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Day Trading Strategies the Pros Use

Day Trading Strategies the Pros Use

Once an activity that was exclusively linked to banks and professional speculators, day trading gained immense popularity after the deregulation of commissions in the US in 1975 and the subsequent advent of electronic trading platforms. Day trading strategies, as the name suggests, involve buying and selling securities during the same day. All positions have to be closed before the market closes for the day. Currencies and associated derivatives are one of the most common day-traded financial instruments.

Day traders attempt to take advantage of frequent and small price movements, relying on in-depth technical analysis, with the use of various indicators, charts and patterns, to predict future price movements. They exit positions before the market closes to avoid any unnecessary risks associated with price gaps between the closing price of the day and the next day’s open price.

Basic Components of Day Trading Strategies

Regardless of whether they are used by experienced traders or beginners, day trading strategies need to fulfill some basic conditions to be successfully executed.

  • Market Liquidity: A trader will be able to swiftly enter and exit a position at stable prices only when there are a large number of buyers and sellers in a market. The forex market is one of the most liquid financial markets in the world.
  • Price Volatility: Traders need some amount of price volatility to be able to make profits. It helps them understand their potential profit range or even prepare for losses.
  • Volume: The average daily trade volume of a currency pair is important for day traders. It gives them an idea about market sentiment, as well as future price directions.
  • Risk Management: Every currency trading strategy, including day trading, is exposed to risk. Price volatility makes day trading risky and to be successful, proper risk management measures should be put in place, such as protective stop-losses, market research and pre-decided risk-reward ratios.
  • Professional Software Platform with High-Speed Internet: This helps execute trades quickly and to use advanced technical indicators.

Types of Day Trading Strategies

Here are some common forex day trading strategies used by pro traders:

1.      Forex Scalping

Scalping is considered one of the most advanced day trading techniques, where the aim is to gain profits very quickly. Small price movements provide opportunities to trade in very short timeframes. Traders enter positions with timeframes less than 5 minutes.

Now, we know that currency prices move up and down by one or two pips, so how do these traders get decent returns on investments? They trade in mass quantities. Some trade approximately 200 times a day, in order to accumulate reasonable profits. The higher the number of trades, the greater the chances of evening out the low risk-reward ratio.

  • Scalping needs extensive market research. Currency prices fluctuate significantly during certain times of the day. For instance, after the release of the US Non-Farm Payroll report, immense volatility is seen in the markets. The price of USD pairs can easily move 50 or more pips at this time.
  • Stop-losses have to be placed very close to the opening price, so that the account stays protected against adverse market movements.
  • Maximum holding time is 5 minutes or less.

2.      Breakout

Chart analysis plays an important part in breakout strategies. If the price of a currency clears a specified price barrier on the chart, along with an increase in trade volume, volatility increases and there are greater chances of the price trending in the direction of a breakout. If the price breaks above the resistance line, a long position is indicated. On the other hand, if the price drops below the support line, a short position is signalled. Currencies with prices that often hit the support and resistance levels are good choices for this strategy.

  • Study the currency’s recent performance to form a suitable price target with the use of chart patterns.
  • Calculate recent average price swings.
  • Plan your exits accordingly.

3.      Fading

Traders sell currency pairs immediately after the price rises. The aim is to try and find those market movements that are trying to restore the past price of a currency pair and earn pips on them. Buyers generally start to step in again at these points.

Fading the breakouts is a commonly-used strategy. One simply trades in the opposite direction of the breakout. This is usually done when traders have less confidence in the direction of the breakouts or believe that it is a false breakout.

  • It is a contrarian investment strategy, best suited for traders with a high risk appetite. It also requires immense experience to identify possible pullbacks and their strengths.
  • It is a volatile strategy, useful for short term, rather than long-term, gains.
  • Faders also go against economic new releases, trading in the opposite direction of the numbers released.

4.      Daily Pivots

A strong pivot-point strategy can help efficiently identify and act on price support and resistance levels. In order to identify a move as a breakout point, traders use pivot levels to identify the key levels. Profit is based on the daily price volatility of currency pairs. While buying and selling is reserved for low volatility periods, positions are closed during the high period of the day.

Central Pivot Point (P) = (High + Low + Close) / 3

Using the central pivot point, the support (S1 and S2) and resistance (R1 and R2) levels can be calculated.

R1 = PX2 – low; while S1= PX2 – high

R2 = P + (R1-S1); while S2 = P – (R1-S1)

  • Pivots are useful for range traders
  • Opening and closing prices, highs and lows of the previous day are used.
  • Pivot points are generally used along with other indicators, like RSI Divergence and MACD, to make decisions.
  • They reflect changes in market sentiment and overall trends for a specific time interval.

Day trading strategies should be tried after sufficient experience in long-term forex strategies.  The higher consistency one can achieve over the long term, the greater will be the skills acquired for trading shorter timeframes. Many traders prefer to use a demo account to practice before venturing into the live markets. Retail day traders have a habit of fixing the maximum losses per day at a level they can bear to take on mentally and financially.

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