People who succeed at day trading do three things very well:
They identify day trading strategies that are tried, tested.
They are 100% disciplined in executing those strategies.
They stick to a strict money management regime.
Your probably thinking:Ã¢â‚¬Å“How do I find day trading strategies that actually work?Ã¢â‚¬Â
Well today, IÃ¢â‚¬â„¢m going to make it easy for you!
All you need to do is set aside a few minutes of your day to tackle one of the following day trading strategies which I outline for you below.
I will show you everything you need to know including
- Awesome day trading strategies that are used successfully every day.
- The main chart patterns associated with these day trading strategies.
- Instructions for implementing the strategies.
Day Trading Strategies we covered in this article are:
- The Moving average crossover strategy.
- Heikin-Ashi Trading Strategy.
- The swing day trading strategy.
Then I will tell you,
- How to manage your trading risk to stay in the game for the long haul.
The simple truth is.
Learning to use and implement a basic day trading strategies can cut your losses by 63% immediately and will increase your profitability chances in the long run.
So lets get down to business!
1: The Moving average crossover strategy.
What is it?
Moving average indicators are standard within all trading platforms, the indicators can be set to the criteria that you prefer.
For this simple day trading strategy we need three moving average lines, One set at 20 periods, the next set at 60 periods and the last set at 100 periods. The 20 period line is our fast moving average, the 60 period is our slow moving average and the 100 period line is the trend indicator.
How do I trade with it?
This day trading strategy generates a BUY signal when the fast moving average ( or MA) crosses up over the slower moving average. And a SELL signal is generated when the fast moving average crosses below the slow MA. So you open a position when the MA lines cross in a one direction and you close the position when they cross back the opposite way.
How do you know if the price is beginning to trend? Well, If the price bars stay consistently above or below the 100 period line then you know a strong price trend is in force and the trade should be left to run.
The settings above can be altered to shorter periods but it will generate more false signals and may be more of a hindrance than a help. The settings I suggested will generate signals that will allow you to follow a trend if one begins without short price fluctuations violating the signal.
On the chart above I have circled in green four separate signals that this moving average crossover system has generated on the EURUSD daily chart over the last six months.
On each of those occasions the system made 600, 200, 200 and 100 points respectively.
I have also shown in red where this trading technique has generated false signals, these periods where price is ranging rather than trending are when a signal will most likely turn out to be false.
The first false signal in the above example broke even, the next example lost 35 points.
The above chart shows the first positive signal in detail, the fast MA crossed quickly down over the slow MA and the trend MA, generating the signal.
Notice how the price moved quickly away from the trend MA and stayed below it signifying a strong trend.
The second false signal is shown above in detail, the signal was generated when the fast MA moved above the slow MA, only to reverse quickly and signal to close the position.
Although the system is not correct all the time, the above example was correct 6/12 or 50% of the time.
BUT.We can immediately see how much more controlled and decisive trading becomes when a trading technique is used. There are no wild emotional rationalizations, every trade is based on a calculated reason.
2.Heikin-Ashi Trading Strategy
What is it?
Heikin-Ashi chart looks like the candlestick chart but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different from the candlestick chart.
In candlestick charts, each candlestick shows four different numbers: Open, Close, High and Low price. Heikin-Ashi candles are different and each candle is calculated and plotted using some information from the previous candle:
1- Close price: Heikin-Ashi candle is the average of open, close, high and low price.
2- Open price: Heikin-Ashi candle is the average of the open and close of the previous candle.
3- High price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the highest value.
4- Low price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the lowest value.
Heikin-Ashi candles are related to each other because the close and open price of each candle should be calculated using the previous candle close and open price and also the high and low price of each candle is affected by the previous candle.
Heikin-Ashi chart is slower than a candlestick chart and its signals are delayed (like when we use moving averages on our chart and trade according to them). This could be an advantage in many cases of volatile price action. This day trading strategy is very popular among traders for that particular reason. ItÃ¢â‚¬â„¢s also very easy to recognise as trader needs to wait for the daily candle to close. Once new candle is populated, the previous one doesnÃ¢â‚¬â„¢t re-paint.
You can access Heikin-Ashi indicator on every charting tool these days.
Lets see how a Heikin-Ashi chart looks like:
How do I trade with it?
On the chart above; bullish candles are marked in green and bearish candles are marked in red.
The very simple strategy using Heikin-Ashi proven to be very powerful in back test and live trading.
The strategy combines Heikin-Ashi reversal pattern with one of the popular momentum indicators. My favourite would be a simple Stochastic Oscillator with settings (14,7,3). The reversal pattern is valid if two of the candles (bearish or bullish) are fully completed on daily charts as per GBPJPY screenshot below.
Once the price prints two red consecutive candles after a series of green candles, the uptrend is exhausted and the reversal is likely. SHORT positions should be considered.
If the price prints two consecutive green candles, after a series of red candles, the downtrend is exhausted and the reversal is likely. LONG positions should be considered.
The raw candle formation is not enough to make this day trading strategy valuable. Trader needs other filters to weed out false signals and improve the performance.
MOMENTUM FILTER (Stochastic Oscillator 14,7,3)
We recommend to use a simple Stochastic Oscillator with settings 14,7,3.
To learn more on how to use this indicator, visit Stochastic Oscillator.
Once applied, it will show the overbought/oversold area and improve the probability of success.
Trader would now:
Enter long trade after two consecutive RED candles are completed and the Stochastic is above 70 mark
Enter short trade after two consecutive GREEN candles are completed and the Stochastic is below 30 mark.
STOP ORDER FILTER
To further improve the performance of this awesome day trading strategy,other filers might be used. I would recommend to place stop orders once the setup is in place.
In the long setup showed in the chart below, the trader would place a long stop order few pips above the high o the second Heinkin-Ashi reversal candle.
The same would apply to short setups, trader would place a sell stop order few pips below the low of the second reversal candle.
3.Support and Resistance - Role Reversal Trading Strategy
To start I needs to assume that you know what is the support and Resistance in Forex trading. If not see few simple definitions and examples below.
Support and Resistance are psychological levels which price has difficulties to break. Many reversals of trend will occur on these levels.
When a certain level is difficult for price to cross upwards Ã¢â‚¬â€œ it is called Resistance.
When a certain level is difficult for price to cross downwards Ã¢â‚¬â€œ it is called Support.
The harder for price to cross a certain level, the stronger it is and the profitability of our trades will increase. The most basic form of Support and Resistance is horizontal. Many traders watch those levels on every day basis and many orders are often accumulated around support or resistance areas.
It important to mention, support and resistance is NOT an exact price but rather a ZONE. Many novice traders treat the support and resistance as an exact price, which they are not. Trader must think of support and resistance as a ZONE or AREA.
These levels are probably the most important concepts in technical analysis. They are a core of most professional day trading strategies out there.
Let me introduce you to the Ã¢â‚¬Å“Role ReversalÃ¢â‚¬Â. LetÃ¢â‚¬â„¢s see how can you use it in your every dayÃ¢â‚¬â„¢s trading.
Role Reversal is a simple and powerful idea of support becoming a resistance (in the downtrend) and the resistance becoming a support (in the uptrend).
Let see how this plays out in the uptrend.
Once the price is making higher highs and higher lows we call it uptrend. Technical trader must assume the price is going to go up forever and only long trades should be considered. Once the uptrend is defined, the lowest strategy to trade is Ã¢â‚¬â€œ buy on pullbacks.
As per definition of an uptrend, the price punching through the resistance and pullback before it makes another higher high.
Ã¢â‚¬Å“Role reversalÃ¢â‚¬Â concept comes handy for bulls in this scenario.
Once the resistance is broken to the upside, it becomes a new support level. Resistance changes its role to support, hence the name Ã¢â‚¬Å“Role ReversalÃ¢â‚¬Â.
After making a new higher high, the price in uptrend must correct. It is likely to correct to the new support level. This can present an excellent buying opportunity for bulls.
We donÃ¢â‚¬â„¢t know where exactly price will resume an uptrend. Risk management must be applied.
Trader must remember to treat support and resistance levels as ZONES rather than exact price.
The same principle applies to downtrends.
If the market is in downtrend, the price will punch through supports making new lower lows. The broken support becomes new resistance and offers opportunity for short positions.
A trader could use other filters to gauge the pullback. Fibonacci retracements are often used by professional traders to measure how deep the price corrects.
A trader can also establish few levels of support or resistance to lower the risk and increase the gain.
I expanded this article for another five strategies.
In the End!
Day trading, and trading in general is not a past-time! Trading is not something that you dip your toes into now and again.
Day trading is hard work, time consuming and frustrating at the best of times! It is no wonder that over 93% of people that try it, lose money and give up!
As Cory Mitchel over at vantage point trading said
Ã¢â‚¬Å“the excuse doesnÃ¢â‚¬â„¢t matter; the cold hard number is that only about 4.5% of traders who start day trading will end up being able to make something of it.Ã¢â‚¬Â
BUT, by recognizing the difficulty and learning some basic trading strategies you can avoid the pitfalls that most new traders fall into!
The honest truth of the matter is this, most new traders get involved because they see huge profits straight ahead by simply clicking BUY .
Believing they will wake up the next morning a newly minted millionaire! What actually happens goes more like this.
Your friend has just opened a trading account, he claims to have made a hundred dollars in ten minutes, he just sold the EURUSD because the U.S economy is so great right now, it said so on TV!
So you go home, lodge a $1000 into a trading account, SELL the EURUSD at $5/ point.
You wake up the next day and the market has moved against you by 200 points, and your account is wiped out!
Lets look at the facts. There are three main reasons behind the high failure rate of new traders, and you can avoid them easily!
- Using untested, or using no trading strategyat all.
As in the story I told above, trading based on hearsay or some popular narrative will lead you to almost certain doom!
The value of using a tried and tested trading technique is immense, and will save you from loosing your hard earned savings.
- Lacking in trading discipline.
By using a day trading strategy, you remove the emotional element from the trading decision.
A trading strategy requires a number of elements to be in place before trading.
So, when those elements are in place, you place the trade.
It is a binary decision rather than an emotional decision. All other actions are off the table, by following a trading technique you avoid the cardinal sin of trading, that is, over trading.
- Bad or non existent money management rules.
So often new traders place a trade without even placing a stop loss position! An error which can lead to catastrophic losses.
Money management can be as simple as using the 3 / 1000 rule.
That is: never ever ever ever risk more than 3% of your capital on any trade.
And never risk more than 1000th (or as close to) of your capital per point.
Now, I've given you the tools, so get to it, and start trading profitably!
Please let me know, which day trading strategy is your favourite in the comment section below. I will expand of the most popular ones.
Trading in Forex Exchange Market is VERY SPECULATIVE AND HIGHLY RISKY and is not suitable for all members of the general public but only for those investors who: (a) understand and are willing to assume the economic, legal and other risks involved. (b) Taking into account their personal financial circumstances, financial resources, life style and obligations are financially able to assume the loss of their entire investment. (c) Have the knowledge to understand Forex Exchange Market and the underlying assets.