Any successful trading strategy depends on understanding your strengths as a trader, so whether you’re brand new to trading or you’ve traded for years, one of the easiest ways to improve is to analyse your own performance.
Like professional sports players, traders have a wealth of data and information on the decisions they have made, the market conditions at the time of their best and worst trades and the level of volatility at every point throughout their trading career.
Whether you’re looking to refine your day trading strategy or are interested in honing your craft around trading charts or trading specific instruments, the first place to start is knowing your own “game” and where your strengths and weaknesses lie.
Obviously the more experience you have in the markets the easier it is to analyse your performance and the circumstances surrounding your trading decisions. Understanding your risk tolerance and how this influences the types of markets you’re interested in, the kind of trading strategy that is likely to appeal to you and even the amount you’re willing or able to trade is a key part of defining a long term strategy.
First off, your experience. It is crucial that you’re honest about your level of experience in the markets so that you don’t bite off more than you can chew. There is no point in trying to trade with a complex trading strategy if you’re just starting out, you’ll overwhelm yourself with too much detail and likely end up performing poorly. You’re better off starting small to build up your confidence and experience before trying more complex, intricate day trading strategies.
Secondly, your risk tolerance. This is a crucial part of both day trading and long term trading strategies, and again you’re best off being honest about what level of risk you find acceptable. Never trade more than you can afford to lose and always make use of stop loss and trailing stop orders to help protect yourself should the market move against you. Understand your appetite for risk; it is different for every trader and only by knowing what you’re willing to lose will you be able to approach your day trading strategy with a clear-eyed view of which type of markets suit you best.
The final part of the trading puzzle as far as knowing your own trading philosophy goes is the emotion aspect of trading. Every trader will become emotional at some point, whether that is the thrill and high of placing a successful trade or the lows of losing on a trade that you felt positive about.
A lot of successful trading is based around being able to control your emotions and not make trades that fall outside of your clearly defined strategy just because you have a hunch. The most successful traders are often those who are most consistent and disciplined. Trading on emotion is a poor substitute for a clear, well thought out trading plan that is executed against existing market conditions.
Test a lot of strategies and trade the best one
Whether you’re looking for a trading strategy as a pattern day trader or you want to try an approach that suits day trading for beginners, one of the best ways to learn is to test different trading strategies in real world scenarios.
You can do this easily by opening up a free demo account with a broker like Eightcap and tracking the success of a variety of day trading strategies. Whether you want to trade using a Breakout strategy, momentum strategy, Reversal strategy or something else entirely, a free demo account is an excellent way to track performance without risking real funds.
Below are a few of the most popular day trading strategies and a brief synopsis on each. Remember, even if you’re trading with a demo account, always take time to learn and understand the markets you choose to trade. Know which macro and geopolitical events may impact volatility and get to learn which other asset classes and financial instruments have strong correlations with the assets you want to trade.
This will help you better understand how and why the market moves both against you and in the direction you predict. The result? A strong basis for a long-term trading approach based on solid research and real world fundamentals.
Day trading strategy: The Reversal
Sometimes called pull back trading or trend trading, a Reversal trading strategy looks to identify pullbacks in charts to pinpoint key trading opportunities when an instrument may be undervalued. A market reversal happens when market consensus switches from either bearish or bullish and recorrects on an asset’s value. To trade a Reversal day trading strategy, you need a great deal of market experience and understanding as well as an in-depth knowledge of exactly how your particular market may behave. A strong understanding of charts and how to read them is also crucial for this particular strategy.
Day trading strategy: The Breakout
There are a number of approaches to using a Breakout trading strategy, but at its most basic, this approach relies on a price reaching a specified level where price action may shift toward the asset breaking above established resistance points. If an asset trades beyond a certain price point it is often likely to continue in the same general direction after a breakout and could represent a trading opportunity.
Again, a very strong understanding of the market is required and remember – just because a trend has happened in the past it is no indicator as to future performance. Get to know the history of the market you’re trading so you can evaluate key breakout opportunities and gauge whether or not they may represent real value – or simply market volatility.
Day trading strategy: Momentum
One of the more immediately suitable day trading strategies for absolute beginners, trading Momentum is a way of taking advantage of current market movements and “swimming with the tide”. To trade on momentum, day traders look for momentum and large volumes of trades in a particular direction in an asset generally driven by macro factors and news cycles.
This short time frame strategy relies on identifying market momentum early, opening a position quickly to take advantage of a higher volume of trades that pushes prices up. Traders must then be quick to get out of the market as soon as reversal looks to be on the cards. This particular day trading strategy can also be bolstered by setting up price alerts on a particular asset or market so that you can identify both opportunity and exit points very quickly.
Signs of a good day trading strategy and how to find them
The above examples of day trading strategies are by no means exhaustive, there are a wide range of strategies to choose from, and something to suit most traders’ strengths. The key to finding a good day trading strategy is to experiment and to make sure that the strategy execution aligns with your style as a trader, your risk appetite and your level of experience in the market.
Remember, there is no silver bullet. Too many new traders are looking for a get rich quick scheme rather than a solid trading strategy. Even short time frame trading strategies require thought, patience and skill to execute and this requires a learning period before you are able to identify the best entry points and exit points in a market.
One of the strongest moves newer traders can make is to read as much financial news as possible. Register for Bloomberg, Reuters and the Financial Times newsletters and become familiar with how and why markets are moving. The more you know, the easier it is to spot potential trading opportunities over time.
Do your research too, there are plenty more day trading strategies out there – some depend on a strong knowledge of technical chart patterns, others demand a huge amount of attention on open positions, yet others look at macro and geopolitical influences. Find the strategy that works best for you and that suits your strengths and level of experience as a trader.
Record your trading performance & adjust if necessary
Keeping a trading journal can be an excellent way to track performance and to learn from both your successes and failures as a trader. Get into the habit of keeping a trading diary where you record the market you’ve decided to trade, why you felt the trade represented a good opportunity, the market entry point and direction of trade and then the price when you exited the market.
These details over time will help build up a picture of the types of trades that work best with your chosen strategy and can also help you be clearer in your own mind about what the better trading opportunities and market conditions look like. It will sharpen your instincts and make you a more rounded, perceptive trader while broadening your knowledge base.
If you’re serious about defining your day trading strategy and want to expand your repertoire, try a variety of approaches and track the progress of each. This gives you more data points for determining the relative strengths of the strategies you are weighing up and allows you to blend parts of each to build your overall approach to the markets.
Another good way to hone your trading craft is to experiment with different trading strategies across a number of assets. This exposes the strategy to varying levels of market volatility and acts as a natural stress test on the weakest parts of your strategy, allowing you to identify where you may need to work on refining things like your exit strategy, risk protection and market entry points.
If you screenshot the charts you use as part of your trade records, you’ll also have visual representation of what the market was doing at the point of trade, helping you identify chart patterns that indicated successful entry points.
Conclusion: Finding your strategy is easy but perfecting it is a never-ending process.
When it comes to trading online, finding your day trading strategy is (relatively!) easy. The harder part is refining your strategy, having the discipline to stick with it and improving your overall trading approach through practice and recording your performance.
Learning to trade the markets is a never-ending ambition, there is always something to learn and improve on due to the evolving nature of financial markets and the ebbs and flows in volatility. It is one of the aspects that makes trading online so interesting.
You’ll also need a good dose of patience, don’t expect immediate results and massively successful trades right off the bat – a successful trading strategy takes time, and evolves with your own market knowledge and understanding.
Use all the resources you can find online, there are a huge array of websites looking into the strengths of different trading strategies. You can also join chat boards and speak to other traders about what has worked for them – or reach out to successful traders who you know or have met and pick their brains about how they get their best trading ideas. There are also a number of fantastic trading strategy books to read like Technical Analysis Masterclass by Rolf Schotmann, Technical Analysis for Beginners by A.Z Penn and High Probability Trading Strategies by Miner.
Keep perfecting your strategy, keep learning more about your own trading performance and keep looking out for solid day trading strategies that you can experiment with and learn from. Then take everything you’ve learned and start putting it into practice with a strong, responsible trading strategy that plays to your strengths as a trader.
Learn more about trading CFDs 5 at Education Hub, or subscribe to Eightcap’s Week Ahead Newsletter for more day trading insights, analysis and news. You can check out Eightcap’s platform pages for a full breakdown of platform functionality and chart capabilities.