Being one step ahead of the game is fundamental to successful stock trading. Particularly as a day trader, strategy plays a big part in determining how to play the markets in any given scenario, and in shaping the look of your portfolio as you move throughout the trading day. Furthermore, in a fast paced, highly active trading situation, having a set blueprint underpinning your analysis and that fits with your trading style can be a remarkably effective way of improving consistency. While no two traders trade in exactly the same way, there are nevertheless a number of key strategies employed by day and short-term share traders that can be put to good use in any trading account.
Going long is almost the default when it comes to day trading. Going long is essentially looking for shares in companies that are likely to go up over the course of the trading day, either as a result of market movements or some boost to the industry. Traders who go long buy shares in companies, holding on to them over the duration of the day or some shorter period therein, closing out before the day is through to hopefully bank a profit.
While a tricky strategy to implement, as with all trading strategies, going long at least narrows down the field of interest as far as your analysis and research is concerned, allowing you to focus only on sectors and companies likely to respond positively over the trading day.
The inverse of going long, going short is the process of borrowing shares to sell at current prices, only to actually buy them (i.e. to repay the shares) when the market value of those shares falls. In other words, the trader who goes short profits from a decline in value of the shares he sells. Ethics aside, short selling companies who are likely to take a hit in the markets for poor performance or as a result of some external factor can be as profitable as any other strategy, and by focusing your attention on those that are getting flagged for all the wrong reasons you can streamline your research and diligence processes.
A slightly more dynamic but by no means less common trading strategy is scalping. Scalping is to day trading what day trading is to long-term investment – investing over the ultra short term to take small and more frequent profits. Scalpers revolve around multiple transactions throughout the trading day, aiming to make on aggregate a return for their efforts. They rely on the compounding effect of multiple successful transactions in order to spread their risk, refraining from going all out for the riskier but larger prize. While scalping can be a profitable strategy, it takes an active, hands-on command of your trading and a sharp eye for underpriced shares in order to make it work.
Another popular trading style revolves around trading on news announcements, official reports and corporate headlines that unfold in any trading day. To a certain extent, all the strategies that traders employ take account of these factors on some level, but by using them as the direct stimulus for trading decisions, you can try to be one step ahead of the game to capitalise on the effect of the markets compensating for any given news story. News trading allows you to focus on reacting to announcements as they happen during the trading day, which can be a strong advantage particularly for those with a shorter term trading outlook.
Reverse trading combines graphical analysis with going long/short in order to capitalise on the cyclical movement of prices and markets. In trading the reversal, you are looking to identify turning points in price movements in order to ride the curve until the market has corrected itself.
Because prices tend to move within a band of highs and lows, it can be possible to predict, taking into account any wider market factors, when a stock is likely to reverse in price – either heading north or south, depending on its previous price direction. If the reversals trader gets in on the correction early, the rewards can be significant over the course of the trading day.
There are a wide number of day trading strategies for playing the stock markets. Whether you’re an expert trader or you’re yet to place your first market order, understanding the importance of having a clear strategy is crucial to delivering a consistent pattern to your trading, and hopefully in deliver a consistent return on your investment capital.
You might also find out more about technical analysis and how to utilise fundamental analysis in your trading.