10 Successful trading strategies
10 Successful trading strategies
Day trading is the process of buying and selling financial instruments during a day, with the aim of making profit from the transactions. Using small price changes throughout the day to profit can be very profitable if implemented correctly. However, day trading is one of the risky styles of trading, and having a good trading strategy can increase your success rate. In this article, we will examine a few day trading strategies for beginner traders.
1. Gain knowledge
In addition to the knowledge related to day trading, day traders must also follow the economic news of the market regularly. These news can include the economic programs of the Federal Reserve for the monetary economy of the United States of America, important economic indicators such as retail sales report, unemployment statistics, gross domestic products (GDP), consumer and producer price index, etc.
Therefore, before you start trading in the financial markets, update your information about economic events. If you want to participate in the stock market, study the balance sheets and information about the companies you are considering, and if you want to trade in the foreign exchange market, try to get information about the economic situation of different countries.
2. Specify your trading volume
Determine your trading volume, and determine how much you are willing to risk per trade. Most successful traders risk around 1% to 2% of their total capital per trade. For example, if your initial investment is equal to $40,000, and you want to risk 0.5% of your capital per trade, your maximum loss per trade will be $200. One of the most important things you need to do is determine your risk tolerance before you start trading.
3. Specify time for transactions
Day trading requires time and attention. In fact, you should devote a large part of your time during the day to this task. If you do not have enough time to work in this field, it is not recommended to start such an activity.
Traders need to follow the market throughout the day and find trading opportunities that emerge throughout the day. The main key to success in financial markets is fast decision making.
4. Start with a small capital
As a beginner trader, focus on only one or two assets per trading day. This way, you can pursue trading opportunities more effectively. Recently, it is possible to trade a fraction of a share in the stock market. This feature allows you to start trading with a small capital and increase it gradually.
For example, if each share of Amazon is worth $3,400, many brokers allow their clients to buy a fraction of this share. For example, investors can invest $25 in Amazon shares, which is even less than 1% of an Amazon share in the US stock market.
5. Stay away from stocks of emerging companies
Probably, the low prices of emerging companies (penny stocks) attract the attention of many investors. But their liquidity is very low and the chance of them becoming a good stock is much less than their failure.
Many shares that are priced below $5 will be removed from major exchanges, and the only way to trade them will be through the over-the-counter market. Try to avoid such stocks as much as possible until you find a real trading opportunity.
6. Schedule your trades
As the market opens in the morning, a massive number of orders placed by investors are executed. This increases price fluctuations in the market. A professional trader can use these volatilily to his advantage and speculate. But beginner traders should not take action in the first 15-20 minutes of the market and only observe the market.
The market usually experiences less volatility in the middle hours. As the market approaches the final hours, the volatility peaks again. Although the number of trading opportunities is greater during peak hours, it is better for novice traders to avoid trading during such conditions.
7. Use the stop loss and take profit orders
Use orders to enter and exit trades. You can use market orders and limit orders. A market order is executed at the current best market price, without any guarantees. Using this order is useful when you want to enter or exit the market as soon as possible.
On the other hand, a limit order guarantees that your order will be executed at the specified price, but it may take a long time to execute. Limit orders help you to proceed with your trades more confidently, because they are executed at the price you specified. Limit orders can also be used to exit trades. However, if the market never reaches your specified price, your order will not be executed and you will remain in the trade.
8. Adjust your expectations
A profitable strategy doesn’t always need to be successful. Many successful traders may only win 50% or 60% of their trades. However, the profit they make on their successful trades is greater than the loss they suffer on losing trades. As mentioned above, it is recommended that you only risk a small portion of your total capital on each trade. Also, always use limit orders to exit the trade, so that you can control the loss amount of each trade automatically.
9. Master your emotions
The market can be frustrating at times. As a day trader, you must be able to control emotions such as greed, hope and fear. A successful trader always makes his/her trading decisions away from personal emotions and relying on logic.
10. Follow the trading plan
Successful traders need to act fast, but they don't need to think fast. Because these traders have already developed their trading strategy, and defined a regular trading plan. The most important success factor in the financial markets depends on strict adherence to the trading plan. Don't let your emotions control you and make you abandon your trading strategy and plan. Plan your trades and always proceed according to this plan.
Reasons why day trading is difficult
In this part, we will examine the reasons why this style of trading is difficult. Day trading takes a lot of practice and there are many factors that make it a challenging trading style.
First, you should know that your competitors in this market are skilled traders who make their living in the financial markets. These people have access to the best technology and communication in the industry. This means that they have everything they need to succeed. Beginner traders entering this market also usually means more profit for professional traders.
Also, keep in mind that you will have to pay a portion of the profit you earn as taxes to the government. Keep in mind that if you hold your short-term gains for more than a year, they will be taxed.
Finally, a day trader is constantly faced with a barrage of emotions that can disrupt his trading process. For example, when one of your trades is at loss, the sense of fear does not allow you to accept your loss and cut the losses. Experienced and skilled traders usually overcome such challenges easily.
The right time and the right share to buy
Day traders earn profit by participating in various markets, including the stock market, foreign currencies, futures and options. They usually use a tool called leverage to be able to trade larger volumes. In order to decide which asset to trade, a trader considers the following three factors:
- Liquidity: If the liquidity of a market is high, the possibility of easy and hassle-free buying and selling is provided. Also, high liquidity causes the difference between the purchase and sale price of an asset to be smaller, and traders pay less spread during transactions. High liquidity reduces the risk of slippage, and orders are executed at the prescribed prices.
- Price Volatility: The greater the range of price changes of an asset over time, the more volatile this asset is. More price volatility also means more trading opportunities.
- Traded volume: The traded volume is equal to the number of buy and sell positions in the market. This measure is also known as average daily trading volume. Traders are interested in highly traded assets in financial markets. Usually, a sudden increase in traded volume for an asset can lead to an increase in its price.
Once you find the asset you want to trade, it's time to choose the right time for your trades. The tools that can help you in this decision are:
- Economic news of the market: news is one of the fundamental drivers of the market. Therefore, it is better to always follow important economic news. One of the most widely used tools in this field is the forex economic calendar.
- ECN: ECN networks are computer systems that provide users with the best buying and selling prices at any time.
- Candlestick charts: Candlestick charts can help you analyze the price trend of a market.
In the day trading strategies, you need to identify the conditions that are known as a trading opportunity. For example, buying during an uptrend is not clear enough. Instead, you should use more specific conditions to initiate your trades. For example, buy when the high of a triangle pattern in the 2-minute chart in the first two hours of trading has broken.
Once you have established your rules for entering the market, check the charts to see when certain conditions will occur. To do this, always check the price charts of different assets, and look for the conditions that you set for entering the trades.
Right time to sell
There are many ways to exit a winning trade. You can use take profit or trailing stop to exit your trades. Using take profit order is the most common way to exit winning trades. In this case, when the market price reaches the price specified by the trader, the transaction is completed. Some of the exit strategies for day trading are:
- Scalping: Scalping is one of the most popular day trading strategies. This strategy involves buying and selling an asset in short periods of time (a few seconds to a few minutes) and making a profit from it.
- Fading: Fading strategy involves buying stocks after sudden price increases. This strategy is based on three assumptions: the market is oversold, early buyers may profit, and current buyers may exit the market due to fear. Although this strategy is a bit risky, it can be quite profitable.
- Daily Pivots: In the daily pivots strategy, traders profit from price fluctuations of an asset throughout the day. In this strategy, traders try to buy at the lowest price of the day and sell at the highest price of the day.
- Momentum: The momentum strategy consists of making trades during the release of economic news and strong market trends.
In many cases, you’ll want to sell your asset when traders lose interest in it. Also, in a successful day trading strategy, the amount of profit obtained from the winning trades must be greater than the total amount of loss suffered in the losing trades. If your stop loss is $0.05 away from your entry point, you should set your take profit level further. Also, always determine your exit point before entering the trade and stick to it.
Several strategies to minimize risk
Using stop loss order
It is important to take measures to limit losses when trading. For this purpose, the stop loss order is used. For buy positions, the stop loss can be placed below one of the recent market lows, and for sell positions it can be placed above one of the recent highs. The optimum place for stop loss can depend on the range of market volatility at that time.
For example, if the price of an asset changes by $0.05 per minute, it is better to set a stop loss order at a distance of $0.15 from the entry point. In this case, you have provided enough space for market fluctuations and you have not lost the opportunity to make a profit.
If you use the triangle pattern to make your trades, you can set the loss limit $0.02 below the recent high. You can also set two stop loss orders:
- Set the actual stop loss at a level that your risk management criteria dictates. In fact, this level represents the amount of capital you have put at risk for your trade.
- Set your imaginary loss limit at a place where if the market hits it, your criteria for entering the trade will be questioned. In this case, if the market hits such a level, you can exit the trade manually.
Set a stop loss for each trading day
It is better to set a stop loss for each trading day. When your loss reaches the set amount, stop trading, and take the rest of the day off. Stick to your trading plan, and try to do better tomorrow.
Test your trading strategy
A day trading strategy should be testable. You have set your entry criteria and loss limit. Now it's time to test your strategy. If this trading strategy imposes too much risk, you should change it in such a way that the risk is moderated.
If the desired strategy is acceptable in terms of risk, you can start testing. First, examine the market history and evaluate the trading opportunities that this strategy could have created for you. Highlight wherever your stop loss or profit limit is activated. Write down your transactions on paper. Do this for at least 50 to 100 trades. Finally, calculate your profit and loss and evaluate the success rate of your trading strategy.
If your strategy is successful, start trading using a demo account. If you succeed in earning profit in this account for two months or more, enter the market with your real capital. If your strategy is not profitable, repeat the whole process again.
Finally, keep in mind that if you are trading on margin, you are much more vulnerable to sudden price changes. Trading using margin and leverage means borrowing capital from the forex broker. If your trades move in the opposite direction and you get a margin call, you need to fund your trading account. Therefore, if you trade with leverage, be sure to use a stop loss to reduce your risk.
Using day trading is a difficult strategy. Acquiring skills in this trading style requires time, perseverance and discipline. Many traders lose their capital trying to succeed in this path. But the day trading strategies pointed out above can help you become a successful trader. Day traders play an important role in the market, because they provide most part of the market's liquidity with their trades. By gaining enough experience, and improving your skills, and by strictly following a trading plan, you too can profit from operating in this market.
You can start trading in different financial markets such as forex, stocks, indexes, energy, metals, cryptocurrencies, etc. by registering in Aron Groups Broker. This forex broker now serves more than 1 million clients over the world and offers extensive services in this industry.
Written by: Mohsen Mohseni (Aron Groups).