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A Guide to Day Trading Strategies and Systems

November 13, 2020 07:50 UTC
Reading time: 20 minutes

In this article we will explain what day trading is before exploring various different day trading strategies and systems which are available and how they are used by traders to make profits. We will also make some suggestions on how to find the best day trading strategy for 2021 and provide some useful tips to help you in your trading!

Day Trading Strategies

What Is Day Trading?

Day trading is a stye of trading in which traders open and close positions on the same day. Day trading strategies tend to be more action packed and require traders to be present at their trading station throughout the session, monitoring the live price charts.

It is widely accepted that the narrower a time frame a trader works in, the more risk they are likely to be exposed to, meaning that day trading is one of the riskiest approaches to the financial markets.

It is not necessarily that the different trading strategies themselves carry more risk. In fact, the overall logic is the same for almost any time interval that exists. However, day trading rules tend to be more harsh and unforgiving to those who do not follow them. Mistakes are more costly and they have the potential to occur more frequently, since the act of trading itself is occurring more frequently.

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Day Trading Strategies

Whilst day traders have a wide range of financial products to choose from, such as CFDs, ETFs, options and futures, day trading strategies can only be used effectively on markets which meet certain criteria.

The two factors which are essential to a market for day trading, irrelevant of the strategy used, are volatility and liquidity. It might seem like a good thing for any kind of trader, but short-term traders are far more dependent on both.

Volatility measures the variation of market movements. When trading short-term, volatility is a must. If trading Forex, this need for volatility reduces the selection of instruments available to the major currency pairs and a few cross pairs, depending on the trading session.Talking about trading sessions, when it comes to volatility, knowing when to trade is just as important as knowing what to trade. Which timeframe is best for day trading depends on what asset you plan on trading with.

Liquidity is the ease of which an asset can be traded on the market at a price reflecting its genuine value and is equally important for day traders. Day trading is very precise. A long-term trader may be able to afford to lose 10 pips here and there, however, a short-term trader can not. 10 pips may well be the whole profit projected for an individual trade. This precision comes from the trader's skill of course, but liquidity is important too. If there is no liquidity the orders will simply not open or close at the desired price, no matter how good a trader is. This once again, limits day traders to a particular set of trading instruments at particular times.

Scalping

Scalping is a day trading strategy that aims to achieve many small profits based on minimal price changes. Scalpers aim for a large quantity of trades, opening almost 'on a hunch', because there is no other way to navigate through the market noise. Scalping can be exciting and at the same time very risky. Scalpers must achieve high trading probability to balance out the low risk to reward ratio. Probably the hardest part of scalping is closing losing trades in time.

A scalper simply can't afford to wait for the market to come back.

If you want to be a scalper, consider developing a sixth market sense – look for volatile instruments, good liquidity, and perfect execution speed. If mastered, scalping is potentially the most profitable strategy in any financial market. It is only the associated risks that prevent it from being the best day trading strategy.

Reverse Trading

Reverse Day Trading StrategiesChart 1: An example of reverse trading using the Stochastic indicator. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Reverse trading is also known as pull back trading, counter trend trading, and fading. In essence, this strategy attempts to profit from a reversal in trends in the markets. For example, if there has been a downward trend in the price of an asset and a trader spots a signal that a price increase is coming, they will aim to make a profit from the reversal of that trend.

The risk comes from trading against the trend. A reverse trader has to be able to identify potential pullbacks with a high probability, as well as to be able to predict their strength. Although not impossible, reverse trading would be considered one of the more advanced day trading strategies, as it does require a lot of market knowledge and trading practice. The 'Daily Pivots' strategy can be considered a special case of the reverse trading strategy, as it specialises in trading the daily low and daily high pullbacks and reverses.

Momentum Trading

Momentum Day Trading StrategiesChart 2: Multiple Momentum line breaks of the Parabolic SAR indicator. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Momentum trading is one of the more straightforward day trading strategies which searches for strong price moves paired with high volumes. The trader will enter a position to take advantage of the price movement and exit the position once it seems the movement has lost momentum.

A high level of trading discipline is required in momentum trading and the difficulty lies in knowing when to enter and exit a position. Traders must be patient and wait for the best opportunity to present itself. Once the position is open, the trader must maintain solid control by keeping focus in order to spot the exit signal.

Day trading is often advertised as the quickest way to make a return on your investment in Forex trading. However, what the the adverts fail to mention is that it's the most difficult technique to master. As a result, many beginner traders try and fail. Through years of learning and gaining experience, a professional trader may develop a personal and effective strategy for day trading.

Forex Day Trading Systems

A Background to Forex Day Trading Systems

A Forex day trading system is usually comprised of a set of technical signals, which affect the decisions made by the trader concerning buying or selling on each of their daily sessions. The system can help traders to navigate the market much more efficiently and confidently, with the aim of allowing them to gain more profit.

In the past, the activity of day trading was limited to financial organisations and professional speculators. The majority of day traders were the employees of banks or investment firms, who specialised in equity investment and fund management. However, with the introduction of electronic trading and margin trading systems, the day trading system has now gained popularity amongst retail traders.

With access to the Forex markets easier than ever before, almost anyone can trade Forex from the comfort of their own homes. People choose to go into day trading for various reasons. However, a factor which is likely to have made this activity much more popular over recent years is the fact that day traders do not incur the 'Swap', which is a fee that is incurred when a position is kept open overnight.

How Do Forex Day Traders Make Profit?

Day traders leverage large sums of capital to make profits by benefiting from small price changes among the highly liquid indices, stocks or currencies. In other words, these traders are not looking for large dips and peaks in the prices. Instead, they are happy with small, moderate movements, but their trades are larger and more frequent than the ones created by traders that invest over longer periods. As a day trader, the main aim is to generate a substantial amount of pips within a particular day.

Ideally, day traders should generate returns on both the highs and lows of the assets. The entries in the different systems make use of similar kinds of tools which are utilised in normal trading - the only difference is in the timing and the approach.

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The Best Forex Day Trading Systems

There are many different Forex day trading systems - it is important not to confuse them with day trading strategies. The main difference between a system and a strategy is that a system mainly defines a style of a trading, while a strategy is more descriptive and provides more detailed information - namely entry and exit points, indicators and time-frames. A brief overview of some of the most commonly used day trading systems is given below (Please note: scalping, fading and momentum are also trading strategies as well):

  • Scalping: In this system, the buying or selling takes place instantly after the trade achieves profitability. In this trading type, the target is to attain profitability when you are up by just a few pips. You can expect to trade a lot and generate quite a large volume. However, the income per trade is rather small.
  • Fading: This system involves the shorting of stocks, an index or a currency pair, immediately after upward moves. In this form of day trading, the price target is set when buyers start to step in again. In other words, you are aiming to make pips on the market moves that try to restore the past price of an asset.
  • Daily Pivots: In this system, the profit is gained through the volatility of the daily prices of assets. The buying or selling takes place during the low period of the day, and closing of the trade occurs at the high period of the day. The price target here has a similar pattern as mentioned above.
  • Momentum: In this type of Forex day trading system, trading is usually performed on news releases, or by locating the strong moves which are trending, and which are supported by high volumes. The price target in this strategy is when the volume starts to diminish, and the appearance of bearish candles takes place. You are generally looking to acquire an asset a few hours before news is released, and then subsequently getting rid of it after the market has moved enough into your direction.

What Is the Best Forex Day Trading System?

As you may have gathered by now, dealing with a day trading system can be quite a challenge. There is a lot to learn and prepare for. Therefore, when you are starting out, it is useful to know what the best trading system is going to be. Whilst it's always nice to have a Forex trading strategy to work from, you need to have something beyond that, to help you actually make the grade and start earning some capital.

The best Forex trading system for you needs to fit your own profile and needs, that means that finding the ideal one can be hard work. However, the best thing to do is to remember that the majority of Forex systems are built around various strategies and tend to run with their own foundations, fundamental aspects and characteristics.

The community of traders using day trading systems is loaded with many different people, with varying setups, therefore, finding the best system is pretty hard and it depends on so many little factors that there is simply no blanket answer to provide. However, you can feel safe in the knowledge that finding the right trading system will typically come from conducting your own research.

Being able to dictate what the best day trading system is for you also comes from your own experience – what do you currently know about the Forex market? Do you need something that can help you get into the system from the very start? Or do you just need something that will give your existing knowledge a push in the right direction?

Whatever you pick, you need to start looking at the trading systems that are out there – some of them will make outrageous claims that you simply cannot trust, but it should be easy enough to start making the right choices and decisions based on how realistic they sound. Remember, the program has to sound authentic – if it's not built around actionable information, and does not provide you with the details that you can actually benefit from in the long term, move onto the next one.

Be prepared to look around and find the right balance for your individual needs – what you know, what you can afford, and what you are willing to invest will all dictate what the top trading systems are for you. In other words, the best system for trading Forex is the most suitable one.

When it comes to trading short-term, you would need to it to be convenient, and you would need to feel confident using it, as this is an activity you would be performing for a few hours almost every day. It is suggested that you try out all of the aforementioned systems on a demo trading account first, before engaging in live account trading. This is applicable even for experienced traders that are considering switching from one system to another.

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Forex Day Trading Tips

The practice of day trading is the least popular among professional traders and the most popular among beginner traders. If you are a beginner, here is the most important Forex day trading tip of all: get some experience with long-term trading. First try to prove yourself by being consistently profitable with a live account for a relatively long period of time, using long-term trading strategies.

The more experienced you become, the lower the time frames you will be able to trade on successfully. If however, you still decide to or even unconsciously slip into day trading, here are a few Forex day trading tips that might help you out. Day trading for beginners usually starts with research. They tend to look out for different ways to improve their trading and dedicate a vast amount of time to searching for the right starting point.

FX beginner traders are always searching for the perfect indicator or trading system that provides setups with a 100% success rate. Even some experienced professional traders do it from time to time. Unfortunately, perfect systems don't exist, even the best strategies lose sometimes.

Here are a few tips if you are trading with Admiral Markets:

  • Open a demo account using the MetaTrader 5 trading platform.
  • Choose one of the strategies from the education section of the Admiral Markets website.
  • Trade the chosen system on a demo account until you are consistently profitable.
  • Try to trade the demo account exactly like you would trade with a live account.
  • The habits you develop in the demo should subconsciously carry over into your live trading.

Develop a strict trading plan and follow it to the letter in order to manage your risks properly. Smart traders exercise risk management strategies within their trading in order to minimise and manage the risks of trading effectively. One of the most important tools for managing risk is a stop loss, which you should always use when trading.

As mentioned above, day trading Forex is riskier than long-term trading, mostly because of the quicker pace and higher frequency of trades. Day traders tend to experience more pressure, have to be able to make decisions quickly and accept full responsibility for the results.

Successful retail day trader have another rule that they should comply with. They set a maximum loss per day that they can afford to withstand financially and mentally. If that point is ever reached, they proceed to remove themselves from the market for the rest of the day. They know that no good comes from emotional trading. Inexperienced traders, in contrast, might not know when to get out.

Traders who are just starting out often feel compelled to make up losses before the day is over, which leads to 'revenge trading'. This never ends well. Exceptions to all these rules are possible, but must be managed with specific care and the results must be accepted with full responsibility. Good results must not serve to reinforce regular exceptions. Bad results should be considered as a good reminder as to why these rules exist.

A trend might be able to sustain itself longer than you can remain liquid. Let's consider volatility spikes mixed in with drops in liquidity. When news releases are due, traders should refrain from trading altogether, unless these are the specific market conditions that their trading strategy requires.

Determining your perfect day trading system for currencies is a hard task. It takes a lot of trial and error, yet it can pay back enormously too. Once you have determined a perfect system, it is then time to select the most appropriate strategy for it.

A strategy will provide you with more detailed information for executing your day trades, while relying on the defined technical indicators and objects. What is also recommended is to try implementing a few systems, and compare which one is the most interesting and comfortable for you. Don't run for profits straight away, the main idea when selecting a system is to be confident in what you are doing.

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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