance. Suppose the price is above R1 than
R1 becomes immediate support & R2 becomes immediate resistance of the price
movement.
Before understanding the different Strategies, we will take a look at the results of
a very long term study of more than 10 yrs.
Actual LOW is lower than S1.......... 43 % times.
Actual HIGH is higher than R1......... 43 % times.
Actual LOW is lower than S2......... 17 % times.
Actual HIGH is higher than R2......... 17 % times.