Intraday trading strategies refer to the trading strategies that seek to profit on intraday price movements or price movements lasting less than or equal to the length of a trading day. Most of the trading platforms provide the option to trade intraday and provide leverage to do so based on the regulations imposed by the supervisory authorities.
Since intraday trading is leveraged it entices a lot of people with expectations of quick big profits. On the other hand, even without leverage, intraday trading is riskier than swing trading or investing in the stock markets.
Due to the riskier nature of intraday trading, an intraday trader needs to be much more vigilant than traders operating in longer time frames in terms of risk management.
However, once risk management practices are mastered, intraday trading can be quite rewarding. This blog explores the 7 most commonly used intraday trading strategies in brief detail.
Intraday Trading Strategies
Breakout Trading Strategy
This is the most widely used day trading strategy and is one of the easiest trading strategies to be practised by beginners. It relies on the fact that a slight movement of stock above and below certain levels will result in significant price movement in that direction. The levels that are used for such a strategy are supports and resistance. The break of support is a signal for initiation of a short position while the breach of resistance is a signal for the initiation of a long position.
Usually, intraday traders look for confirmation signals including volumes along with the break of the support or resistance. Spikes in volumes generally result in better setups for intraday traders since they indicate that there are buyers or sellers available at the recently breached higher or lower levels respectively. Support and resistances can be drawn with the naked eye.
The strength of support or resistance is established by looking at the previous price action along with those levels. Essentially, the number of times a support/ resistance is respected or unable to be breached determines the strength of the support/ resistance.
Breakout trading strategy is particularly interesting since it provides good risk-reward possibilities to a trader. The risk is just below the resistance or above the support, the reward however is usually multi-fold the risk taken. Other features that make this strategy stand out is its ease of implementation and frequency of occurrence on a particular trading day.
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Momentum Trading Strategy
The momentum trading strategy relies on the stocks that are particularly trending on a particular day. Every trading day there are certain stocks, most of the time belonging to the small-cap and mid-cap territories that catch significant market attention. Such stocks catch market attention due to a myriad of reasons including events like earnings and other releases made by the company. A lot of the time the reason is hard to identify.
The skill involved in such strategies is to identify such stocks and at the right moments. Usually, opening hours and closing hours provide good opportunities since the volatility is higher here.
Momentum indicators including Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) can be helpful tools. Such stocks usually are trading with higher volumes as compared to their average volumes or the normal level of their volumes and are usually near their all-time highs or all-time lows in higher time frames including the daily, weekly or monthly time frames.
The key component of such a strategy is to ride the winners and get rid of the losers. Putting stop losses close and targets further away is essential in this strategy. This strategy relies on the risk-reward ratio and not the frequency of success. A nice and easy way to use this strategy could be with moving averages which can be used for both stock selection and strategy implementation.
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Reversal Trading Strategy
Reversal trading strategy or against the trend trading strategy refers to the strategy that profits in price movement contrary to the one being followed by stock at a particular period of time. Such trading strategies are relatively more difficult than trend following strategies as the ones discussed prior since such strategies are trying to beat the markets in their own game.
In such a strategy, the chances of significant losses become huge if proper stop losses are not in place. Such strategies include strategies involving pull-backs, pivot points, harmonic trading strategies, etc.
Pull back is an essential part of the movement of a stock which does not go linearly in either the up or the down direction. Pullbacks can be capitalized by identifying the points at which the pullback is expected and the extent to which the pullback is expected. Tools such as pivot points and Fibonacci retracements are particularly helpful for trading pullbacks.
Harmonic trading strategies use geometric price patterns to identify precise turning points. Such strategies are quite successful in sideways markets and rely on the concept of a trend reversal.
Indicators including Bollinger bands and RSI can be used to trade reversals since they assist in identifying the overbought and oversold zones.
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Gap Trading Strategies
Stock markets are open for only about 6 hours a day. There are however 18 other hours in a day where significant activity is happening. Gap trading strategies capitalize on off-market speculation.
Opening gap or gap is the difference between the previous day’s close and the current day’s open. A gap can be positive in which the stock will be opening gap up and negative in which gap down.
Gap trading strategies can be both in the direction of the gap or opposite to the direction of the gap with the stock facing the dilemma of whether to fill or not to fill the gap.
Analysing the price movement at the end of a particular trading day and news developments are particularly helpful to trade the gap made by the stock the next day.
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Moving Average Crossover Strategy
Moving averages are powerful tools used by the majority of traders in some way or the other. They are lagging indicators that follow the price with a delay.
The concept behind a moving average crossover strategy is that when one relative short term average crosses (for eg: 10,20,30) over or under a relatively long term average (for eg: 50,100,200), the strategy indicates a buy or sell signal respectively.
This can be understood intuitively since the long term average is following the short term average which is following the stock price in a moving average crossover system using two averages- one short term and one long-term. Similarly, just a crossover between a stock and its moving average can be used as well with using 1 moving average only.
Such strategies are particularly effective but an issue with such a strategy is that they do not provide fixed targets and stop losses. Other indicators can be used for this purpose or other practices can be put in place to minimize risk.
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Flag Trading Strategy
Bull flags and bear flags are patterns visible in most of the stocks in various time frames. A stock that has shown significant up or down move in the previous time periods usually waits for some time retraces for a bit, rests, reduces the volume and the hype associated.
Then once the weak players or players not patient enough to wait for the next move are wiped out by testing their patience, the stock continues its journey in the up or down direction.
Flags can be traded in two ways in the intraday time frames. They can either be identified in 1 minute to 30 minute or 1 hour time frames and capitalized on the breakouts in the direction of the momentum leading up to the flag formation.
Or they can be identified in a higher time frame: 4 hours, 1 day, 1 week, etc. Once identified the upper and lower (usually parallel) trend lines can be marked and then the trendlines can be capitalized upon by using them as supports and resistances in lower time frames.
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Head and Shoulder Trading Strategy
Head and shoulder and inverse head and shoulder strategies are interesting strategies. Similar to the other pattern trading strategies (including harmonic trading strategy and flag trading strategy), head and shoulder trading capitalizes on the repeated emotional decisions taken by traders which are visible on the technical charts.
If a stock goes up from a particular price range A to a particular price range B, comes back to A, goes higher than B, explores the price range C, comes back to price range A, goes again till price range B and reverses from there till A, we say that a head and shoulder pattern formed.
The head is formed due to the price movement till C, the left shoulder is formed due to the first price movement to B and the right shoulder is formed due to the second price movement to B. If an opposite price movement takes place, the resulting pattern is called the inverse head and shoulder.
The intraday trader can capitalize on such patterns in lower time frames or time frames less than a day by going short when A is breached (on the downside) in a head and shoulder pattern and going long when A is breached (on the upside) in an inverse head and shoulder pattern.
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Although this blog focuses on intraday trading strategies, most of the trading strategies discussed above can be used on longer time frames including the daily, weekly and monthly time frames as well. The strategies discussed above can be used in all segments including equity, commodity, currency and derivatives.
Even after mastering the theoretical aspects of trading, there are many psychological and emotional aspects of trading that take time and effort to slowly master. Therefore, a beginner trader should trade with as small capital as possible.